Corp Comm lets oil producers shut in some wells

  • A crew from Morgan Well Service, of Prague, repairs a hole in the casing at a 10,000-foot-deep gas well outside Tuttle in 2017. Ledger file photo by Mike W. Ray
    A crew from Morgan Well Service, of Prague, repairs a hole in the casing at a 10,000-foot-deep gas well outside Tuttle in 2017. Ledger file photo by Mike W. Ray
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OKLAHOMA CITY – The state Corporation Commission has given oil producers permission to temporarily shut in unprofitable wells on the grounds of “economic waste.”

The request was filed with the commission on April 10 by Tulsa attorney and oilman Lee Levinson on behalf of LPD Energy Co. Levinson is the registered agent for the Tulsa-based company, state records reflect.

The commission approved Levinson’s application April 22 on a 2-1 vote. Commission Chairman Todd Hiett and Commissioner Dana Murphy endorsed the proposal, but Commissioner Bob Anthony declined. “I will not participate in the signing today,” he said.

Anthony pointed out that Administrative Law Judge Jan Preslar, who held a hearing on LPD Energy’s request for an emergency order, did not make a recommendation on her written reference to the commission.

Levinson asked the commission to issue an order “finding that the production of oil under currently existing conditions may constitute economic waste, in some circumstances...”

During a public hearing April 17, Levinson told the commissioners and ALJ Preslar that he has operated oil wells “since the ’70s,” and what’s happening in the oil patch “hasn’t occurred in 70 years.”

OIL PRICES PLUMMET IN HISTORIC SLUMP

Crude oil commanded $63.05 per barrel on Dec. 30, 2019. Three and a half months later, benchmark West Texas Intermediate (WTI) had plunged to $18.12 per barrel, and three days later, on April 20, crude oil dropped into negative territory for the first time in history. WTI crude rebounded to $17.60 per 42-gallon barrel on April 23.

BP was seeking to push its break-even oil price down to $40 a barrel by 2021, Shell’s break-even for projects approved in 2019 was under $30, and Total’s “organic pre-dividend” cash break-even was below $25. However, the industry’s large debt load may drive break-even levels higher.

The cause of the price collapse is massive oversupply blamed on Saudi Arabia and Russia, aggravated by little spare storage in the face of a decimation of demand arising from the sudden and almost total interruption of economic activity attributed to the COVID-19 pandemic.

OIL PRODUCERS SOUGHT PERMISSION TO SUSPEND OPERATIONS

LPD Energy Company sought approval to classify unprofitable production as economic waste.

The price that Oklahoma energy producers are receiving for crude oil “probably doesn’t even pay the electric bill,” Levinson told the Corporation Commission. “Selling oil at these prices constitutes waste” as defined in state law, he said. “We’re, in fact, giving it away.”

He said “state law provides that, as it pertains to the Corporation Commission, the term ‘waste,’ in addition to its ordinary meaning, ‘shall include economic waste.’ The Corporation Commission, he said has authority to “make rules and regulations for the prevention of such waste” state statute decrees.

The commission can intercede “when there’s no market demand,” Levinson contended. “If oil stays in this price range, we’re all insolvent.”

An organization of more than 500 oil producers made a similar request of the commission on April 10. The Oklahoma Energy Producers Alliance urged the Corporation Commission to issue a mandate requiring operators to curtail oil production in the state until markets improve. The commission is scheduled to consider the OEPA’s request May 11.

Levinson applied for an interim order authorizing operators to voluntarily shut in or curtail oil production from wells “where the operator deems such action necessary in the current abnormal and volatile pricing environment.” His request for a temporary emergency order was filed before the OEPA submitted its application.

“This will offer interim relief,” Murphy said. In urging approval of the emergency order, she added there were “extenuating circumstances.”

The order will remain in effect until superseded by another commission order.

“The global energy landscape has been turned upside down due to the COVID-19 pandemic,” Murphy said afterward. “While overproduction by Saudi Arabia and Russia has played a role in the collapse in oil prices, the far bigger factor is a drop in oil demand that only weeks ago would have been thought impossible. There was no way for Oklahoma and other U.S. producers to anticipate and plan for up to 30 million barrels per day of consumption to disappear within just a few weeks.”

OKLAHOMA PRODUCERS LOSING BIG BUCKS

Oil producer Eddie Rongey of Kiefer testified earlier this month in favor of Levinson’s proposal. Rongey said he has been an independent oil and gas producer for 35 years and operates more than 600 wells in Oklahoma.

Rongey told commissioners he has shut in one well already and it’s saving him $30,000 per month. When asked by Levinson whether he would be able to shut in the rest of his wells without a waste ruling from the Corporation Commission, he replied “no.”

Levinson said he operates or is “substantially involved in” 100 wells, and said he would save “probably $75,000 to $100,000 if we shut in our wells.”

He mentioned savings on fees charged for hauling and disposing of wastewater that’s generated in oil production, and on utility bills for the electricity that powers the pumps on the wells, for example. Labor is a small portion of the cost of operating a well, he said.

In the absence of a waste declaration from the commission, a producer who voluntarily shuts in a well could lose a lease to a “scavenger,” Levinson said. But with the Corporation Com- mission’s approval of his request, “If I shut in my well to prevent waste, then I have a defense against somebody who tries to ‘top lease’ mine.”

Levinson and others similarly situated can use the commission’s finding of “economic waste” to defend their leases from non-production clauses. A lease is a private contract, and any disputes are referred to a district court, not the Corporation Commission.

COMMISSION BRACES FOR BUDGET CUTS

In a related matter, the Corporation Commission was briefed on the Board of Equalization’s declaration of a $416 million state revenue failure for the remainder of this fiscal year, which ends June 30. The shortfall is attributed primarily to the three-month postponement of the income-tax payment deadline, to July 15.

A projected budget shortfall next year of $1.37 billion could see state agencies face budget cuts of 5% to 7% in Fiscal Year 2021, which starts July 1.

Those percentages would translate into Corporation Commission budget reductions of $878,000 to $1.2 million. The commission was appropriated $17,568,000 by the Legislature for Fiscal Year 2020, and the agency’s total budget for FY ’20 is $60,845,806, according to Mark Tygret, Fiscal Division Director for the Oklahoma House of Representatives.