VOLUME 22, NO. 9 THE TIPRO TARGET April 30, 2020 Texas OIL PRICES DIP INTO UNCHARTED TERRITORY, Independent BRIEFLY GO NEGATIVE Producers and Royalty Owners Oil prices nosedived on Monday, April 20, plummeting below the $0 benchmark for West Texas Association Intermediate (WTI) crude oil front-month futures for the first time as the industry continues to reel from an unexpected and severe downturn. A combination of unusual dynamics led to the historic drop in prices of crude oil last week, including a significant build of inventory of domestic crude oil supplies, substantial decline in demand after the outbreak of the coronavirus (COVID-19) pandemic, limited storage availability and the close of contracts for the month of May leaving West Texas Intermediate crude oil May 2020 futures contract (April 19-21, 2020) traders unable to find other market participants dollars per barrel to accommodate oil purchases. At one point, WTI prices traded as low as -$40.32 per barrel. “On Monday, May WTI futures did what was once thought to be unthinkable – they went negative. This most recent collapse is the direct result of an oversupplied market, dramatic demand destruction as a result of COVID-19, and contract expiration nuances. It marks yet another perfect storm-type scenario that negatively impacts the price of crude oil,” explained Bernadette Johnson, vice president of strategic advisory group and data analytics firm Enverus. ”Outright negative prices are a sign Source: U.S. Energy Information Administration, based on CME Group and Bloomberg, L.P. that well shut-ins are imminent and are actually occurring in many places where prices in the field are in the single-digits or, in the case of some crude oil condensates, are negatively priced.” And though June contracts have since traded in a relatively stable range, sustained volatility in oil markets, ongoing supply gluts and other economic challenges will continue to hurt Texas producers for the foreseeable future. Another looming concern is the scarcity and high cost of available crude oil storage as oil producers fear space could run out in the coming weeks. According to U.S. Energy Information Administration (EIA) storage capacity data, crude oil storage facilities at Cushing - one of the world’s largest crude oil storage complexes - have 76 million barrels of working storage capacity. As of April 17, Cushing inventories totaled 60 million barrels, some of which (about 2 million barrels) were in transit by pipeline, water, or rail. The remaining 58 million barrels are held in tank farms at Cushing, implying that storage was 76 percent full. “Although EIA data indicates that some storage remains available at Cushing, some of this physically unfilled storage may have already been leased or otherwise committed, limiting the uncommitted storage available for financial contract holders without pre-existing arrangements,” explained analysts from the EIA. “The availability of storage in Cushing will remain an issue in the coming weeks, and could still result in volatile price movements in the June WTI futures contract or other U.S. crude oil spot prices that face limited storage options.” At a press conference last Tuesday, April 21, Texas Governor Greg Abbott expressed his intent to provide solutions offering relief to the state’s oil and gas industry. “We as a state, we as a nation, want to make sure that we are doing all that we can to try to protect and aid and support all of the men and women who are working in the oil and gas sector,” said Governor Abbott. In the meantime, a downturn in drilling in the state’s oil patch is likely to hinder not just the energy industry and economy, but government coffers, too, which are fed by revenue from taxes collected on exploration and production activities. “While this unprecedented volatility is concerning, the greater impact to Texas will come if demand remains historically low for a prolonged period of time and supply gluts continue to strain storage capacity,” said Texas Comptroller Glenn Hegar. The comptroller noted the state’s Rainy Day Fund and State Highway Fund were expected to be impacted from the reduction of oil and gas severance taxes collected this year, as would state and franchise tax revenue. “Given the historic nature of today’s market moves, we are carefully monitoring trading as June contracts come into focus. Should prices remain depressed over a long period of time, we anticipate the impact will be reflected in a reduction in the revenue forecast we’ll be releasing in July.” Page 2 April 30, 2020 THE TIPRO TARGET CHAIRMAN’S MESSAGE TIPRO Members, The 50th anniversary of Earth Day, celebrated last week on April 22, presents a timely opportunity for all of us to reflect on the continued improvements by the oil and gas industry to further enhance our environmental performance and do our part to ensure progress that will promise a better environment