Oil billionaire and influential Trump adviser Harold Hamm drew a sharp response from a top industry group and questions from legal experts after his company, Continental Resources Inc., said April 23 it could not deliver crude to customers, citing hardships based on low prices.
With fuel demand destroyed by the coronavirus pandemic as people worldwide stopped driving and taking flights, oil producers have been forced to store hundreds of millions of barrels of crude and fuel that would otherwise have been consumed. With tanks now brimming, producers are cutting output.
Continental Resources, the largest producer in North Dakota, stopped all drilling there, shut in wells and issued a force majeure notice, according to three sources familiar with the matter, an action typically reserved for situations out of a company's control, such as natural disasters.
"The entire U.S. energy supply chain is hurting amid COVID-19 demand destruction. The answer to any of our shared pain isn’t putting a boot to the throat of U.S. refiners by canceling contracted deliveries of American crude oil," said Chet Thompson, CEO of the American Fuel and Petrochemical Manufacturers.
A spokeswoman for Continental did not reply to requests for comment.
Producers across the United States have been shutting wells and idling rigs, but the falloff has been particularly swift in North Dakota, the second-largest producer after Texas. More than 300,000 bbl/d of output has been cut out of 1.4 million bbl/d produced in 2019, according to state officials.
However, North Dakota oil regulators this week decided not to label current production as "economic waste," which would have them the rationale to mandate production cuts. The state's Industrial Commission said it will hold a meeting soon to consider this possibility, but regulators have been reluctant to mandate cuts.
“I think it’s going to be very difficult for them to assert economic force majeure, which is basically what they’re doing,” said Ted Borrego, who has practiced oil and gas law for over 45 years and teaches at the University of Houston Law Center. "I think the chances of success are pretty close to zero."
Continental also produces in Oklahoma, which this week issued an emergency order allowing producers to shut in wells without fear of losing leases.
Hamm has advocated heavy government intervention in the oil markets in response to Saudi Arabia's decision to flood markets with supply last month. He called for investigations into "illegal dumping of crude oil" by Saudi Arabia and Russia and for a ban on oil imports.
Coming into this year, Continental produced nearly 150,000 bbl/d in the Bakken, according to company figures. It had reduced its production through May by 30% before the latest price crash and suspended its dividend.
A producer who saw the notice predicted legal action, saying, "The only way there will be a force majeure on the producer side is if states prorate production."
Continental is exposed to weak prices because it did not hedge future production, betting economic growth would lift prices. Many large shale producers use derivatives as a type of insurance policy to lock in a price for their future output.
Bakken crude this week was selling regionally at roughly $3/bbl, far below the U.S. benchmark, said Ron Ness, president of the North Dakota Petroleum Council. Benchmark U.S. WTI crude settled at $16.50 on April 23.
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