CEO Of Shale Giant: “No One Wants To Give Us Capital Because We Have All Destroyed Capital And Created Economic Waste”

Authored by Josh Siegel and Abby Smith, from the Washington Examiner

TEXAS DEBATES PRODUCTION CUTS: Texas can lead in producing a “real” U.S. oil production cut to save the shale industry, Scott Sheffield, CEO of Pioneer Natural Resources, argued Tuesday in calling for the state to take action to force companies to hold back their production for the first time since 1973.

Sheffield opened all-day testimony before the Texas Railroad Commission, which is considering imposing “pro-rationing” on oil companies in the largest-producing state. The measure would require drillers to reduce their production by certain percentages until it no longer exceeds market demand.

Pioneer is one of two Austin-based companies with Parsley Energy that has called on the Texas oil regulator to act, despite the overwhelming opposition from large oil majors, refiners, and the trade groups that represent them, who fear a mandate would upset the free-market system in the U.S.

Sheffield, in strikingly blunt comments, suggested the financial problems of shale producers existed before the current crisis driven by the coronavirus, as companies took on too much debt amid the shale rush and produced more than the market demanded.

“No one wants to give us capital because we have all destroyed capital and created economic waste,” Sheffield said. But he said regulators could bring the market back in balance when it’s needed most.

What’s a ‘real’ oil cut?: Sheffield said the OPEC+ plus agreement to cut oil production nearly 10 million barrels per day, coupled with some 5 million barrels per day in market-driven cuts from G-20 countries like the U.S., won’t be sufficient to compensate for the lost demand from the coronavirus.

“Texas can lead in getting a real G-20 cut of 5 million, not a fake 5 million barrels per day,” Sheffield said.

The market-driven cuts in the U.S. touted by President Trump and Energy Secretary Dan Brouillette “are happening,” Sheffield said, “but it’s a very, very slow process.” He said most independent companies like his are hedged and are continuing to drill, and significant cuts won’t happen until later this year, and mostly in 2021.

Sheffield called on the commission to mandate a 1 million barrel per day production cut in May, and to be prepared for more in future months.

Texas can’t do it alone: But he said Texas should act as part of a “global deal,” and the commission should make its cut contingent on Oklahoma, a neighboring state also considering pro-rationing, doing the same, along with OPEC+ and the G-20 imposing additional cuts.

“We have never recommended Texas do it by itself,” Sheffield said.

Ryan Sitton, one of the three Texas railroad commissioners, all Republicans, has advocated for the state to consider pro-rationing. But he was more cautious about the prospect on Tuesday. Since the global oil surplus (decline in demand) is between 20 million barrels and 30 million barrels per day, he noted, how would cutting Texas’ production by 1 million barrels per day make a difference?

“If we were to pro-rate, how is that going to resolve this?” Sitton asked.

Do free-markets matter? Lee Tillman, CEO of refiner Marathon Oil, argued in his testimony that pro-rationing will “not have any meaningful impact on oversupply and will hurt Texas producers.”

He said Texas producers are already shutting in the least profitable and efficient wells in response to market forces. “Economic forces will ultimately drive supply and demand back in balance,” Tillman said.

Sheffield, however, argued the partnership in recent years between Saudi-led OPEC and Russia has already distorted the concept of free markets, and the principle isn’t so sacred.

“If anyone thinks we really have a free market, you have to be joking,” Sheffield said.