By Keith Goldberg

Law360 (April 13, 2020, 8:30 PM EDT) -- The deal the Organization of the Petroleum Exporting Countries struck with partners to slash global oil production will tap the brakes on free-falling oil prices, but won't do much to calm the headwinds facing the industry as the novel coronavirus continues to crush global energy demand.

On Sunday, the group of OPEC nations and allies known as "OPEC+" agreed to cut their production by 9.7 million oil barrels per day in May and June, but that's well short of the 20 million-plus barrel-per-day decrease in demand due to the COVID-19 pandemic. Factoring in the expected voluntary reductions from drillers in countries including the U.S. and Canada will only bump global production cuts to 14 million barrels a day, according to a Monday report from IHS Markit.

While it should stop the oil market from plummeting further, it won't stem the growing tide of driller bankruptcies.

"It keeps the bottom on the market," Jim Krane, an energy fellow at Rice University's Baker Institute said of the OPEC+ deal. "It doesn't bring the market into balance."

Here, Law360 breaks down three issues to follow after the OPEC+ deal:

A Temporary Reprieve, But Long-Term Problems Remain

Experts say the OPEC+ deal to cut production and end a price war between Saudi Arabia and Russia is an acknowledgment of the practical consequences of plunging demand and a growing supply glut: a rapid tightening of global oil storage capacity.

"If there's no place to put oil production, then you have this cascading series of pretty damaging reactions to shut in oil production," Krane said. "That can be expensive and it can be physically damaging."

But the OPEC+ deal only slows the rate that the global storage capacity is filled, it doesn't stop the process. As long as demand remains depressed, experts say the cuts won't be enough to spark a major oil price recovery; indeed, prices remained relatively flat Monday despite the OPEC+ deal being announced the day before.

And U.S. oil production isn't exactly headed off a cliff yet. Last week, the U.S. Energy Information Administration released its monthly Short-Term Energy Outlook, which said the nation will produce an average of 11.8 million barrels of oil per day in 2020, down from 12.3 million barrels per day in 2019.

Producers will keep producing as long as they can sell it for more than it costs them to extract it, said Steve Hendrickson, president of petroleum engineering company Ralph E. Davis Associates, a unit of energy advisory firm Opportune LLP

"We're not at a sustainable place in terms of the economy and oil markets," Hendrickson. "It's going to take a while until we find ourselves back in one."

A Clearer Picture for Oil and Gas Lenders

Lenders this spring are poised to redetermine the borrowing bases for reserve-based loans taken out by oil and gas producers. Those loans, a staple of energy industry lending, are based on a company's total reserves and the price of oil, and are usually revised twice a year.

If the OPEC+ deal provides some clarity on what prices and the oil market will look like, at least in the short term, it will also provide guidance for banks and other lenders poised to make major cuts in drillers' borrowing abilities that could drive many companies into bankruptcy, experts say.

"One of the reasons the banks wanted to hold off taking action with respect to borrowing bases is they had no clear line of sight as to what the next several months would look like," said Kraig Grahmann, the co-chair of Haynes and Boone LLP's energy finance group. "The decision helps give them that line of sight, so now they have to assess each credit individually to determine what will improve the bank's recovery on the loan."

While some companies might be able to convince their lenders to kick their debt cans down the road, others may face a more immediate reckoning because a lender's prospects for a recovery will only get worse, Grahmann said.

More price clarity might be useful in figuring out how creditors stack up in a restructuring, but asset prices are still too low for companies to unload a lot of assets, Grahmann said.

And the OPEC+ deal doesn't change the fact that driller bankruptcies were already on the rise before the onset of COVID-19 and the Saudi-Russia price war, or that approximately $200 billion worth of oil and gas company debt is set to mature within the next few years.

"For a lot of situations, lenders are taking action and this agreement doesn't soften the need for them to take those actions," Hendrickson said.

Will Texas Join the Production Cut Party? 

The OPEC+ agreement came just a few days before the Railroad Commission of Texas considers a petition by Pioneer Natural Resources USA Inc. and Parsley Energy Inc. to start a statewide proration of oil production, in which Texas drillers would have to reduce a percentage of their total production in order to align it with market demand.

The RRC hasn't taken such a step since 1973, and is generally loath to restrict oil and gas development. Experts say on one hand, the OPEC+ deal means the agency won't be on an island if it orders any curtailment. On the other hand, RRC commissioners might feel that OPEC has done enough and a statewide curtailment could place Texas at a disadvantage compared to other oil-producing U.S. states that don't take such a step.

"They're going to start with a bias against [prorationing]," Hendrickson said.

Indeed, outgoing RRC Commissioner Ryan Sitton, who has publicly floated the idea of prorating oil production and said the agency should explore the idea, walked back some of his enthusiasm following the OPEC+ deal and in advance of Tuesday's RRC meeting.

"While I have been public about my thoughts that Texas should take a lead role in this conversation, I still have many reservations, and I will be examining heavily if and how proration could be done," Sitton said in a statement Monday.

But Krane said one way the RRC could force production cuts without having to resort to prorationing is to simply enforce state rules against excessive venting and flaring of gas from wells

"They'd be taking offline the least-efficient producers," Krane said. "If you still can't produce oil without having to dump waste products into the sky, you shouldn't be in the business."

Several environmental groups have urged the RRC to target drillers that excessively flare or vent for the bulk of any potential curtailment of production.

--Editing by Emily Kokoll and Alanna Weissman.

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