By Keith Goldberg

Law360 (April 21, 2020, 4:20 PM EDT) -- The Railroad Commission of Texas on Tuesday punted on deciding whether to curtail oil production in the state, as two commissioners suggested the proposed cuts wouldn't survive legal challenges.

A day after U.S. oil prices tumbled into negative territory for the first time ever, RRC Commissioner Ryan Sitton said he was ready to vote on and approve cuts of 1 million barrels of oil per day — 20% of the state's output — starting in June. But Chairman Wayne Christian and Commissioner Christi Craddick said the RRC needs to take more time to examine the issue, including a consultation with the Texas attorney general's office to determine whether a move would hold up in court.

"Anything we do will probably end up in court," Craddick said at an RRC meeting Tuesday. "Litigation for the next four to six years doesn't help anybody. We need to make sure we have the legal grounds to do what's appropriate."

Texas shale giants Pioneer Natural Resources USA Inc. and Parsley Energy Inc. want the RRC to start a statewide proration of oil production in which Lone Star state drillers would have to reduce a percentage of their total production in order to align it with market demand. The RRC hasn't ordered proration since 1973.

All three RRC commissioners questioned whether the state's drillers were in dire enough straits due to coronavirus-depressed demand and a growing supply glut to order proration at a lengthy public hearing a week ago, but subsequent oil market events have moved Sitton into the pro-curtailment camp.

The events include the price of a U.S futures contract for delivery of crude oil in May falling as low as -$40 a barrel Monday, which means producers would have to pay someone to take the oil off their hands.

The RRC taking weeks, even days, to act is a choice in itself that could have devastating long-term consequences for the state's oil industry, Sitton said at Tuesday's meeting.

"I don't believe inaction on our part is acceptable," Sitton said. "I'm ready for us to vote on proration."

Sitton said his support of proration would hinge on several conditions, including production cuts from other oil-producing states and nations, and exemption for the smallest of producers. But that wasn't enough to ease the concerns of his fellow commissioners.

Craddick said she wasn't sure that everything Sitton proposed was legal. Questions she wants the AG's office to answer include whether the RRC can order statewide proration as opposed to ordering proration on certain oil fields and whether the agency must conduct an evidentiary hearing prior to issuing an order.

"I think there are some real questions about it," Craddick said. This is going to the courthouse and we really need to think about it."

Meanwhile, Christian noted that regulators in Oklahoma and North Dakota are mulling similar requests to curtail oil production and that he wants to see large-scale coordination between states and nations on production cuts rather than have Texas go it alone. He said he could be ready to decide on proration as soon as the RRC's next meeting, scheduled for May 5, as long as the agency can ensure the information supporting its decision is sufficient and can survive legal scrutiny.

"I believe we need to have it reviewed by the attorney general and make darn sure we don't get shut down," Christian said at Tuesday's meeting.

Parsley President and CEO Matt Gallagher said he was disappointed that the RRC chose to take no action on proration.

"The situation is urgent and further delays will cripple our state and the industry," Gallagher said in a statement Tuesday. "I am encouraged by the parameters the commissioners are going to vote on the 5th. It is clear we are not in normal market conditions and we need a symphony of solutions to bring stability back to our industry."

A Pioneer representative couldn't be immediately reached for comment Tuesday.

--Editing by Kelly Duncan.

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