Crude Summit Q&A: US output growth to slow - Hamm

OREANDA-NEWS. Continental Resources chief executive Harold Hamm spoke with Argus on the sidelines of Argus' North American Crude Summit in Houston. This interview has been edited for length and clarity.

Analysts expect US oil output growth to fall to 400,000 b/d by Q4 2015. Do you see it falling to that?

Certainly from what was projected, I think you will see a half a million barrel lower or greater. I think we may see from about the 1 mn b/d numbers I saw projected for this year I think it will be almost half of it.

By when?

We ran our numbers on these three plays [Bakken, Permian, Eagle Ford] and we see them starting to peak out here by March, flatten out and the decline starts in about June. So it is not going to be felt until the second half of the year. We saw rigs fall last week by 43. You are going to see a lot more than that this week. So they are fast coming down, but the thing that you don't see occurring is people dropping those completion rigs. Why complete that well? Sixty percent of the drilling cost is in well completions. Why complete that now? You are going to complete that when costs are much lower.

Last year Continental dropped its hedges for the next two years, just before prices fell even more. How did that decision come about?

First of all you need to understand what was going on with this whole thing. We were trying to understand what was going on. Right now, prices are artificially low. Does anybody disagree with that? Prices are at an artificial low. Gas is cheaper than Starbucks. So, it's an over-reaction. It is not going to stay there very long at all. Everybody has been forced to react quickly.

We went into it with two tenets. One was that – if prices fell beyond a certain point, we would pull back on capex. And that's basically what we have done for a lot of our plays. And the other part was – cash becomes king. If we don't believe this [price fall] is going to last long, and as fast as it was falling we don't believe it will last very long. It isn't going to last very long. So this measure of money is over two years -- the hedges went way out there. I don't believe that this thing will last that long. So that was the determination that made my decision, the decision by the board.

What do you see as the optimal market for Bakken crude?

Bakken crude, due to the distillate content and very little bottoms, it can compete with any oil in the world. We pushed most of the African oils out of the US with Bakken. It saved those eastern refineries, was a boon to them, a life saver. Bakken oil can compete very well anywhere in the world at these prices or any price. Everyone, be it Africa or the region we're in, is going to see problems replacing any of the supply at these prices. It's not going to happen.

Will the east coast remain a key market for Bakken?

A lot of people put a lot of money in rail. Those refineries put a lot of money in rail as well, so I think they'll continue. I think there's a good chance we'll see pipelines serving that area once we get Line 9 reversed. We are seeing new pipe go in up there [in the Bakken]. Pipes are so much cheaper than rail, so much more dependable, they're the preference. That's one of the reasons Kinder makes so much sense going up there [referring to Kinder Morgan acquiring the Hiland midstream business from Hamm]. That's not going to be the only pipeline they're going to do up there. You know how Rich [Kinder] is.

Will falling Bakken output slow the development of infrastructure needed to meet North Dakota flaring rules?

No, they're still playing catch-up. The biggest problem up there is although they've got imminent domain up there they don't have ‘quick-take' up there, where you can go and lay the pipe and then go into arbitration later to pay the land owner. That is a necessary component and we're trying to work on that with the legislature. Right now there's 1.8 miles of right-of-way owned by a native American tribe that won't deal with anyone, and it's really holding up the building of infrastructure.

Are there more asset sales on the horizon for you?

No. [The sale of Hiland] was just a completely different matter. We just had a lot of interest in it. And we wanted to be sure we had someone we could work with closely. But we don't' have any other assets we're planning to sell. We've done a couple of joint ventures that have worked out well.

Do you expect to acquire distressed assets?

We don't see a lot of people being out there in that situation yet. And we think that it will recover before it gets to that. So we're not spending a lot of mental energy on that. Everybody's doing the same thing, the market forces are working on all of us. If you put yourself in the position of not conserving cash you're going to hurt yourself, you're going to be that guy that everyone's picking on. Everybody's going to take the same procedures to conserve cash: you drop rigs, you don't complete wells. You do everything to cut projects you don't have to go forward with. Our company is very very strong financially. As soon as the market realizes [where production is going] we'll see these prices recover quickly.