Hold My Beer, I Can Fix This

March 27, 2020

The yahoos in the photograph above are tired of cutting their respective country's oil production only to watch the US shale oil industry grow its production and steal their market share. The world is swimming in crude oil, the price is headed for $15, or worse, and the EIA says the American shale oil sector is set to bring on another 18,000 BOPD in April. Look at the chart below and you'll get a better understanding of why these two guys are pissed off. 

 

But low oil prices are killing OPEC and Russia, just like America.  With any conciliatory gesture and ensuing agreement from the United States to take oil off the market to help raise oil prices, OPEC and Russia would cut production and oil prices would rise. I'll bet the ranch on that. 

 

That gesture of cooperation is NOT going to come from an administration in Washington that believes $30 oil is good for America and that is trying to get re-elected in November with cheap gasoline. 

Texas is the 3rd largest oil producing country in the world. The Federal government does not control oil and gas production in Texas, the people of Texas do thru our State Constitution and by reliance on  the Railroad Commission of Texas to uphold laws that  prevent resource waste and promote resource conservation. 

 

Last week lame duck Texas Railroad Commissioner, Ryan Sitton, proposed that Texas re-implement a proration plan that would allow wells to  be produced so many days per month thereby reducing production in Texas and allowing prices to rise. OPEC invited Mr. Sitton to its meeting to discuss this plan.

 

The US shale oil industry immediately started whining like little girls about having to shut wells down for a few days a month. The Chairman of the Commission, Mr. Wayne Christian,  immediately poo-poo'ed the idea, accordingly. The shale oil lobby in Texas is strong and has lots of money; Scott Sheffield, for instance, recently said on CNBC that Exxon owns the American Petroleum Institute. The Chairman suggested the Commission no longer has the manpower to implement a proration plan and before Sitton's plane landed in Vienna, the proration idea was DOA.

 

Shutting in frac-induced horizontal wells is probably not a good idea; it might lead to near wellbore skin damage, proppant embedment and fracture closure. It might hurt those wells in the long term;  I get that. I say let them produce. Half the HZ wells in the Permian Basin already make less than 50 BOPD and are at their economic limits (shaleprofile.com).  80% of all Eagle Ford shale oil wells now make less than 50 BOPD (shaleprofile.com). Mother Nature will sort all  that part of the oversupply problem out soon enough; the terminal decline rates on shale oil wells after year five and six  is stunning. 

 

Approximately 38% of America's current light tight oil production is less than a year old (shaleprofile.com). The far better way to show cooperation with the rest of the world to raise and stabilize oil prices, to save Texas jobs,  bring capital back to a capital intensive industry, stop the waste of associated gas,  preserve reservoir pressure and increase recovery of oil in place... is to slow the frantic pace of drilling new wells.    

                                                                            TRRC Map of Eagle Ford Shale Oil Wells Drilled on 330 foot spacing 

 

That's easy to do. I could fix that in a Midland minute but I need help from Austin. Lets resend all existing,  applicable field rules that have previously been granted as exceptions to Texas Statewide Rule 37... immediately. The Texas Railroad Commission can do that; administrating a slow down in drilling  will require less Commission manpower and fewer  tax dollars. The basis for that rule can be found in the Texas Administrative Code, 16 TAC 3.37 

 

(a) Distance requirements.

 

  (1) No well for oil, gas, or geothermal resource shall hereafter be drilled nearer than 1,200 feet to any well completed in or drilling to the same horizon on the same tract or farm, and no well shall be drilled nearer than 467 feet to any property line, lease line...

 

Statewide Rule 37 is the law. We can mandate that no exceptions to Rule 37 even be heard at the Railroad Commission for at least 12 months. In the Permian Basin, where most of America's oil future lies, that Wolfcamp oil is 300 million years old, it's not going to "escape," or disappear; when world oil prices stabilize,  when infrastructure gets caught up and we don't have to waste natural gas, we can go back in between these 1200 foot spaced wells and drill more wells. The short investment cycle of US shale oil, the time from spud to first production, makes it a perfect resource for helping control worldwide product prices and stable long term employment. 

 

Continuous drilling provisions in Texas leases and other forms of mineral conveyances must follow Statewide spacing rules. Lenders that demand continuous drilling in their loan covenants can take a hike, as can hedge pledges. They'll get over it, or they won't; who cares? They made their own bed. 

 

For all you 'let-free-market-principles-prevail' space cadets, nothing's free about free enterprise when you are up to your ass in long term debt that you can't pay back. Cutting 2020 budgets will reduce drilling and lower production rates but as soon as prices recover, if they ever do recover, the shale oil industry will resume its out of control fiscal irresponsibility and we will be right back into an oversupply situation again. Russia and OPEC both know that. Waiting for budgets to reduce production output  puts 70% of the shale oil industry at risk of bankruptcy and 1,000,000 people at risk of losing their job (Bloomberg).

 

If OPEC and Russia  don't get meaningful cooperation from Texas, they'll destroy not only the US shale oil industry but the entire oil industry in Texas, and in the rest of America.  And what Texas does the rest of the country will do; Commissioner Christian is wrong about. Following conservation law in Texas should not be dependent on what other states in the nation do.  

 

Texas has always been a leader in the worldwide oil and natural gas industry. For 47 years, from 1930 to 1977,  the Railroad Commission of Texas controlled the  price of oil and it ensured the conservation of Texas resources for the benefit of our future. Ninety years later Texans are still enjoying the rewards of proper resource management.  Its time once again for the Texas Railroad Commission to step up. For Texas and for America. 

 

Re-implement Texas Statewide Rule 37 For America's LONG TERM energy security !! 

 

 

 

 

 

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