Warren Henry, Vice President, Investor Relations of Oklahoma-based Continental Resources (NYSE: CLR), talks with the Opportunist’s Managing Editor Leslie Stone about his company’s role in the Bakken oil play, its vision for energy independence and how it will affect the U.S. economy.
The Bakken oil boom in North Dakota and Montana is being hailed as the biggest discovery in decades. Continental Resources, the largest leaseholder in the game, is using a technology known as horizontal drilling to access oil and natural gas plays that were previously not economical to produce. “Continental has a love for exploration and the ability to apply new technology and be innovative,” says Warren Henry. “North Dakota is now the No. 2 oil producing state in the union, as well as the No. 1 job market and the No. 2 housing market.”
Founded in 1967 by billionaire Harold Hamm—named one of Time magazine’s 100 Most Influential People in the World—Continental Resources is a Top 10 petroleum liquids producer in the United States, with total revenues of $1.6 billion for 2011.
Opportunist: Please tell us about Continental Resources and its role as an industry leader.
Henry: Our niche is exploration and production, known as E&P. Until the mid-1980s, our primary focus was on natural gas but due to changes in government regulation in gas pipelines, the company felt the market was going to be flooded with natural gas and that oil would have better long-term value. So a decision was made to start seeking oil plays in the United States. This led us to the Williston Basin in North Dakota and Wyoming. Our first big find, so to speak, was the Cedar Hills Field in what is now called the Red River Units—down in the southwest corner of North Dakota.
Opportunist: What was unique about Cedar Hills?
Henry: Cedar Hills was our first venture into the Williston Basin and the first field to be developed entirely with horizontal drilling. It became one of the Top 20 onshore oil fields in the United States, and it is still producing for us today.
Henry: Horizontal drilling is a way of drilling and harvesting what we call unconventional oil plays. A conventional play is where you have this deep target with high porosity and permeability, and the oil flows through it very easily. You drill a vertical well down 15 to 100 feet or more into the oil reservoir and you harvest the oil from it. Unconventional oil plays have very low porosity and low permeability. Quite often, these oil reservoir formations are very thick. The answer to that, which literally developed in the last 15 years, is to go down as much as two miles and make a 90-degree turn and drill out anywhere from one to two miles into the formation. Instead of exposing 50-100 feet of rock, you expose one to two miles of it and harvest it from a very long horizontal well bore.
Opportunist: That sounds arduous.
Henry: It’s really a fascinating technology. It involves geo-steering, which is literally having to steer up and down in this rock two miles deep and two to three miles out. In the late-‘90s after the Red River Hills success and Cedar Hills, Harold Hamm and the exploration team said “OK, this is working; now where is the next one?”
Opportunist: What was the next project?
Henry: The Elm Coulee Oil Field in Richland County, Montana. That was the first part of the Bakken field to be discovered. This project was much more challenging because the oil-bearing part of the reservoir was only eight feet thick and you had to keep your drill bit in the top part. Drilling companies at that time said they didn’t have the technology to drill with that level of precision two miles down. We worked on it with two other companies and, between 2000 and 2003, finally figured out how to do it with enough precision to stay in the top two or three feet of the formation and drill one-mile laterals.
Opportunist: What is the difference between horizontal drilling and hydraulic fracturing, known as fracking?
Henry: The whole idea of horizontal drilling originally was you don’t have to frack it. That worked in Cedar Hills, but when we went to Elm Coulee in Montana, the rock was too tight, so we eventually had to fracture stimulate it. This involves shooting a high-pressure mix of sand and water into the tight rock formation to prop open tiny cracks and allow the oil to flow back into the well bore.
The Elm Coulee Field was a tremendous success. The exploration team decided to take what they learned in Montana over to North Dakota, where they had the same rock deposition but tighter, with less permeability. They focused on an underground hill or a ridge that runs down North and South Dakota, called the Nesson Anticline. Somebody said instead of just fracture-stimulating the entire well at one time—and these were two-mile laterals—let’s break it into stages. And let’s try doing it 1,100 feet at a time. So they went into the very end of the well, called the toe, two miles down, two miles out, and they isolated the first 1,100 feet or so and fracked it in eight stages and it worked.
