Oil waste decisions left to operators, for now
Elected members of the Oklahoma Corporation Commission decided to leave in place an emergency order allowing operators to voluntarily shut- in wells in cases where they believe crude oil is being wasted.
However, they opted to give oil and gas industry executives and attorneys more time to consider an amended request made by the Oklahoma Energy Producers Alliance that would, if adopted, result in a declaration from the agency that oil production from wells across the state is wasteful.
During a hearing Monday, OEPA representatives stated a mandatory oil waste declaration from commissioners would allow the agency to take additional steps requiring operators to shut in wells or to take other actions deemed appropriate to cumulatively cut crude production.
It would leave determinations about what would be allowed and how to achieve those cuts up to the regulatory agency, unlike its initial request calling for the agency to take a series of specific steps to curtail production.
The O EPA represents mostly smaller, independent oil and gas producers who primarily operate older, vertical wells with smaller rates of production.
Dewey Bartlett, chairman of the OEPA and president of Keener Oil and Gas Co., said such a declaration is needed.
“It is the duty of the OCC as stated in the statutes to determine economic waste, and, that if one is made, to consider means of eliminating that waste in manners they see fit,” he said.
Joe Warren, an OEPA board member who is a partner in Brown & Borelli Inc. and Cimarron Production, agreed each well is unique in terms of production costs and revenues.
“But for the vast majority of Oklahoma producers, the West Texas Intermediate price is not what most receive,” Warren said. Instead, those prices are based on monthly averages of WTI, less costs to transport the product to storage.
He noted some companies are setting up massive amounts of temporary storage to hold crude they were forced to take involving contracts settled when oil was trading at negative values.
“In Oklahoma, we have more oil than we have demand. I would ask the commission to consider exercising its statutory duties and powers to prevent waste and to prevent this dumping of Oklahoma oil production by taking a stance and prorating oil production in the state,” Warren said.
Mary Anne McGee, an OEPA member who is president of GLM Energy, said her company began shutting in some of its wells in April, and expects it will have to shut in additional wells, moving forward.
McGee said one of her biggest expenses is the electricity it takes to run her wells, plus limited storage capacity for wells.
“I have not seen anything like this” before, McGee told commissioners. “At this rate, there is no way for smaller, vertical producers to continue operating.”
Other OEPA board members also addressed elected commissioners, expressing similar observations and requests for help.
During Monday's hearing, Commissioners Bob Anthony and Dana Murphy questioned what remedies the OEPA would support to prevent waste.
David Little, president of Kingery Energy Co. and president of the organization, responded there are various steps the commission could take to reduce the amount of oil produced by as much as 20%.
But Little also acknowledged coming up with the right steps to curtail production might not be easy, adding that companies are barred by antitrust law from coming together to reach an industry wide solution.
“We have to look to our governmental authority to help so that we don't break the law and end up in jail,” Little said.
Representatives of many larger oil and gas companies operating in Oklahoma told commissioners they don't support either of the proration requests.
Parties involved in the cases( including Devon Energy and XTO Energy, Ovintiv and Marathon, among others) maintain the free market is taking care of production issues on its own.
Brook Simmons, the new president of the Petroleum Alliance of Oklahoma, noted his group is united in that regard, arguing proration orders could pick winners and losers.
He noted the market already effectively shut down a vast majority of drilling in Oklahoma and that demand is beginning to return.
While Simmons noted the current pandemic and demand reduction situations will create massive impacts on the state's energy industry, he urged the commission not to do anything to “add to that burden.”
“The commission can avoid taking an action that would harm future capital investment in the state of Oklahoma,” Simmons said.
Dean Foreman, chief economist of the American Petroleum Institute, noted current low pricing is a result of weak demand, not robust supply.
He noted the U.S. Energy Information Administration and institute saw oil production fall by 1.1 million barrels daily since the end of March, and expects production could drop by another 900,000 barrels daily by the end of June.
“The market has already responded in historically large ways,” Foreman said.
As for downstream demand f or petroleum products, Foreman said the institute observed a demand increase there just since the OEPA's application was filed. He said the organization expects that trend will continue.
“It is largely a demand driven problem, yet almost all of the policy solutions are targeting supply,” he said. “We are hopeful the worst is past us now.”
As for the OEPA's amended request, it caught other parties involved in that case by surprise.
Attorney Ron Barnes, representing FourPoint Energy, said appropriate notice related to the amended request hadn't been met.
“I don't really know what relief the OEPA is asking for,” Barnes said. “It is like they are asking the commission to do whatever it would like to do.”