Decision time approaches for Oklahoma regulators on question of mandated reduction of produced oil


Oklahoma regulators will hold a hearing Monday whether to support a request of an oil and gas group to order reduced production of crude oil statewide, despite a 1988 Oklahoma Supreme Court ruling that said the Corporation Commission does not have the authority to issue such a ruling.

Commissioners will meet Monday morning at 9:30 a.m. for their decision on the request filed in April by the Oklahoma Energy Producers Alliance which contended the regulators have a constitutional obligation to prevent the “waste” of crude oil due to extremely low prices on the market.

The hearing comes less than a week after the Texas Railroad Commission abandoned an effort to order a reduction of crude oil in Texas.

In a weekend press release, David Little of Ardmore, the President of OEPA and owner of Kingery Energy stated, “It is the belief of the OEPA and it’s 525 members that the OCC should use its jurisdiction to regulate the volume of oil produced wherein the statutes actually prohibit oil to be sold below its actual value. We are just asking them to do what’s in the best interest of Oklahomans.” 

He again pointed to the State Constitution.

“The taking of crude oil or petroleum from any oil-bearing sand or sands in the State of Oklahoma at a time when there is not a market demand therefor at the well at a price equivalent to the actual value of such crude oil or petroleum is hereby prohibited, and the actual value of such crude oil or petroleum at any time shall be the average value as near as may be ascertained in the United States at retail of the by-products of such crude oil or petroleum when refined less the cost and a reasonable profit in the business of transporting, refining and marketing the same, and the Corporation Commission of this state is hereby invested with the authority and power to investigate and determine from time to time the actual value of such crude oil or petroleum by the standard herein provided, and when so determined said Commission shall promulgate its findings by its orders duly made and recorded, and publish the same in some newspaper of general circulation in the state.” 

“We are asking the OCC to consider their obligation to not only regulate the oil and gas industry but determine whether the mineral assets of the state are being wasted by being sold at an uneconomical price,” said OEPA Chairman and Owner of Keener Oil & Gas Company in Tulsa, OK, Dewey Bartlett. “In addition, allowables on oil production are rarely enforced, but should be adjusted to fit the current market condition, which is a living nightmare for most oil and gas producers right now.” 

But as OK Energy Today reported last week (May 6), the State Supreme Court in 1988 in a case entitled Conoco V. Corporation Commission sided with Conoco which fought a Commission’s order on prorationing of natural gas.

In his written opinion, Justice Robert E. Lavender wrote, “It is clearly established that the authority of the Corporation Commission relating to the conservation of oil and gas is limited to the powers expressly or by necessary implication granted to it by Constitution or by statute Further, the exercise of the Commission’s authority, to be valid, must be in strict conformity with the grant of power.”

The Justice said the only authority the Commission has in limiting product is from “common sources of supply” and that’s the challenge facing the Commission in determining the request of the OPEA. There is not one common source for oil across the entire state. Common sources exist in certain oil pools or plays but not across all of Oklahoma.

David D. Le Norman, Chairman, The Petroleum Alliance of Oklahoma issued a statement filed with the Corporation Commission in which he urged Commissioners to reject the OEPA’s request. He pointed out the Commission’s recent approval of an emergency order in support of LPD Energy Company in Tulsa only applied to the company in question and not to the rest of the state.

“While the emergency order notes the dramatic drop in price of oil and corresponding revenue decline to operators it should also be noted that the free market already is addressing U.S. crude oil
oversupply more quickly and efficiently than can any government entity. A significant portion of Oklahoma’s production already is being shut in. The Alliance requests that the Commission reject the application thereby terminating the emergency order.”

Opposition was also raised by Richard Woodward of Bartlesville on Friday who issued a memo to the Commission stating that any prorationing statewide would limit the flow of capital into Oklahoma. John Welch of Okmulgee made the same argument against the request. So did Louis Meadors of Norman, Alyce Kindcaide of Yale, David Harcrow of Tishomingo and Destiny Coker of Spiro.

Corporation Commissioner Bob Anthony filed his deliberations on the questions of any possible move toward a statewide-ordered reduction of crude oil.

“—- price decline is a national if not global problem, but no
other state has thus far prorated oil wells to address current market oversupply. In fact, the Rail Road Commission of Texas recently declined to proceed with a proration plan after taking ten
hours of expert testimony. Still, OEPA asks the Commission to go it alone. On that path, the central question is whether there is any remedy in the statutory quiver that will improve anything,” he wrote in statements filed for Monday’s hearing.

He also took note of the Conoco v. Corporation Commission Supreme Court decision first raised by OK Energy Today saying it raises questions about the actions already taken by the Commission this year and what it will consider on Monday.

“Oklahoma Energy Producers Alliance’s application asking the Commission to reduce oil allowables statewide because of the oil price collapse. Concerning the three applications, this memo reaches the following conclusions: Cutting the unallocated gas allowable even for a limited group of wells raises the question of whether the proration procedure in OAC 165:10-17-11 complies with the Conoco Decision….”

One oil company, Kaiser-Francis is in support of the OEPA’s request. In a proposed interim order, H.G. “Buddy” Kleemeier, CEO at the company wrote, ” First, we ask that the OCC declare that waste is occurring due to the market conditions discussed above. Second, we ask that the OCC restate its statutory authority/obligation to prevent such waste in order to protect correlative rights. The Proposed Interim Order does not specifically request that the OCC command wells to be shut in and/or implement some type of allowable/curtailment.”

The issue of any mandatory reduction of crude by the Corporation Commission has even raised the interest of Canada. Rachel McCormick, the Consul General of Canada recently wrote the three commissioners.

“The Consulate General of Canada for Oklahoma, Canada’s oil and gas producing provinces, and our energy companies have followed with interest your discussions on prorationing and the
diverse views which have been expressed in Oklahoma,” she stated.

While she did not urge regulators one way or the other, she observed how similar free market action has occurred in Canada.

“As is occurring in Oklahoma, crude oil producers in Canada have announced production cuts as a result of the current situation. she said. “The Government of Alberta, Canada’s largest crude oil producing province, instituted in January 2019 a crude oil production curtailment program to respond to production levels that exceeded what could be shipped for export by pipeline, rail or used internally within the province. The curtailment program continues today and is set currently at 80,000 barrels per day, although it was initially set at 325,000 barrels per day in early 2019. ”

Marathon Oil, a Houston company that recently announced a suspension of all drilling activities in Oklahoma filed an op-ed piece published in the Houston Chronicle in which the company opposed any state interference in oil production in Texas.

Representatives of Continental Resources, Devon Energy and Ovintiv Mid-Continent Inc. also filed notices they intend to be at the hearing and requested time to speak for or against the issue.

Harold Hamm, founder of Continental Resources came out last month in support of the petition for Texas to order a statewide reduction in crude oil production. Texas regulators voted last week not to proceed with the question.