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Reeling Oklahoma oil producers win right to keep leases while wells shut

Reeling Oklahoma oil producers win right to keep leases while wells shut 1

(Reuters) – Oklahoma’s energy regulator said oil producers can close wells without losing their leases, the first victory for struggling U.S. companies seeking relief from states following the market crash.

Reeling Oklahoma oil producers win right to keep leases while wells shut 2

FILE PHOTO: An oil pumpjack is seen in Velma, Oklahoma U.S. April 7, 2016. REUTERS/Luc Cohen/File Photo

Several U.S. states have considered aiding oil companies, many of whom were already hurting before demand tanked during coronavirus pandemic lockdowns. That, and ballooning supply, sent U.S. prices into negative territory for the first time ever on Monday.

In an emergency order, the state energy regulator that oil companies could consider their unprofitable production economic waste, allowing oil and gas producers with money-losing wells to retain leases that could otherwise be voided if they halted output.

“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,” said Oklahoma Corporation Commissioner Dana Murphy, in a statement.

U.S. production reached a record near 13 million bpd in late 2019, but the pandemic has cut worldwide consumption by 20% to 30%, or up to 30 million bpd. Supply cuts from producers led by Saudi Arabia only amount to about 10 million bpd, while private companies in the United States and elsewhere are scrambling to close wells to avoid being stuck with oil that they cannot profitably sell.

Oklahoma was the fourth-largest oil producer in 2019, with output of about 580,000 barrels per day, but its production costs are among the highest in the country. More than half of the rigs operating in the state at the beginning of the year have been laid down, leaving just 24 currently, according to Baker Hughes figures.

Two out of three Oklahoma commissioners voted in favor of the order, enough to win approval. One commissioner, Bob Anthony, said he would not sign the order, but did not vote against.

The emergency order, as well as a separate application submitted by another group of producers requesting outright limits to Oklahoma’s oil output, will go before the state’s Corporation Commission on May 11.

New Mexico on Tuesday agreed to allow producers to apply to shut in output on state lands for at least 30 days, and Texas regulators also are considering mandated production cuts to halt losses. North Dakota is weighing aid for producers, but pushed back on the idea of limiting output at a meeting Tuesday.

Crude supplies have overwhelmed global demand during the coronavirus lockdowns. On Monday for the first time ever, traders agreed to pay customers to take U.S. crude futures off their hands, and on Wednesday U.S. crude futures fetched only about $14.60 a barrel.

Oklahoma oil companies have slashed jobs since oil prices began collapsing last month as major Middle East producers, Russia and others abandoned a pact to cut their output.

Eddie Rongey, an Oklahoma producer who operates some 600 wells, testified that he is losing $200,000 a month by producing from “economically challenged wells,” according to the order. Rongey sought the order to prevent having shut-ins jeopardize his leases.

In Cushing, Oklahoma, the largest U.S. oil storage depot with room for about 76 million barrels, traders this week said 100% of capacity was already contracted.

A March survey by the Dallas Federal Reserve Bank tinyurl.com/y89rcrog found producers in Oklahoma’s shale region needed to sell their oil for $33 per barrel to cover operating expenses.

Texas and Oklahoma can curb oil production to prevent waste of the states’ natural resources. Both used economic waste as the rational behind imposing restraints decades ago.

Stopping production takes time and must be done carefully to avoid damaging future output. Shut-ins also can cause an oil and gas producer to lose their right to drill under many leases.

Additional reporting by Jennifer Hiller in Houston; Editing by Franklin Paul, Jonathan Oatis and David Gregorio

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