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Continental reportedly halts most shale production, seeks to cancel deliveries
US
CONTINENTAL Resources, one of the US’ pio- neering shale producers, has halted most of its production in North Dakota’s Bakken play and is seeking to cancel at least some contracted oil deliveries, according to media reports.
Bloomberg reported that on April 21, a day after US crude futures settled at negative prices for the first time in history, Continental declared force majeure on at least one of its contracts to deliver oil to a fuel producer. The news service cited a document seen by its reporters, in which Continental said that selling oil at negative prices constituted waste and was commercially impractical. The company also said it could not have foreseen the unprecedented down- turn caused by the coronavirus (COVID-19) pandemic.
Continental argued that its contracts to deliver crude were based on a positive price, as well as the ability to produce and sell oil without creating economic waste.
A Continental spokeswoman told Bloomberg that the company continued to honour commit- ments and was working closely with purchasers. However, the company added that the pandemic had brought about “conditions under which force majeure applies”.
Force majeure clauses are more commonly invoked after natural disasters that prevent companies from meeting contractual obliga- tions. Declarations of force majeure have been on the rise in the energy industry globally as COVID-19 has prompted lockdowns and led to a collapse in oil and gas demand. At least some of the declarations have been disputed, however, for example in the case of Chinese buyers invok- ing force majeure to cancel cargoes of liquefied natural gas (LNG).
Continental’s efforts to cancel some of its contracted deliveries may also end up being disputed. Reuters cited a rival who had viewed Continental’s notice of force majeure as saying that without state regulators requiring output cuts, a contract could not be cancelled simply because sales had become unprofitable. How this plays out – assuming the details become public knowledge – will be closely watched by the shale industry, as other producers are likely to follow suit in curtailing production the same way Con- tinental is reported to have done.
On April 23, Reuters reported, citing three sources familiar with production in North Dakota, that Continental had stopped all drill- ing and shut in most wells in the state. While Continental has not commented publicly on the matter, the company had already reduced its out- put guidance up to the end of May by 30% before oil prices crashed into negative territory. Further
reining in of production would thus not be surprising.
Indeed, the North Dakota Petroleum Coun- cil’s president, Ron Ness, was cited by Reuters as saying last week that Bakken crude was selling regionally for $14-15 per barrel below the US benchmark, West Texas Intermediate (WTI). And WTI, despite having recovered some- what from its plunge into negative territory, is still trading below $16 per barrel as of April 29, resulting in Bakken oil being unprofitable – and indeed loss-making.
An additional challenge for Continental is that it has declined to hedge future production, making it more exposed to low oil prices than some of its peers.
Continental’s executive chairman, Harold Hamm, called last week on US regulators and an exchange operator to investigate whether manipulation or system failure had led to the WTI price crash.
Lawsuit
Separately, it was reported this week that Casil- las Petroleum Resource Partners is taking legal action against Continental, alleging that the lat- ter backed out of a $200mn deal last month as crude prices fell.
According to a lawsuit filed in Tulsa County District Court in Oklahoma on April 15, Conti- nental agreed to buy oil and gas properties from Casillas on March 6, with the deal set to close roughly three weeks later. However, March 6 was the same day that OPEC+ talks on reduc- ing supply collapsed, sending crude prices into a downward spiral.
The lawsuit alleges that Continental then pro- posed postponing the closing of the deal, citing “changes in the oil and gas markets”, and then terminated the agreement altogether on March 24, citing title and other problems.
Neither company has commented publicly on the lawsuit.™
Bakken crude was reported to be selling regionally for $14-15 per barrel below the US benchmark last week.
An additional challenge for Continental
is that it has declined to hedge future production.
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