Le Norman: Mandating production cuts in Oklahoma is the wrong answer

Oklahoma has been hit hard. America has been hit hard. Our planet has been HIT. Battling the COVID-19 crisis has resulted in an unprecedented drop in demand for oil and natural gas, and the ongoing price war between Russia and Saudi Arabia has led to a massive oversupply of crude oil. It is a double black swan event that has significantly impacted our oil and natural gas producers and challenged our national security.

As Oklahoma’s oil and natural gas producers struggle to adjust to this new reality, some have desperately proposed the radical idea of having our state’s regulatory authority, the Oklahoma Corporation Commission, intervene by implementing mandatory cuts to Oklahoma oil production. The role of the OCC is a balancing act of weighing the economic benefits to the state, and the prosperity derived from development of its resources, versus wasting or squandering the state’s natural resources as suggested recently by the Oklahoma Energy Producers Alliance in a letter to the OCC’s commissioners.

The OEPA letter is naïve. The position they have taken does not consider the many reasons an operator might develop resources in a low-price environment. It does not consider the strategic nature of protecting leasehold, drainage boundaries infringement by offset operations, sunk capital costs in infrastructure, etc.

The OCC should remain diligent and monitor the macro environment, but should not involve itself in picking winners at the expense of other industry participants. It should also not deem product prices either wasteful or imperative for an operator’s criteria to determine its development plans.

Natural market forces dictate pace of development. The headlines are littered with capital cutbacks, production being shut-in and, unfortunately, jobs being lost. The native decline of the horizontal wells predominantly producing out of shale horizons is much higher than conventional reservoirs produced in the past. The result is the U.S. production of 12.97 million barrels of crude oil in (January 2020) will decline rapidly without arbitrary proration or mandated production cuts. The lack of storage capacity, refinery run rates, as well as transportation costs that manifest in regional price depression, will all play a role with respect to curtailing our production.

The prices for our products are constantly oscillating, and we all know from experience…

Read the full article at The Journal Record.