How we got here
The TRRC’s historic decision caps off a five-week effort which included several key milestones: a 30 March 2020 motion by Pioneer and Parsley requesting the TRRC consider prorationing, an initial hearing on 14 April 2020, an interim hearing on 21 April 2020, and a final hearing and decision by the TRRC to dismiss the motion on 5 May 2020.
Pioneer and Parsley kick started their efforts on 30 March 2020, by filing a motion with the TRRC requesting that it (i) determine the reasonable market demand for oil, (ii) consider whether 'waste' was occurring or is reasonably imminent, and (iii) if appropriate, issue a proration order to prevent such 'waste.' The TRRC has authority to rule on these matters under several sections of the Texas Natural Resources Code ("Code"), including Sections 85.046, 85.051, 85.054, and 85.058. Under these sections, if the TRRC determines 'waste', production in excess of reasonable market demand, is occurring or is imminent, then the TRRC must take any action it considers reasonably required to correct, prevent, or lessen the 'waste.' The motion by Pioneer and Parsley set off a firestorm of debate across the oil and gas industry over how to respond to the demand reductions and oil price collapse brought about by COVID-19 and oversupply, focusing on whether free markets should be allowed to adjust on their own or whether unprecedented times warrant extraordinary intervention by the TRRC.
In advance of the initial 14 April 2020 virtual hearing, over 200 individuals, companies, and groups submitted public comments to the TRRC. At the hearing, more than 50 individuals and groups presented to the three Commissioners over a period of ten hours, with over 20,000 virtual attendees watching the event. Following the hearing, Commissioner Sitton released a draft prorationing order proposing a 20% oil production cut, approximately 1 million barrels per day, across Texas until global demand exceeded 85 million barrels per day. The draft order was contingent on other states and countries reducing their own production by 4 million barrels per day, and would have exempted small operators in Texas producing less than 1,000 barrels per day. At the TRRC’s 21 April 2020 hearing, the Commissioners did not vote on prorationing but rather requested more time to review the legal ramifications of a potential prorationing order to ensure any such order could withstand legal scrutiny. Chairman Christian also sought additional time to liaise with other states’ oil and gas regulatory bodies, as well as other oil producing countries. Finally, Chairman Christian assembled a Blue Ribbon Task Force of key industry participants to generate ideas and recommendations to assist Texas’ oil and gas industry during the current crisis.
Historic decision on 5 May 2020
At the 5 May 2020 hearing, the Commissioners again did not vote on prorationing, but instead dismissed the 30 March 2020 motion by Pioneer and Parsley, putting an end to the matter. Each of the Commissioners spoke on the issue. Commissioner Sitton noted that he did not put the matter up for a vote because he felt the support was not there. Chairman Christian described his conversations with other states and countries regarding their production levels and their unwillingness to respond with production cuts at the current time. He then focused on the need for free markets and operators to act independently in their best interests. Additionally, Chairman Christian expressed his view that it would be inappropriate to order prorationing simply because such a remedy exists, and pointed to the Blue Ribbon Task Force as evidence that the TRRC was taking other proactive steps to address the crisis. Commissioner Craddick engaged in a brief dialogue with the TRRC’s General Counsel, Alex Schoch, during her limited remarks. Commissioner Sitton closed by explaining that in his assessment, the TRRC did not effectively determine whether 'waste' was occurring under the Code. While noting that proration may not necessarily be the right answer, Commissioner Sitton expressed that he would have preferred a more analytical versus philosophical approach to the proceedings. Chairman Christian responded that the significant public hearings provided the Commissioners ample opportunity to make the necessary 'waste' determination under the Code. With that, Chairman Christian and Commissioner Craddick dismissed the motion with their two votes.
While the TRRC stopped short of ordering statewide production cuts, the Commissioners instituted a number of alternative measures at the hearing intended to provide relief to the Texas oil and gas industry, including the following:
- Certain permit application fees are waived for the rest of 2020 for P-17, commingling, W-14, disposal of oil and gas waste, H1, injection, and W-3C, surface equipment removal for an inactive well, permit applications.
- Oil storage in formations that are non-salt formations under Texas Statewide Rule 95 may be allowed upon application.
- Plugging and abandonment requirements under Statewide Rule 14(b)(2) are extended from one to two years.
- The TRRC may exercise discretion under Statewide Rule 107(b)(2) in setting penalties for violations occurring from March 2020 to March 2021.
- The TRRC lifted the mandatory hearing requirement for construction of underground facilities, the facilities must still be administratively approved and follow established safety and environmental requirements.
What now?
- Stay tuned for further guidance from the TRRC and the newly formed Blue Ribbon Task Force. Chairman Christian requested the Blue Ribbon Task Force assess flaring and provide recommendations and solutions at the next TRRC hearing on 16 June 2020.
- Operators should carefully consider the implications of COVID-19 and the current price environment on their oil and gas leases. For example, whether the current crisis constitutes a force majeure event under their oil and gas leases, and if so, what are the available remedies. And for a discussion of issues arising with co-tenant financial distress. Operators should also carefully consider any action warranted under their oil and gas leases to preserve the leases where wells are not producing in commercial quantities.
- Consider restructuring options to reduce costs and whether a formal Chapter 11 restructuring bankruptcy process is warranted.
