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Vol. 17, No. 25 Week of June 17, 2012
Providing coverage of Bakken oil and gas

Boosting returns

Continental’s Harold Hamm urges fellow Bakken operators to change tactics

Ray Tyson

Petroleum News Bakken

There are numerous things that famed Continental Resources chief executive Harold Hamm likes about the Bakken and his adopted home, North Dakota. But there are a few things that bother the native Oklahoman, particularly the Bakken’s relatively low rate of return on investment compared to some other unconventional liquids plays in the United States.

Before a packed house at May’s Williston Basin Petroleum Conference in Bismarck, N.D., Hamm cited statistics showing an average 25 percent return from the Bakken, versus 40 percent from the Permian basin and 50 percent from the Eagle Ford, a major unconventional Texas liquids play and among the Bakken petroleum system’s chief competitors for investment capital.

“You know that doesn’t cut it,” he asserted. “A percentage of that money is going to compete and go to some other play. That capital goes where the opportunity is. We have to get better at what we do here.”

In the world of finance, rate of return, also known as return on investment, rate of profit or sometimes just return, is generally defined as the ratio of money gained or lost — whether realized or unrealized — on an investment relative to the amount of money invested.

Fly a smaller jet

Hamm called on his fellow producers to begin altering the way they do business in the Bakken, to reduce costs through more efficient oilfield developments and to generally tighten their money belts.

“You guys may have to settle for a little bit slower jet, maybe a smaller jet,” he quipped.

Continental, a major producer and largest leaseholder in the Bakken, already is well on the road to improving its own returns, in part by way of the so-called ECO-Pad, a drilling technique whereby Continental drills four wells from a single drilling pad. The approach allows the company to develop two separate formations on two separate spacing units simultaneously, increasing production efficiency. It also allows the operator to harvest more of a reservoir’s resources while reducing environmental impact on the surface of the land.

While other companies are using a single-pad technique for extracting natural gas, Continental is using the technology to drill for oil. The company completed its first ECO-Pad project in 2010 in Dunn County, N.D., from the Three Forks and Middle Bakken formations.

ECO-Pad means savings

Continental says the ECO-Pad technique provides an estimated 10 percent cost savings on the drilling and completion of each well. Continental planned to add about 40 ECO-Pad projects in 2011 and 2012, and to see continued cost savings on each well.

“We’re planning a lot of pad rigs,” Hamm said. “And as we reach the point that our matrix helps our position, we will be drilling at least 50 percent pad locations. And this is only one concentration we are going to focus in on.”

Another thing that troubles Hamm are the huge price differentials that seem to plague crude markets, with West Texas Intermediate, or WTI, trading at a big discount to North Sea Brent, and Bakken crude scraping the bottom of the barrel, trading at a big discount to WTI.

“I don’t know if that bothers you all or not; it certainly bothers me,” Hamm said. “We need to get rid of this differential, and we’ve got to do it now. We ought to be at parity.”

The price differential between WTI and Bakken is partly due to the additional costs to transport increasing volumes of Bakken crude via train, barge and truck to distant refineries.

Oil pipelines needed

“What we need are pipelines to be able to get our oil to water … so that we can ship to anywhere in the world.” Hamm said. “We need several major lines to this field. So we need to get this done. We are way behind time on it.”

Meanwhile, Hamm told the Senate Finance Committee June 12 in Washington, D.C., that the United States must retain tax breaks that help independent oil and gas producers. He noted that Continental would drill about one-third less oil without the ability to expense drilling costs.

Companies should continue to be able to expense intangible drilling costs rather than deduct them over time, explained Hamm, who also is an energy adviser to Republican presidential candidate Mitt Romney.

“If we do away with those, we’ll start to stop this march to energy independence that we’ve begun,” Hamm told the committee, adding that he wasn’t speaking for Continental or Romney.

‘Scarcity’ versus ‘abundance’

In his May 24 presentation to the Williston Basin Petroleum Conference, Hamm turned to politics and the upcoming presidential election, saying that when it comes to America’s oil and gas resources, Romney’s energy policy is based on “abundance” and Barack Obama’s on “scarcity.”

Obama’s energy policy has failed, Hamm charged, because it was based on the need for alternatives to counter the supposed irreversible decline in oil and gas resources. In fact, the continuing development of vast new reserves in recent years, like the Bakken, has actually put America on the road to energy independence, he said.

“We were running out, so we had to turn to these alternatives — solar, wind, and anything else you can think of,” he said of Obama’s energy policy. “He’s had a wave that just crested over him.”

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