Finders Keepers? by Daintith Terence;

Author:Daintith, Terence;
Language: eng
Format: epub
Publisher: Taylor & Francis Group
Published: 2010-08-15T00:00:00+00:00

PRORATIONING OF PRODUCTION

This was the framework within which a divided industry approached its problems of dealing with excessive production and declining demand as the Great Depression overcame the country in 1929. That the industry’s attitudes at such a time should have been driven by a desire to preserve activity and profits rather than protect future generations through improved oilfield practice is hardly surprising, but they are important in explaining the form assumed by conservation measures in the crucial decade of the thirties. Capture was at the root of the problems these measures were trying to address, but the need for quick-acting solutions meant that the approach chosen was one in which the symptoms of the malaise were forcibly suppressed while the underlying sickness went untreated.

That approach was state-by-state restriction of production, and the legal basis on which the industry sought to rest it was the prevention of waste. Oklahoma’s 1915 oil conservation statute conveniently included in its definition “waste incident to the production of crude oil or petroleum in excess of transportation or marketing facilities or reasonable market demands.”61 Schemes permitting control on this latter basis have been generally referred to as “market-demand prorationing.” Not every oil-producing state was prepared to accept market demand as an appropriate basis for production restrictions. The association of the two notions was uncomfortably suggestive of official endorsement of monopolistic price fixing. The Texas statute of 1919 had omitted this basis for control, Louisiana explicitly admitted it only for gas, and California never succeeded in passing any kind of prorationing statute, though it is said to have achieved prorationing “to a limited extent” by voluntary agreement through the Conservation Committee of California Oil and Gas Producers.62

Whether based on production in excess of market demand or on the risk of some other form of waste, either physical or economic, prorationing involved dividing up the permissible production among producers from a common source. Proration orders were drafted after hearings by the relevant commission, were elaborately reasoned, and reflected considerable input by producers. Indeed, producers—where they could agree—effectively designed the structures employed. In the first proration order, No. 920 of June 5, 1915, made by the Oklahoma Corporation Commission in relation to the Healdton field, the restrictions were applied by gauging the potential production of each well and reducing its output to the same fraction of that potential as was being applied to the field as a whole.63 Assessing well potentials took time, and some large new fields, like Oklahoma City and later East Texas, were initially prorated simply by dividing the permitted production by the number of wells. Thus, the order for the Oklahoma City field, issued after imposing an initial 30-day shutdown, provided for proration on a “time basis,” with each well allowed to run wide open for a proportion of a given period—initially a week—corresponding to the permitted fraction of fieldwide potential. This was initially 40 percent, allowing wells to be run 2.8 days a week; within a year, it was down to 2.75 percent, so that an operator could run its wells for only 8 hours in any 12-day period.

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