Trump-Mediated Oil Deal Splits Large, Small Producers
On April 12, Saudi Arabia, Russia and the United States agreed to the largest-ever oil production cuts in a deal brokered by President Donald Trump.
The deal was intended to bring an end to a punishing, month-long price war between Saudi Arabia and Russia that had taken global oil prices to new lows and threatened dozens of small American frackers with unsustainable losses.On top of that came sharply reduced global demand for oil and gas due to the coronavirus crisis and its lockdowns. Before the COVID-19 crisis, global demand was about 100 million barrels per day. That demand has plunged by at least 35 percent. The American oil benchmark price was about $23 a barrel on Sunday night. Six years ago it stood at $100 a barrel.
The deal that was agreed to by Russia, the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, and some non-OPEC producers in a group called OPEC Plus will cut production by 9.7 million barrels in May and June, or about 10 percent of global production. Experts have said the agreed-to cuts do not come close to the levels needed to stabilize the oil markets. Non-OPEC Plus countries like Canada, Norway and the United States have also been cutting production on their own.
According to the New York Times, the deal resulted from a week of telephone calls between Trump, Russian President Vladimir Putin and Saudi ruler Mohammed bin Salman, known as MBS. Trump tweeted that the deal “will save hundreds of thousands of energy jobs in the United States.”
Mexico almost scuttled the deal when it refused to cut its allotted share of 400,000 barrels a day, committing to cut only 100,000 barrels. Trump intervened, promising unspecified support to Mexico.
While small U.S. producers have gotten more efficient and lowered their break-even price point at existing wells over the last several years, the price war and virus crisis have pushed many of them below break-even. Many were already carrying heavy debt loads.
The break-even point for drilling new wells is much higher, and as prices fall, new drilling and exploration shut down before production at existing wells.
Cuts Divide Producers
Meanwhile, according to Bloomberg News, state oil regulators in Texas and Oklahoma were considering their own production cuts,the first considered since the 1970s.
Pioneer Natural Resources Company and Parsley Energy Inc. asked the Texas Railroad Commission (the state’s oil regulator) to cut the state’s output by 20 percent, saying the free market can’t cope with the economic downturn.
Bloomberg reported that the debate—by videoconference, to comply with social distancing rules—included discussion by more than 50 people, evenly split between supporters and opponents of setting production limits. About 20,000 listeners tuned in.
Smaller producers generally favored cuts, but oil giants and trade associations argued that the market can take care of production cutbacks on its own.
The oil industry has already announced spending cuts of about $50 billion, not including privately owned companies that don’t have to report their finances, according to Todd Staples, president of the Texas Oil and Gas Association. Experts say those cuts will likely lead to production cuts of 1.8 million barrels a day. Texas, which produced about 5.3 million barrels of crude a day in January, accounts for about 40 percent of U.S. production.
The three-member Texas Railroad Commission will make a decision this week.
The Oklahoma Corporation Commission is scheduled to hold its own hearing on production cuts May 11 after getting a request from a group of small producers.According to Bloomberg, both Texas and Oklahoma used to set allowable levels of oil production in their states in a system known as pro-rationing. Oklahoma allowed that system to lapse in the 1950s, and Texas did so in 1973.
The American Petroleum Institute, a national trade group, opposes direct intervention by the federal or state governments and testified against the proposal in Texas.
“A Texas quota system imitating OPEC is not the answer to the challenges facing the industry and would only penalize the most efficient producers and create long-term negative consequences for American energy leadership,” API President Mike Sommers said in a statement.
More Coronavirus-related stories in the WJ:
April 20 issue:
April 13 issue:
April 6 issue:
March 30 issue (online only):
March 23 issue:
March 16 Issue:
March 9 issue:
March 2 issue:
February 17 issue:
February 10 issue: