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Can Texas Railroad Commission Rule Global Oil?

What is the Texas Railroad Commission (RRC)?

Established in 1891, the Texas Railroad Commission (RRC) is one of the oldest regulatory agency in USA.

In the 1800s, the RRC had the mission to regulate the rail industry, especially for the transportation of oil and gas when it emerged on early 1900s.

In 1917, its legal competences were extended to the regulation of the oil and gas transportation through pipelines, then in 1919 to the oil and gas production in Texas.

Today, the RRC is tracking the oil and gas production in Texas and ensure its compliance with the given allocations on monthly basis.

But then, how this local institution ended up in the eye of the cyclone of the oil market?

The Limits of the OPEC+ April 10th Agreement

When the OPEC members led by Saudi Arabia met with the non-OPEC members producing countries headed by Russia on Friday April 10th to agree on an historical cut of production by 9.7 million barrel per day (b/d), USA had also to commit to a reduction of its production.

The first limit of this diplomatic exercise relies on USA position, which has become a major producer of oil but is not member of any global institution, leaving the OPEC+ members to negotiate quotas among themselves. 

In an opposite way, these OPEC+ members sees USA as the main source of glut with the unconventional oil flooding the market, at the expenses of Saudi Arabia and Russia market shares.

So, the goal to remove nearly 10 million b/d from the market agreed on April 10th by OPECcountries could only be possible because USA on its side also committed to decrease its own production, but without disclosing any formal number.

The Limits of US Government on Oil Production

In the OPEC+ producing countries, the oil production is managed by National Oil Companies (NOCs), therefore the governments have the legal authority to turn the oil tap On or Off at their convenience.

In USA, there is no NOCs, the oil production is in the hands of International Oil Companies (IOCs), foreign NOCs investing in US, and a mass of Independent Companies (Independents).

These contracts for exploration and production are signed per concession leaving each operator space for developing the fields in optimized conditions.

In this market-driven environment, USA and its State Secretary of Energy have no legal authority to impose any reduction on the production, so the commitment of USA to contribute to the global effort to remove oil from the market can only be wishful thinking at the national level.

In addition, the exposure to Covid-19 and barrel price war varies significantly from state to state, leading to some kind of internal competition among the producing ones, headed by the State of Texas.

The Limits of the Texas Railroad Commission

When this debate to cut oil production comes down to Texas, that is where the Texas Railroad Commission (RRC) gets involved as the only legal agency which may have the legal power to regulate the oil and gas production.

It is the first time in its history, that this Texas Railroad Commission is getting exposed at that global scale, finding itself at a strategic crossroad against its will.

De facto, this authority is reaching its limits of competences too, for various reasons:

  1. The disagreement among the operators in Texas
    If all the companies may agree on the goal to cut the production, they disagree on the way to do it.
    Typically the independent companies such as Continental Resources, Parsley Energy and Pioneer Natural are favoring a decision from the RRC to set up a moratorium on the Texas oil production, while the IOCs Chevron, ConocoPhillips, ExxonMobil, Marathon or Occidental Petroleum (Oxy) are against it and prefer to leave the market to regulate the production.

  2. Any Texas RRC decision should be conditioned by others efforts too
    When the RRC met on April 21st to discuss about the conditions and the possibility to impose a production moratorium, the working scenario was to cut Texas production by 1 million b/d, but at the conditions that others US States contribute; and that other producing countries should cut an additional 5 million b/d.

  3. The legacy of the RRC for such a decision
    If the RRC has the legal mandate to regulate the oil and gas production in Texas, it is not clear if this mandate goes to the extend of imposing production quotas to the operators in Texas as it may conflict with existing regulations and licenses.

  4. No evidence of an actual implementation of OPEC+ decision
    On April 10th the OPEC+ countries decided quotas of production, but to be implemented on May 1st.
    There is a concern, not only in USA, but in all the world that these restrictive quotas may not be implemented according to plan since number of producing countries are running for cash to maintain their economy afloat.

Thus, imposing a decision without the approval of the companies themselves may open a massive legal process in which the State of Texas does not want to be involved.

At the end of the day, the RRC came to the conclusion that no conditions were met to enable the RRC to decide and impose a moratorium on Texas producers.

Can still the RRC rule the global oil market?

Obviously, the  OPEC+ countries have realized since April 21st that their April 10th decision to reduce production by approximately 10 million b/d from May 1st was far from the reality of the needs and could hurt them as a boomerang in stopping all economies with the spectrum to see negative oil prices again in May.

The proposed plan to cut again the production from OPEC+ countries by an additional 5 million b/d, making 14.7 million b/d cut in total, should be a good sign considering that the consumption has dropped by 30 million b/d in March but should slowly recover as number of countries go for deconfinement and restart activities.

In parallel, the US State Secretary of Energy is running discussions with producing states in USA for a potential alignment on the producing policy.

In the meantime, assuming the RRC meets again ad makes a decision, the oil price will continue to be only regulated by the balance between consumption and production, giving the advantage to the leaders in USA as in OPEC+ countries.

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