OKLAHOMA CITY – The Oklahoma Corporation Commission took no vote after listening to five hours of testimony last week about a pair of requests to declare oil production in the state a “waste.”
However, it is clear there is a distinct difference of opinions about making such a move.
Some operators contend it’s a waste of oil to sell it at current low prices, while others argued the free market system is working and oil production is already being reduced voluntarily.
The commissioners decided to take two related requests “under advisement.” The Oklahoma Energy Producers Alliance (OEPA) modified its request for such a declaration, now saying it is a “voluntary” decision on the part of oil makers if an order were to be approved by the state agency.
IS PRODUCTION TRULY A ‘WASTE’ AT TODAY’S PRICES?
In the first of two hearings, the commissioners considered whether to issue a rule on the emergency order granted to LPD Energy Co. LLC of Tulsa on April 22.
“This is a serious matter we’re facing. There could be a substantial period of time before the industry recovers,” attorney and oilman Lee Levinson argued. “What we’re asking for is voluntary, not compulsory. I’m not asking for anything mandatory” nor “anything on a statewide basis,” he said.
His company filed a request April 10, asking the Corporation Commission to declare that the production and sale of oil at current prices is a waste as defined in the state Constitution.
The price that Oklahoma energy producers are receiving for crude oil “probably doesn’t even pay the electric bill,” Levinson told the commission last month.
But his request was met with opposition from Charles Helm with Crawley Petroleum. “There’s no evidence to support the claim,” Helm said in disagreeing that there is no market for Oklahoma crude oil.
Steven Hatfield, CEO with Crawley Petroleum, concurred with Helm. “Operators already have the ability to shut in wells on leases. What they’re trying to do is interfere in contractual rights and it only opens the floodgates to legal actions. It will open Pandora’s box for litigation.”
A producer needs the blessing of state regulators before shutting in a well in order to retain his lease, Steve Goetzinger of Nichols Hills, a member of Huntington Energy LLC, told Southwest Ledger recently. Energy leases remain in effect so long as oil and gas are produced “in economic quantities,” he said. Regula- tory authorization to cur- tail or cease production is a producer’s defense to a lease cancellation lawsuit.
At one point Monday, Hatfield and Levinson openly disagreed as Levinson cross-examined Hatfield.
“This order has achieved nothing productive,” said Hatfield. “Oil in the ground is worth nothing until it’s produced.” His comment produced laughter on the other end of the remote-hearing and a man proclaimed loudly, “That’s bull----!”
But Levinson, under questioning by Commissioner Bob Anthony, agreed that the commission cannot mandate any reduction in crude oil production on a statewide basis. “I can see one big word all over this, and it’s called ‘litigation’,” Anthony said.
FREE MARKET VS. REGULATION
“I’m dumbfounded how anyone could disagree with relief for the industry,” Levin- son said Monday. “This is very important for small producers of Oklahoma.”
Others disagreed with Levinson, arguing that the Oklahoma Corporation Commission “cannot delegate its authority.”
Michael Stack with Tulsa-based Kaiser-Francis Oil Co. maintained the Corporation Commission “has a duty to prevent these wastes.” Kai- ser-Francis supported LPD Energy’s request and one filed by the Oklahoma Energy Producers Association (OEPA).
LPD’s request was opposed by Devon Energy, by the Petroleum Alliance of Oklahoma and by the Oklahoma Mineral Owners Association. However, Devon took no stand on LPD’s request, but did oppose the pro-rationing request of the OEPA.
After agreeing to take the LPD Energy request under advisement, the commissioners heard similar arguments for a broader application by the OEPA.
Nine representatives of the organization, including Dewey Bartlett, a former Tulsa mayor who was a founder of the OEPA, testified for the application. Bartlett urged the commissioners to “show courage and stand up” because the Corporation Commission “was created to protect Oklahoma oil.”
Mary Anne MaGee, another OEPA board member, told the commissioners, “The bottom line is: this is waste,” in referring to the crisis before the OEPA members and others in the oil and gas industry.
“I cannot stay in business if I continue to lose money,” said Darlene Wallace, another member of the group’s board.
Mike Cantrell, an energy industry veteran for 40 years who has managed an oil/gas investment company for the last 20 years, said 70 percent of his wells are shut down. “We ought to follow the law, and if you don’t like the law, go across the street and change it!”
Attorney Richard Parrish, who represented the OEPA, told the three-state regulators, “The commission not only has the authority, but the duty, to make rules” to prevent waste.
But others who opposed the request by the OEPA made their arguments to allow the free market to continue working.
“Their testimony failed to prove there was waste statewide,” argued Grayson Barnes, an attorney for Staghorn Petroleum.
An attorney for Marathon Oil also announced their firm was opposed to any pro-rationing. “All operators would be forced to shut in production statewide and that would be devastating,” asserted Matthew J. Allen.
The Petroleum Alliance of Oklahoma stood firmly against the request by the OEPA.
“The scope of the application exceeds the com- mission’s authority,” argued Brook Simmons, who took over as the Alliance president on May 1. “This is a blatant attempt to force the commission to pick winners and losers. The free market is already working. The commission can do nothing to affect the armada waiting to unload oil in the U.S.”
The last to testify was Dr. Dean Foreman with the American Petroleum Institute. “The supply and demand are responding, and we need to resist the temptation to affect the market,” he said. “States are gradually reopening, and hopefully the worst may be past us now.”
‘GREATER FORCES THAN COMMISSION DICTATE PRICE OF OIL’
“Greater forces than the Corporation Commission dictate the price of oil,” A.J. Ferate wrote in a news column recently.
“The free market has shown that since prices tumbled into negative territory just a few weeks ago, they have already returned to the mid-$20 range. It’s not where we want them to be, but it provides an example that free markets brought us to the dance and should also take us home.
“Operators maintain the best data for making economic decisions related to production on a well-by-well basis,” he continued. “The provisions are written into leases and sales agreements. An operator does not need permission from the government to shut
in production, and we should not look to them to do so.”
Ferate is an attorney in Oklahoma City and a former vice president of regulatory and legal affairs for the Oklahoma Independent Petroleum Association.
MARKET DEMAND MUST FIRST BE DETERMINED
Like the first request received from Levinson, the Corporation Commission took the issue of declaring the sale of crude oil at current prices to be an “economic waste” under advisement.
The commission on April 22 gave oil producers temporary permission to voluntarily shut in unprofitable wells on the grounds of “economic waste”.
The commission approved Levinson’s application on a 2-1 vote. Chairman Todd Hi- ett and Commissioner Dana Murphy endorsed the proposal, but Commissioner Anthony abstained.
Anthony declined at the time to explain his decision, but did point Southwest Ledger to an Oklahoma Supreme Court case in which the Justices wrote:
“The orders of the Corporation Commission under consideration ...are based upon a finding that the total production of oil is in excess of the reasonable market demand.
“Until such jurisdictional determination has been made, based upon competent evidence, after a hearing thereon, and until after a jurisdictional determination or order has been entered relating to the particular source of supply in which production is to be restricted, the Commission is not clothed with power to proceed to curtail and limit the production by a person from the particular source of supply.
“There could be no determination that waste was being committed by reason of excess of production over market demand until the market demand was properly found and determined.”