Leslie Haines Executive Editor At Large, Hart Energy, Paul Hart Editor-In-Chief, Midstream Business Hart Energy Tuesday, January 2, 2018 - 6:00am
Sales abroad of crude oil, natural gas and petroleum products have reached more than 7 MMboe/d, representing a new industry for the U.S., according to Continental Resources Chairman and CEO Harold Hamm, who heads one of the nation’s largest independent oil and gas producers.
Crude oil exports alone may increase to 4 MMbbl/d by 2022, according to recent remarks by Enterprise Products Partners LP, as the world demands more light sweet crude. The problem is, the nation simply is not equipped to handle the potential outfl ow after a 40-year federal law that prohibited most crude sales abroad. The nation’s excellent midstream infrastructure was directed to bringing in and distributing oil supplies, not sending them out.
The shale revolution changed that. The U.S. has re-emerged as a major crude oil and natural gas trader on the world’s energy stage.
New infrastructure must go in place to transport and/ or liquefy the gas and load tankers—many of which are so large they can’t enter U.S. ports—if the U.S. expects to reach its potential. Since Hamm has been a strong proponent of energy exports, Hart Energy editors met with him at his Oklahoma City headquarters recently to discuss the potential and challenges he sees in fulfilling that promise.
Hart Energy: Why are crude exports so important to U.S. producers?
Hamm: We can’t control the market, so through contractual arrangements or otherwise oil and gas companies are quickly changing what they do and how they do it. We’ve brought in people to do that, and we’re not the only ones. As much as 30% of U.S. oil production could be going to foreign countries soon. It would be ‘game over’ if the U.S. couldn’t sell that oil; that’s the name of the game.
The first product shipments were going to South America, but there are a lot of shipments of crude and products now going all over. China is a big market; they have a lot of these small—I call them ‘teapot’— refineries, but some of them run 160,000 barrels per day, which is not that small. They were required to use domestic crude supply, but now they can deal directly with anybody and buy supply from anywhere, and they want to diversify their supply. The Chinese are coming here to talk.
China needs our light sweet crude. A lot of foreign refineries were built—and are operated—on the cheap. They are not complex and can’t run heavy and sour crudes. We’ve found there are a lot of refineries that want light shale oil; there’s a good market for it.
Hart Energy: You recently projected that U.S. LNG exports will roughly triple in the long term and take about 40% of domestic gas production. Given increasing LNG output by Australia and other suppliers, is there a sufficient worldwide market for such large volumes?
Hamm: There is. The short answer is there are a lot of LNG markets, and not always where you expect. There is a lot of interest even in the Middle East, in Dubai, for example, in U.S.-produced LNG. The Middle East producers have drilled for gas, thinking there would be a lot produced, but really not much has been found. And what they found has been sour natural gas, so they haven’t had much success with it. It’s tremendously sour.
We’ve seen LNG exports rise to between 2.5 Bcf and 3 Bcf per day [70.7 MMcm/d and 84.9 MMcm/d], and it could grow to 10 Bcf or 11 Bcf per day [283 MMcm/d or 311 MMcm/d] by 2019. We’re off to an awfully good start. There are 143 to 147 receiving points around the world, and there will be more, so it’s a big market. It’s a lot easier to build receiving terminals than liquefaction plants. It is absolutely a good growth industry for us.
And can we compete with Australia and Qatar? Yes, I absolutely think we can. We have the infrastructure, and we can be the low-cost producer.
Hart Energy: What about Mexico? Will the U.S. continue to increase its exported gas volumes across the border in the foreseeable future?
Hamm: Mexico has been a very good market. Let’s face it, natural gas is cheap and very accessible to them. People thought it would be about a 5-Bcf-perday [141.5-MMcm/d] market, but it’s going way past that. Some people have forecasted that it will go higher. A lot of times forecasts and predictions are wrong.
Hart Energy: How have crude exports affected Continental?
Hamm: They benefit us in a lot of ways. Instead of worrying about outlets for our crude, we’re working at capacity, and we’re not going to be at the mercy of U.S. refiners—I never want to be in that position again. We’re not going to do that anymore.
The balance has shifted. We did have something of an adverse relationship with refiners before the export ban was lifted. Some of them actually fought to keep it, but the big refiners, like Exxon Mobil, Chevron and Phillips 66, were supportive. Others want to keep domestic producers as their milk cow, and we do not want to do that.
It’s important to remember that a large share of U.S. refining capacity—about 30%—is owned by foreign crude producers, who bought plants and modified them to run their specific crudes. They aren’t interested in U.S. crude production being exported.
Hart Energy: Has the export market for U.S. crude grown as rapidly as you expected following the lifting of the export ban at the end of 2015?
Hamm: It has. Lifting the ban had two effects. First, within 11 hours, the differential between West Texas Intermediate [WTI] and Brent went to zero, though Brent has gone back up. Two, the market has grown since then to about all the exports we can handle with the infrastructure that we have. We really need to be able to load those very large ships. A couple of things have helped. One was expansion of the Panama Canal. The other is the expansion of our ability to load tankers for export at our ports.
Hart Energy: Have you heard from overseas crude customers that buy U.S. oil? What are their thoughts?
Hamm: We have had early contacts with some of them. We talk with South Korea all the time. They were buying oil from Iran and some other people they really didn’t want to deal with. They wanted to change that permanently and quickly. They want deals that are dependable; they’re following the lead of China.
Hart Energy: Can the U.S. gain markets by proving itself a dependable source in comparison with Venezuela and other politically unstable countries?
Hamm: I’ve said all along that the U.S. can be the producer of choice. We are dependable, and we have the banks, the rule of law and the courts; contracts matter if there are questions. It’s quick and easy to do business with us. We knew we’d become the market of choice, and we’re seeing that play out.
Hart Energy: You recently said that, overall, domestic producers need crude prices at $50/bbl or higher to be consistently profitable. Will exports help meet that goal?
Hamm: They will, but there’s quite a bit of variance. The impact of exports can be great. There may be a lot of supply now, but that’s not sustainable worldwide at lower prices. Producers are incapable of sustaining production without adequate capex and the EBITDA to support it, and we have to have that to generate a return for our investors. There’s one inescapable fact: The lower the price is, the less revenue you have and the less capex you have, and then you can’t meet the world demand.