This was another technological step forward and creatively thinking outside the box. We drilled the first commercially successful horizontal well in March 2004 and now North Dakota has surpassed California and Alaska in oil production. Texas is the only one bigger. In early 2008 North Dakota oil production was 135,000 barrels per day. As of June this year, production is 660,332 barrels per day.
Henry: Absolutely. That’s the other area where technology has come along tremendously in the oil and gas business. We have learned how to decrease the amount of surface disturbance when we drill a well. We’ve also learned how to complete the drilling as minimally invasive as we can. We work hard to minimize our surface footprint. You also have casing systems that protect ground water and, again, ground water sources are typically 200 to 500 feet down. We are going down two miles before we start the horizontal procedure. So, when people worry about fracture stimulation we’ve got two miles of rock between the horizontal well bore and the groundwater source above us. There is no way to fracture through it. It’s physically impossible. The states—especially North Dakota, Oklahoma and Texas—have done an excellent job of regulating how we do this and assuring that we do it as cleanly as possible. And it has been very, very successful.
There have been more than 1 million wells fracture-stimulated without any emissions problems in an aquifer. The technology is very good. We came out with an idea three years ago called the ECO-Pad. The whole idea was it’s more ecologically friendly and more economical. One pad is slightly larger than normal, say seven acres instead of five, but we are going to put four wells on it instead of one and go down two miles. Then we will go north two miles and south two miles. We avoid building three other pads on this land. We have been doing six well pads and we just got our first permit for a 14-well pad. One drilling pad, which is going to be larger than seven acres hasn’t been designed yet, but we are going to have 14 wells on it and avoid constructing 13 drilling pads. That’s the right way to get things done.
Henry: A bunch of millionaire ranchers. [Laughs] There are lots of newly minted millionaires in North Dakota in the last five years—they certainly became millionaires if they weren’t already. We lease the land and pay about 19 percent in royalties to the owners, plus an11.5 percent extraction tax to the state.
Acreage that we and other companies are leasing today for $5,000 to $10,000 an acre we could lease five years ago for $200 an acre. It’s amazing. There is some state land and federal land, too, but mainly it’s privately owned.
Opportunist: How much potential is there?
Henry: This is exactly the conversation I have with investors. How do we as a company execute this growth model and increase the efficiency of how we drill and complete wells and how much potential is there? Estimates are that North Dakota in the next three to five years will be producing a million and a half to two million barrels per day.
The USGS [United States Geological Survey] in 1995 (17 years ago) estimated there were 155 million barrels of technically recoverable oil in the Bakken play—with the technology at the time. I joined the company in February 2008, and by April of that year the USGS revised [their estimation] and said the area contained anywhere between 3 billion and 4.3 billion barrels of technically recoverable oil—with the current technology.
In late 2010, after we had done extensive horizontal drilling and pioneered several zones, we came out and said we believe Bakken has 24 billion barrels of oil equivalent that is technically recoverable based on our research and actual results. This includes 20 billion barrels of oil—five times the USGS estimate—plus 4 billion barrels of oil equivalent of natural gas.
Opportunist: In talking with you, Warren, we have to question if there really is an oil shortage.
Henry: There is certainly no North American oil shortage. We have done some further modeling and research and drilling in the Bakken and discovered oil saturation goes much deeper than we previously realized. Now we believe the oil in place is about 56 percent larger than we previously thought, but we haven’t done enough drilling to find out how much is technically recoverable.
What’s fascinating is that over the past five years or so we, as an industry, have drilled about 4,500 horizontal wells in this formation up there, which is about 15,000 square miles. The North Dakota industrial commission estimates that before it’s over there will be approximately 50,000 wells drilled. We are just getting started.
When you throw in the Canadian oil sands, North America’s oil independence is even closer. We won’t give up importing some, but perhaps we can take away the leverage from unstable parts of the world and regions that are openly hostile to the United States. This has a huge impact on our trade deficit. Last year, refined petroleum products became our No. 1 export.
The Keystone XL pipeline needs to be built from Alberta to the Gulf Coast of Texas. If I have to buy crude oil I’d sure as heck rather buy it from Canada than Venezuela or Russia or the Middle East. It’s just common sense.
