Thursday, July 16, 2015
How the plunging price of oil has started killing off the US Oil production.
How the plunging price of oil has started killing off the US Oil production. (Alwasat).
In the previous six months, Hamm, founder of oil giant Continental Resources, had lost $6.5 billion, more than one-third of his net worth. The industry that Hamm had helped create was facing its greatest test in a frantic race to stay profitable as rival Saudi Arabia worked to drive down oil prices and, according to some analysts, undermine America's oil industry at the most important moment in its history.
Behind the low price of a gallon of gas at the pump this summer lies a competition worth trillions of dollars and which is capable of swinging the geopolitical balance of power. On one side are Hamm, a famous wildcatter, and other American oilmen who rode the discovery of hydraulic fracturing to tens of billions of dollars of wealth and a promise of, in Hamm's words, ending the "disastrous" days of Saudi Arabian control. On the other are the Saudis and their allies in the Organization of the Petroleum Exporting Countries, which are trying to stem rising U.S. oil power and maintain their 40 years of dominance.
On Tuesday, the cost of West Texas Intermediate oil, a U.S. benchmark, fell to $52.11 a barrel -- down from about $110 over the past year. Meanwhile, the number operating oil rigs in the country has fallen to just 645. That was lowest rig count in almost five years, down from more than 1,500 a year ago. OPEC said last month that it would continue to pump 30 million barrels a day, despite low prices, sending a strong signal to U.S. competitors that it had no plans to let up the pressure on the Americans.
Nearly a year into the oil contest, senior players in oil capitals from Riyadh to Houston are making risky bets about their next moves. Riyadh is continuing to pump, even as that puts its own petro economy on shakier footing.
For the U.S., the risk is that sustained cheaper energy prices will derail what had seemed only months ago like an inexorable energy revolution, one that was helping to power a still-recovering economy.
"A tidal wave scenario," Ryan Lance, chairman and chief executive of ConocoPhillips, said in Houston, describing the forces that were challenging producers across the world. "The industry is in a bit of survival mode."
Hamm's company, renamed as Continental Resources, grew into an oil giant over less than a decade thanks to new but pricey drilling technology that opened access to a previously out-of-reach bounty. "Thank God we had good oil prices," Hamm said at a Continental event last September, with oil at $97 per barrel.
"One time everybody was looking at the sunset of the [American oil] industry," Hamm said. "We've seen America driven to a new era, if you will."
But the price collapse has put the United States' — and Continental's — continued rise in doubt.
Since last fall, U.S. drillers have shuttered 60 percent of their rigs, seen share prices tumble with little recovery, and laid off tens of thousands of workers who might not return even if prices were to recover. Only a handful of companies have so far faced questions about their solvency, but they have been furiously cutting projects that are no longer viable. The pullback has been severe enough to slow down the broader U.S. economy, which for years had been powered by oil job growth and investment.
"There was an irrational expectation that the market for U.S. oil was unlimited," said Michael Levi, an energy specialist at the Council on Foreign Relations. "It led to a lot of ill-advised investment."
The oil prices of the previous years — $111 per barrel in 2012; $108 per barrel in 2013 — had helped Continental grow at a breakneck pace. In early September 2014, Continental stock hit $80 per share, and Hamm, who owned 68 percent of those shares, was worth more than Rupert Murdoch.
But then prices started to fold.
The downward slide has left Continental particularly vulnerable because Hamm bet wrong on what would happen in the oil market. As oil began its slide in early November, Hamm believed that oil had reached its "bottom rung." So he sold off Continental's hedges, netting $433 million in cash while losing his assurances that he could sell oil at a fixed price.
The company, in industry parlance, was "going naked," fully exposed to the markets. Then, on the day after Thanksgiving, OPEC held a meeting in which the Saudis determined that they'd no longer work to balance the market. Though Hamm perhaps saw that part coming, what he didn't foresee was how the markets would react: They freaked out.
"In hindsight, it was not the right decision," said Leo Mariani, an analyst at RBC Capital Markets who follows the energy industry.
Continental declined to make Hamm or other executives available for comment to describe company decision-making, but responded to several questions by e-mail.
Warren Henry, Continental's vice president of investor relations and research, said by e-mail that "no one anticipated the rapidity of the price drop, in part because it was based on price-cutting actions by OPEC members rather than supply/demand fundamentals alone."
Continental is a much different — and smaller — company than it was a year ago. It's pressured suppliers to lower their costs and has fewer rigs in fewer places. In the Bakken formation that made Continental famous, operations were once spread across eight counties. Now, Continental works only in a tight cluster where oil is cheapest to come by.
"Last year, I could sit on my deck and count 60 trucks in an hour," said Jean Nygaard, a Divide County resident who leases her farmland to Continental. "Now, I can drive to work 28 miles and not see a vehicle."
Today, the U.S. oil industry is trying to feel out what will happen next. Some figure an increase in oil prices has already been set in motion, triggered by the fact that so many companies have cut down on searching for the next place to drill. Without exploration, companies can maintain production for one or two years. But not for a half-decade.
Hamm has come to interpret the events of the last half-year as a sign of U.S. oil's staying power. Continental lost $33 million in the first three months of 2015, but Hamm says the company will be able to tread water for the rest of the year — and quickly ramp up if oil prices touch $70, something he says "could happen fairly soon."
"We are adapting well to the new price environment," Hamm said. "It's a great time to be in the American oil business," he added. "America will again be an energy superpower."
Hmmm......In one year when Iran dumps it's full potential on the market it will kill off any U.S. shale oil companies left. Then it only has to wait for the right time to close the Strait of Hormuz. The Obama 'admin' has just sold the rope with which the Iranians will hang the U.S. Read the full story here.