Why a Texas Oil Regulator Could Play the Role of OPEC

(Bloomberg) -- Oddly named and highly powerful, the Texas Railroad Commission on Tuesday will weigh whether the state should curb crude production for the first time in almost half a century. At issue is one of the worst price collapses in history, which has left the Texas oil and gas industry in tatters. Unusual for a state-level agency, the commission suddenly finds itself integral to national and even international energy policy.

1. What is the Texas Railroad Commission?

Despite its name, the three-member commission no longer oversees the state’s rail system. It was established in the 1890s to regulate private railroads, terminals, wharfs and express companies. That mandate grew to include oil and gas in 1919. Its oversight of railroads was gradually transferred elsewhere within state government, with the Texas Department of Transportation taking the last of the rail functions in 2005. Today the commission has a reputation for being a lenient regulator of the state’s oil and gas industry, which raked in $138 billion last year. Producers needs permits from the commission to drill and operate wells.

2. What could the commission do to curtail oil production?

Ryan Sitton, one of the three commissioners, wrote in a Bloomberg Opinion column that the agency could order production limits for Texas producers, something last done in 1973. “In theory, Texas could cut production by 10%, and if Saudi Arabia is willing to cut production by 10% from its pre-pandemic levels and Russia is willing to do the same, it would return the market to pre-crisis levels (and only somewhat oversupplied),” he wrote. Since writing the column, Sitton has said that he, like his fellow commissioners, has reservations over mandating cuts and is merely in favor of considering it.

3. Why now?

Global crude prices are getting hit as the world locks down in an effort to combat the coronavirus pandemic. West Texas Intermediate crude futures, the U.S. benchmark, settled in negative territory on April 20 for the first time in history. Much of the collapse can be chalked up to the expiration of that particular contract, with holders unloading to avoid having to take physical delivery at the end of the trading window. But it’s also a reflection of rapidly filling crude storage that’s leaving producers with nowhere to put their oil. Pioneer Natural Resources Co. and Pioneer Energy Inc. have been the most vocal proponents of production caps, while majors including Exxon Mobil Corp. and other large independents have said they’re opposed to such measures.

4. What gives the commission this power?

In the early 1930s, a coalition of industry members, scientists and public officials advocated for the state to regulate production in order to stabilize plummeting prices driven by unrestrained output from East Texas. The commission ultimately won the authority to “prorate” output -- meaning it can set the rate at which every oil well in Texas produces. In its wielding of this power, the Texas commission served as a model for OPEC.

5. Who chooses members of the commission?

Texas voters elect them to staggered six-year terms. The next election -- for Sitton’s seat -- is this November. Sitton himself won’t be on the ballot: In a major upset, he lost the Republican primary election on March 3 to Jim Wright, a rancher and chief executive of an oilfield service company. Two Dallas lawyers, Chrysta Castañeda and Roberto Alonzo, will compete in a May runoff for the Democratic nomination to challenge Wright. No Democrat has won election to the commission in more than 25 years. The two Democratic candidates say the commission should be tougher in regulating the oil and gas industry, particularly when it comes to flaring.

6. What is flaring?

It’s the process by which oil producers burn off unwanted natural gas that comes up with their crude. Oil drillers say flaring is the most environmentally friendly way to get rid of excess gas they can’t sell. Environmentalists say regulators in states including Texas and North Dakota should be tougher on a practice that harms air quality and contributes to climate change. The commission, which has never denied a flaring permit, has faced criticism even from some industry members for its lax policy on the issue.

The Reference Shelf

• QuickTake explainers on the OPEC-Russia price war and natural gas flaring.
• The Texas Railroad Commission historically has been one of the most important regulatory bodies in the nation, David Prindle writes for the Texas State Historical Association.
• Commissioner Ryan Sitton’s opinion piece calling for the U.S. government to coordinate production curtailments with Saudi Arabia and Russia.
• The commission’s website.

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