Opportunist: What are your thoughts on how this oil discovery will affect the U.S. economy?
Henry: I think that, as an economy, we are going to continue to grow and continue to be a dominant world economic power. Growth, for the next four or five years at least, is going to be a little slower than it has been historically since World War II. But compared to Europe, for instance, I think it’s going to be steady and dependable. A huge key to the growth of our economy is going to be to figure out how to take advantage of the energy resources that we have and develop them in a way that benefits people as broadly as possible, such as reasonably priced energy for transportation fuel and for generating electricity and, as much as possible, energy that is American made.
In 2006, the United States imported 60 percent of the oil and liquids that we consumed. Most goes for transportation fuel. In 2011, we reduced that figure to 45 percent of what we consumed. In the second quarter of 2012, we produced 58.3 percent of what we consumed and imported only 41.7 percent. So, it’s just having a huge impact on the economy in the United States.
The main benefit, besides providing our own oil and providing thousands of jobs, is going to be cutting the strategic leverage that these hostile and unstable regimes have over us. Frankly, it will be a welcome change to not be so dependent on the Middle East. And we won’t have to send our Navy to the Strait of Hormuz to protect the world’s economy, because that’s where the oil source is right now.
Opportunist: Does this mean gasoline prices might actually drop one day?
Henry: Sure, it will put downward pressure on gasoline prices.
Opportunist: Please tell us about Continental’s management team.
Henry: We have a really good combination of people who have been here a long time with Harold—including geologists and engineers and all kinds of professionals in the petroleum industry. We have also been bringing in a lot of new people with additional expertise over the last four years especially. They are helping us prepare to be a much larger company than we are today. We moved our headquarters from Enid, Okla., to Oklahoma City as part of that effort. This company is very innovative, very entrepreneurial and very willing to take risks and make mistakes and learn.
Henry: The industry has known about the Bakken oil field since the late ‘50s, but it wasn’t economical to harvest. The other big challenge for us was the green movement, which basically demonized any kind of hydrocarbon. They encouraged us to stop using coal and oil and became favorable to natural gas until it became successful. Their mantra is they are open to any solution but oil and gas and coal.
Opportunist: What is the solution?
Henry: Even the U.S. EIA [Energy Information Administration], which is very pro-renewables, says that in 25 years from now 85 percent of our transportation fuel is still going to be oil based. Vaclav Smil, distinguished professor at the University of Manitoba in Winnipeg, tells the same story. He’s the best writer I know of on energy systems today. We should do a better job of developing technology that enables internal combustion engines to be more efficient. However, you don’t change primary energy systems in 10 years. We need to learn how to use oil better instead of chasing impractical methods that won’t work for decades.
You have several problems to overcome in terms of educating people and getting them out of a negative mindset. We basically debunked the peak oil idea that we are running out of oil and we have to wean ourselves off of it. The greens said we have to develop alternatives no matter what it costs and how uneconomic it is. What people could never appreciate was changes in technology that enable us to harvest oil economically.
With the collapse of so many green alternatives like ethanol and Solyndra and the wind energy problems, we as a company strongly believe that we should be working on (1) being energy independent as a country and (2) using the hydrocarbon sources of energy more cleanly and efficiently.
Europe adopted this carbon-trading scheme three or four years ago and their carbon emissions have continued to increase per capita. The United States refused, and our carbon emissions per capita have gone down. Society must be practical and intelligent in solving these matters.
Opportunist: Can you share some interesting highlights of your time with the company?
Henry: The most interesting thing to me is the idea that the Bakken is so new that, when the company went public in May of 2007, people didn’t want to talk about it and now it’s the hottest thing going. You could have bought stock in the company for $15 a share during the IPO in 2007. Now it’s trading at $74.75.
Opportunist: Where do you see Continental Resources in five years?
Henry: It will be a much, much larger company than it is today. We are the ninth largest oil and liquids producer in the United States and I expect us to be a top-five producer in the next few years.
Visit Continental Resources online: www.clr.com
Leslie Stone is an award-winning writer/editor with more than two decades of experience covering business, finance and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides in the Orlando area.