Q&A: Continental CEO says EIA forecast caps WTI
Oklahoma City, 27 September (Argus) — Continental Resources chief executive Harold Hamm says Nymex WTI crude prices are lower by about 20pc because of the US Energy Information Administration's (EIA) overly bullish forecasts of the country's crude output. He spoke with Argus Media about how industry has challenged the forecast, his expectations of oil prices and well output.
You say the EIA's US oil production data is too optimistic. What impact do you think that's had?
It has the same effect we experienced when Libya and Nigeria came on with half a million barrels extra [earlier this year]. When the market saw that, there was a pretty good sized price correction, of about 20pc. At that time, WTI was at about $53/bl, looking like it may go to $55/bl, and suddenly went to $43/bl. Just over a short period of time, by 1 June from 1 April, it fell by 20pc. That was about the same amount of volume. What [EIA] is over is very significant. We wouldn't be making an issue otherwise.
I have a history back to 2011 with the EIA. Back then we were trying to get them to recognize the importance of some of these early shale plays, like the Bakken, because we needed infrastructure, and they were under-forecasting back then. It was kind of a struggle to get them to realize what really was happening in the American energy renaissance, what horizontal drilling was doing for oil.
They need to get it right. If they don't we see distortion happen. And we are seeing distortion happen now. The Brent-WTI spread is a good example. Here we are, within two months or three suddenly down to Brent by $6/bl. We have been about $2/bl.
What steps are producers taking to address the data issue?
We looked at this from the DEPA (Domestic Energy Producers' Alliance) group. We saw that everybody cut back from April through June and EIA's projections were way up there. We looked at projections what they should be and came to the conclusion that they should be somewhere between 9.3mn-9.4mn b/d by year-end. So, a big difference from the 9.9mn b/d they were predicting at that time. So we requested a meeting — that was in July.
In the meantime we tested everybody that reported publicly in the second quarter. And of the 25 oil and gas companies that report publicly, sure enough capex had been cut and corresponding production was cut as well. So we knew that production is not growing like the EIA is saying. It was coming down. Rig count was turning over and so were well completions.
We sat down with them and asked them to explain how they could make this type of a projection, when the actuals had been flat since the end of February through June, and expect them to jump those levels. It seemed to me that they were just enamored by technology — they just thought it is going to get more and more efficient and produce more and more oil. We showed them how much over-forecasted they were for those months. They had lowered from 9.9mm b/d to 9.82mn b/d finally. But still the 9.82mn b/d from the consensus — or what everybody thought it would be — they are still 100pc off. The actual growth is about 500,000 b/d, to 9.35mn b/d, about half a million barrels from last year to this year. And they were at 9.82mn b/d, which is another half a million barrels, so that's 100pc off.
We waited for their Short-Term Energy Outlook before we said anything. It came out last week and they cut their forecast by 130,000 b/d, down to 9.69mn b/d. That's still 80pc high.
Are there any other factors driving the Brent-WTI spread or is it just the EIA forecast?
What this is really representative of is a US glut and tightness in the rest of the world. That's really the story and that's what causes this.
Certainly the two ought to be within a dollar or two, one way or the other. We probably have less supply disruption right now than we have ever had the last two years — ISIS related, Nigeria and North Africa. We probably have less right now than any time. I don't believe that's the case.
They need to do their own homework in the market and get it figured out because it can cause serious distortion, both high and low, if it is wrong.
What are your forecasts for crude oil price?
Right here I see just if this correction is made and if the market realizes where we really are in America, I think there is a 20pc adjustment due right now.
I have said all along that below $50/bl is not sustainable, that we would not have enough supply to meet demand in the world and I believe that is true. Once this adjustment is made with the oversupply that we have had — which was created by Opec over-producing — once that adjustment is through, then we are going to need something north of $50/bl for sure, and probably around $60/bl that is going to take to supply the world's needs on oil.
The market needs to get used to the fact that we have capability in this country of oversupplying the market. Are people going to do that? I don't think so. Here's a good example of what's going on right now: We did not oversupply the market and we are seeing that the industry has been very well disciplined, price goes down everybody cuts back. Some people will probably spend more than cash flow, sure, but the majority isn't. Majority of the operators are going to be responsible.
Do you think US onshore producers have overworked their wells as we are seeing gas to oil ratios (GOR) worsening in some basins?
I think it varies play to play. As to any impact in the Permian — we are not there, so I can't comment on that. I know that in the Bakken we don't face that at all and haven't. Bakken is a different play, is strictly the best pure play, oil play, in America. I don't believe it is an issue in the Scoop and Stack. We have not seen that effect there. I can't comment on the Permian.