for future generations to come. Earth Day was established by President Richard Nixon in 1970 to demonstrate support for keeping our environment vibrant and safe as well as bring awareness of environmental protection measures adopted to ensure we all have access to clean air and water resources. On this occasion, and throughout the year, I am proud to know that many members of TIPRO are voluntarily working towards new solutions and innovations that will further protect and improve the environment, while also allowing domestic producers opportunities to reliably deliver sources of energy to our fellow Americans. While America today is the world’s top producer of petroleum and natural gas, our country also continues to be a leader in clean air progress, and has experienced a 73 percent reduction to the six main criteria air pollutants since the first Earth Day. This significant environmental achievement has in part been supported by initiatives put in place by the nation’s oil and gas industry that is contributing to the overall decline of Eugene Garcia greenhouse gas emissions in the United States. In fact, as a serious testament to our commitment, the oil and gas industry has invested over $356 billion since 1990 to improve our environment performance. In 2017 alone, we spent $15.9 billion on new technology, cleaner fuels and other environmental initiatives backing this cause. Furthermore, in the Permian Basin, America’s largest oilfield spanning across more than 75,000 square miles in Texas and New Mexico, concentrated efforts are underway to further mitigate air emissions and minimize the environmental footprint from E&P activities. Energy companies are going above and beyond regulatory compliance requirements and choosing to voluntarily adopt programs that further drive emission reductions at production sites. As shared earlier this year, TIPRO also as an organization is proud to serve as a partner of the new Texas Methane & Flaring Coalition (TMFC), an initiative representing nearly 80 percent of oil production in Texas that has been formed to minimize methane emissions and flaring in the state of Texas. TIPRO is committed to working with the coalition and member companies to continue to help the industry improve its environmental performance. For those of you interested in learning more about the work of the TMFC and want to become involved, I encourage you to visit www.texasmethaneflaringcoalition.org. It is worth noting that many TIPRO members not just producers, but also are surface owners that have a long history -- some for generations -- of owning a “little piece of heaven” in Texas. These ranchers, farmers, and land owners proudly maintain their land in what has today become known as an “environmentally friendly” fashion, though their mindful approach has always been at the heart of how they traditionally manage and look after their land. This legacy goes hand in hand with the emphasis TIPRO has placed in working with regulators and industry partners in improving standards outside of the regulatory process across our industry. Now and in the future, we look forward to further building on the success of the industry to continue advancing environmental growth in conjunction with the expansion of energy development in Texas and across America. Eugene Garcia TEXAS REGULATORS TO TAKE VOTE MAY 5TH ON PRORATING OIL PRODUCTION Energy regulators in Texas are expected to vote in early May on the possible establishment of oil production limits that would reduce output of crude from the nation’s top oil producing state at a time when the world is experiencing a historic oversupply of oil. During the Railroad Commission’s next open meeting scheduled for Tuesday, May 5, Railroad Commissioner Ryan Sitton has proposed the panel of three commissioners make a formal decision on an order he has submitted that recommends the state optimize and control production of crude oil in Texas in order to support the stabilization of oil market forces. As detailed in Commissioner Sitton’s proposal, he has suggested the state take the following course of action: • Cut 20 percent of Texas’ oil production (or 1 million barrels per day), but only after other state or national governments commit to making "complementary" reductions in addition to the oil cuts that have already been announced by the Organization of the Petroleum Exporting Countries (OPEC) • Limits would remain in effect until other governments stop curtailing their output or oil demand increases to roughly 85 percent of its level before the virus struck, equal to 85 million barrels of oil per day Article continued on Page 3... TIPRO Calendar of Events JUNE 10, 2020 JULY 8, 2020 AUGUST 12, 2020 AUGUST 19-20, 2020 HOUSTON — IPAA/TIPRO HOUSTON — IPAA/TIPRO HOUSTON — IPAA/TIPRO SAN ANTONIO — TIPRO’s Leaders in Industry Leaders in Industry Leaders in Industry 2020 Summer Conference, Luncheon, 11:30 a.m.