The US shale revolution is “the best thing going on in the world since the computer chip”, says Harold Hamm, chairman and chief executive of Continental Resources.
“Look at what’s going on today, how the world’s changing. It’s the best thing for America, in my opinion, in 40 years. It’s completely transformative.”
No one embodies that transformation better than Hamm. Continental, which has its origins in a company he founded back in 1967, is now the leading producer in the Bakken shale of North Dakota and Montana, one of the two principal centres of the US shale oil boom.
The company spotted the region’s potential back in 2003, when conventional wisdom still held that oil production from shale reserves could not make economic sense. Advances in the techniques of horizontal drilling and hydraulic fracturing or “fracking” — and oil prices in the region of $100 (Dh367)a barrel — proved that assumption spectacularly wrong.
Oil production in the Bakken has quadrupled in the past four years, from about 250,000 barrels a day at the end of 2009 to about 1 million b/d today, and Continental has risen with it. Its oil and gas production trebled over 2009-12, and is on course to treble again in 2012-17.
“This is the best field found in the world in about 40 years,” Hamm says. “It’s unique.”
Since its float in 2007, Continental’s shares have risen sevenfold, and Hamm’s 68 per cent stake is worth more than $13 billion, making him one of the 40 richest people in America. It has been an extraordinary trajectory from his roots as the 13th child of Oklahoma sharecroppers.
He is now one of the leaders of an industry that will determine the future of US oil supplies, with profound implications for America and the world economy.
After decades of decline, US oil production is surging, thanks principally to the Bakken and the other booming shale field, the Eagle Ford of south Texas. It has blown previous forecasts from the US government’s Energy Information Administration, and is expected to return to close to its 1970 peak by 2016.
Yet with the shale oil revolution still in its infancy — production really started to pick up strongly only in 2011 — there is still great uncertainty over how long the boom can continue.
Analysts at Bernstein Research pointed out earlier this year that peak production rates for new wells in the Bakken had been falling, suggesting that the best parts of the field had been drilled and companies were moving into less productive areas.
Hamm, however, argues that there is still plenty more to come from the Bakken.
Speaking to the Financial Times at a Platts conference in New York where he picked up awards for himself and Continental as chief executive and company of the year, Hamm says the output of the Bakken, which has doubled in the past two years, will probably double again.
“We’ve expected that to go to 2 million barrels per day, and we think it will get to 2 million before it peaks out,” he says.
He also rejects suggestions that the rapid rate of production growth means that the field is being sucked dry more quickly. The number of rigs working in the Bakken has actually fallen back since last year, and with 186 running this month it has less activity than Oklahoma.
“Everyone thinks it’s a huge boom up there. It’s not,” Hamm says. “It’s very orderly development.”
One constraint is oil and gas pipeline connections, which have been lagging behind the new wells coming on stream. Continental prides itself on limiting the amount of gas released alongside oil production that it burns off in flares, and new oil wells can come on as more equipment is put in place to collect the associated gas.
Doubling the output of the Bakken, however, will require further advances in technology. One aspect of that is improving the economics of production by driving down costs. Drilling a well in the Bakken cost Continental an average of $9.2 million last year, and about $8 million in the third quarter of this year. Its target is to cut that to $7.5 million by the end of next year.
The biggest leap forward, however, would be drilling more wells in the most productive areas. Continental has been running pilot projects packing wells in closer together, and drilling into the Three Forks formation that lies underneath the Bakken.
The pilots so far have been “going well”, Hamm says. More results are due next year, but he is already looking forward to what they might mean. Earlier estimates had suggested the Bakken could take about 50,000 wells to develop, but Hamm suggests that is now too cautious.
“I think you can double that number,” he says. “So you’re possibly looking at 100,000 wells to develop that field adequately.”
The implications for Continental would be dramatic. Its proved reserves were 922 million barrels of oil, equivalent at the midpoint of this year. If it can drill wells that are more closely packed and deeper, without having too great an adverse impact on production from each well, it could add several billion barrels of potential additional resources.
The industry’s evolving understanding of the geology of shale reserves, the potential for volatility in oil and gas prices and the prospect of tighter regulations on companies all create risks of unexpected twists in the story of the US energy renaissance.
Hamm, however, has faith in the capacity of human ingenuity to keep the revival going.
“Nobody’s found another Bakken, but...I think there will be several more applications of horizontal drilling found. So this will go on for a long time.”