At least one attorney who is a former officer with the Oklahoma Independent Petroleum Association says the argument in support of mandated crude oil reductions in Oklahoma will fail. A.J. Ferate compared it to what Communist nations have done.
It’s what he wrote in the McCarville Report.
By A.J. Ferate
The sudden collapse of oil prices in the wake of COVID-19 have left many in the energy sector uncertain about the future. Two weeks ago, oil prices briefly plummeted into negative territory for the first time in history and this volatility has left some looking for a quick government fix in the form of production curtailment.
Two proration proposals before the Corporation Commission – submitted by LPD Energy and the Oklahoma Energy Producers Alliance – stem from a belief that state-induced suppression of demand can affect global commodity markets. Both proposals request a finding of “economic waste,” a standard that gives the Corporation Commission the ability to shut in production. But the LPD Energy proposal claims to transfer the determination of “economic waste” to well operators rather than have the Commission make the ruling as envisioned in state law. This resembles a 1999 proposal brought by the same attorneys. It failed that then and should fail now.
What are the potential consequences? Operators would suffer legal liability by finding themselves in a no-win situation. How would that work? A well operator shuts in production because the economics aren’t there. The adjacent well operator chooses to continue production. Has the adjacent operator now opened themselves up to liability from shareholders or operators that shut in production? What about the operator that did shut in production? Will royalty owners question their decision? This seemingly innocuous path is in fact a dangerous legal minefield. The wiser course would simply be to allow operators to manage their own production in a prudent manner as is traditionally the case.
The Oklahoma Energy Producers Alliance application promotes a concept that has been tried and failed in diverse places such as North Korea and Venezuela. It is called a “command economy” and requires a government, by edict, to decide the amount of supply of a given product. These attempts will inevitably fail when they cannot react to changing conditions on a timely basis. This is an intrusion into private business and contrary to the American way.
Certainly, oil production is a cornerstone of our state economy but, on a global basis, we produce only a fraction of one per cent of daily production. The reality is any government decision to cut production made solely in Oklahoma would have little, if any, effect on markets while further devastating the state economy.
Also worth noting is that this temporary glut of oil could be resolved long before any quota program is in place, and any effort by Oklahoma to curtail production would only hurt our ability to regain market share when prices rebound. It is for this very reason that the Texas Railroad Commission declared a similar measure dead earlier this month. Commissioners wisely assessed that curtailment would not only fail to yield the desired result but would have a cascade of harmful secondary consequences for the state, and nationally. It would be wise for Oklahoma to follow suit.
Greater forces than the Corporation Commission dictate the price of oil. The free market has shown that since prices tumbled into negative territory just a few weeks ago, they have already returned to the mid-$20 range. It’s not where we want them to be, but it provides an example that free markets brought us to the dance and should also take us home.
Operators maintain the best data for making economic decisions related to production on a well-by-well basis. The provisions are written into leases and sales agreements. An operator does not need permission from the government to shut in production, and we should not look to them to do so.
A.J. Ferate is an attorney in Oklahoma City and a former Vice President of Regulatory and Legal Affairs for the Oklahoma Independent Petroleum Association.
Source: McCarville Report