OPEC-Shale Peace Prospects Fade
(Bloomberg) -- Just hours after one of the most powerful officials in the biggest U.S. oil state was invited to OPEC’s inner sanctum in June, prospects for a rapprochement between two historically antagonistic crude powers began to unravel.
Texas Railroad Commissioner Ryan Sitton said Friday he was invited by OPEC Secretary General Mohammad Barkindo to attend the group’s summer meeting in Vienna. But even as the surprise announcement reverberated across U.S. and international petroleum circles, Sitton’s proposal to curb Texas crude output for the first time since the 1970s was criticized by fellow regulators.
“While I am open to any and all ideas to protect the Texas Miracle, as a free-market conservative I have a number of reservations about this approach,” Wayne Christian, chairman of the Texas commission that oversees the oil industry, said in a statement. If Texas cuts supply, “there is no guarantee other nations, or even states will follow suit.”
Sitton, an entrepreneur and Republican Party activist virtually unknown outside the Lone Star state, proposed Texas would curb oil output by 10% in exchange for an equivalent gesture by the cartel that controls more than one-third of global production.
The third commissioner, Christi Craddick, also expressed doubts about capping production, according to a person with direct of knowledge of the situation
Sitton’s outreach came at the end of a brutal two-week stretch in which international crude lost almost half its value, triggering layoffs, cash crunches and the steepest dive in Permian Basin oil drilling in more than three years. The demand-sapping spread of coronavirus was compounded with the unraveling of the Saudi-Russia supply compact on March 6.
“We all agree an international deal must get done to ensure economic stability as we recover from Covid-19,” Sitton said in a tweet after his conversation with Barkindo.
Although Sitton’s proposal appears to face an uphill battle, the potential consequences of an OPEC-Texas agreement would be hard to overstate. The cartel’s primacy over world crude markets is unrivaled; Texas pumps more than 40% of U.S. oil and as a standalone entity gushes more than every member of the cartel except mighty Saudi Arabia.
Such a tie-up would also confront Russian President Vladimir Putin with a formidable and heretofore unimaginable foe in using petroleum as a geopolitical weapon.
As it stands, the Organization of Petroleum Exporting Countries and U.S. shale producers are caught in the middle of a price war between Saudi Arabia and Russia, which has helped to drive crude prices to an 18-year low.
U.S. Energy Secretary Dan Brouillette told Fox Business he’s aware of the Texas proposal, but he said his agency isn’t “not part of that conversation.”
“There are state laws that are available to Governors, state regulators if you will, to manage production within the states,” he said.
Sitton wrote in a Bloomberg Opinion piece on Friday that the federal government could coordinate output cuts with Saudi Arabia and Russia to calm the market.
Riyadh and Moscow have been locked in a bare-knuckle fight for market share for three weeks after they failed to agree on a response to the oil-demand crash, and dissolved a partnership that had coordinated oil supplies for three years.
In addition to his philosophical objections, Christian cited the state agency’s lack of experience in throttling back output by thousands of independent companies. “Our IT capabilities to handle this process are limited at best,” he said.
It wouldn’t be the first time Sitton has split with his fellow commissioners. Last year, Craddick nominated Christian to serve as chairman, even though tradition dictated that Sitton would lead the agency as he ended his six-year term.
In a shocking upset earlier this month, Sitton lost the Republican primary election 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.
OPEC officials have often said that U.S. shale drillers, the biggest contributors to the oil surplus that has emerged this decade, should help shoulder the burden of rebalancing the market. With depressed prices forcing a flurry of job cuts, they may now be willing to join in.
Permian oil explorer Parsley Energy Inc. said the industry needs a coordinated approach, and railroad commission caps on state oil output could be one part of the solution. “This is a uniquely catastrophic time for the industry, and as such we need to think outside of our normal course of action,” Chief Executive Officer Matt Gallagher said Friday in an email.
But American Petroleum Institute Senior Vice President Frank Macchiarola blasted the proposal as “shortsighted” and “anti-competitive” efforts that will “harm U.S. consumers and American businesses.”
“It seems totally irrational that the solution to the disruptive behavior of Saudi Arabia and Russia would be to imitate OPEC,” Macchiarola said in a phone interview.
--With assistance from David Wethe, Javier Blas, Grant Smith, Jennifer A. Dlouhy and Teaganne Finn.
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