Sheffield Speaks
“We're asking for a 20% cut until Sept. 30th, with the TX RCC" - Scott Sheffield
***Editor’s Notes: (1) if you find this newsletter helpful, forward it to friend or colleague; (2) we’re doing 3x issues this week***
Upcoming Oil/Production Policy Dates:
April 9th: OPEC + RoW Producers Meeting
April 14th: TX RRC Pioneer / Parsley Hearing
April 21st: TX RRC makes proration decision

RRC & SCOTT SHEFFIELD.
Yesterday, CNBC interviewed Pioneer’s CEO Scott Sheffield.
The latter half of the interview is worth taking note of:
"About 10x days ago, we were notified, along with all producers in the state of Texas, by all the purchasers - the purchasers said that storage is going to be full by May 15th. May 15th, we're not going to be able to take some of your oil. The majors might be able to sell 100% of their oil bc they can go directly to the [their] refineries.”
“It's the small & medium producers that don't have midstream contracts that can't sell their oil. So we [Pioneer & Parsley] decided to file a motion, last week - and you have to prove that you're wasting the oil.”
"And last week, we were selling Delaware Oil at $3/bbl. So you're wasting oil, that's easy to prove. Secondly, decimation of our industry & infrastructure and our service companies. And then fairness, being fair to all producers.”
“We're asking for a 20% cut until Sept. 30th, with the TX Railroad Commission" - Scott Sheffield
A few notes:
We expect TX storage to be full before May 15th, even with the proposed cut
Sheffield’s pitch was for proportionate across all producers*
*With an exemption for small producers (classic political pandering; FWIW - in his shoes - we would’ve done the same)
It comes down to this:
Majors own refineries
Independents don’t
Refineries buy crude
In the face of this unprecedented demand shock, having someone to sell to is now a critical issue for independents.
In this new world, owning refineries may be difference between surviving & permanent loss of capital -

OPEC + RoW.
A geopolitical bonfire is weeks away from going inferno.
It’s not about OPEC.
Or Saudi.
Or Russia.
Planes aren’t flying. People aren’t driving.
Rhetoric has taken over.
And tangible scapegoats are better than “COVID”.
We’ve spent more time thinking about the 2nd order effects of Thursday’s meeting than everything else in 2020, w/ the exception of the Wuhan virus.
Before digging into that, here’s why the deal is dead, before the call:

*figures represent proportional cuts in different demand scenarios
Targets / Stipulations / Dates:
Russia: 1MM max, US must participate
TX RRC: decision, if any, on Apr 21
Rest of US: *crickets*; ambiguous tweets
Canada: *open*; also, *tariffs*
Iraq: everyone must agree
We don’t see a 10MM bopd cut being agreed upon, let alone a 30MM cut (which we believe is a better estimate of current demand destruction).
Scapegoating:
The US & Canada have tempted an explicit blaming of Russia & Saudi
Russia’s position is to scapegoat the US (demanding US participation)
The US can’t (easily) legally regulate production
Saudi has counter-positioned that it’s Russia’s fault:
“the Russian Minister of Energy was first to declare to the media that all the participating countries are absolved of their commitments starting from April 1st,” - Saudi Energy Minister Prince Abdulaziz bin Salman
Amidst the positioning, it’s been made clear by the Saudis that words can & will be used against you.
[we can’t get that song out of our heads…]
Words are very unnecessary
They can only do harm

Onto the meat of the matter -
If a deal is dead on arrival, then what scenarios play out?
The meeting is canceled
The meeting happens, no agreement
The meeting happens, a verbal agreement (that is not held)
The consequences of which include a long list of serious counter-party risks:
For oil exporting nations, how do you pay the bills?
For OFSs - have any unpaid receivables?
For Midstream - do you have E&P counter-party risk?
If prices collapse, who’s on the other side of crude swaps?

What follows - to us - is clear:
Economic self-interest
Political self-interest
Harold Hamm (Chairman of Continental) recently stated:
"The US producers don't need to coordinate between themselves. That's unnecessary. Each one of them will have his own situation to deal with”
Coordination doesn’t work well in negative sum-games.
Even outside of the oil world, we’re seeing evidence of this reality:
“Being an open trading nation has been a core part of our prosperity over centuries, but equally we need to look very carefully at our domestic economic sovereignty” - Australian PM Scott Morrison
Morrison’s words reflect our economic paradox:
That trade has been core to Western prosperity
And that - in this demand shock - trade will run against national self-interest
So, Trade Agreements are now targets…
[… that song again]
Vows are spoken
To be broken
Look - we’re hoping for cooperation.
But hope is not a strategy.
Hedging is -

OTHER NEWS.
Argentina defaults, again
Boris Johnson is still in the ICU
That’s it for today - we’ll be back tomorrow - take it easy -