Harold Hamm: “Drill, Baby, Drill” Needs $80 Oil

Authored by Tsvetana Paraskova via OilPrice.com,

• Harold Hamm: would need an oil price of around $80 per barrel to cover the cost of drilling wells.’

• U.S. Energy Secretary Wright: the administration isn’t targeting a specific price of oil, but it works to bring back common sense and pro-energy policies in America.

• Scott Sheffield: The cash breakeven price, including dividends, is $50-$55 for U.S. oil companies, and “that $50 oil is not going to work.

U.S. shale needs much higher oil prices than $50 per barrel, and even higher than the current WTI Crude price in the high $60s, for a “drill, baby, drill” boom, oil tycoon and Trump campaign donor Harold Hamm says.

American producers, especially those pumping crude outside the Tier 1 inventory in the best Permian locations, would need an oil price of around $80 per barrel to cover the cost of drilling wells.

“There are a lot of fields that are getting to the point that’s real tough to keep that cost of supply down,” Hamm told Bloomberg Television in an interview on the sidelines of the CERAWeek conference in Houston.

“When you get down to that $50 oil that you talked about, then you’re below the point where you’re going to ‘drill, baby, drill,’” the shale pioneer added.

Over the past few days, there has been a lot of talk of $50 oil and the shale industry.

The Trump Administration appeared to be pointing to $50 as a price that would be low enough for American energy prices to drop but still good enough for U.S. shale to prosper.

However, the industry and Wall Street banks beg to differ. 

They say that $50 oil is so low that it would see production curtailments as the average cash breakeven price, including dividends, is estimated at $50-$55 per barrel of oil.

And the industry is definitely not prepared to cut dividends after diligently working for a few years to boost shareholder returns and make U.S. oil stocks attractive again.

U.S. Secretary of Energy Chris Wright told the Financial Times last week that shale producers could increase production even if oil prices fell to $50 per barrel as the sector continues to innovate and boost efficiency gains.

“New supply is going to drive prices down. Companies are going to innovate, drive their prices down and consumers and suppliers will bounce back and forth,” Wright, a former boss at fracking firm Liberty Energy, told FT.

At CERAWeek by S&P Global, Secretary Wright said the administration isn’t targeting a specific price of oil, but it works to bring back common sense and pro-energy policies in America.

The Trump Administration believes that eased permitting and lighter regulatory burdens on U.S. oil and gas producers would lead to more production even at lower oil prices.

But industry veterans, from Harold Hamm to Scott Sheffield, the founder of Pioneer Natural Resources which was sold to Exxon last year, don’t think prices lower than $60 would work.

Oil executives cheered the pro-energy agenda of the Trump Administration, welcoming the lifting of the Biden LNG permit freeze and the start of the process to repeal the so-called methane fee.

However, they are quietly concerned that oil prices at current levels are already on the verge of making money much more difficult.   

Pioneer’s founder and industry veteran Sheffield has some advice for the U.S. oil firms.

“You’ve really got to hunker down,” Sheffield told a Bloomberg Television interview on last week.

Oil prices are likely to fall into the range of $50 to $60 per barrel, Sheffield says, noting that American producers will struggle at these prices.

The cash breakeven price, including dividends, is $50-$55 for U.S. oil companies, and “that $50 oil is not going to work,” Sheffield told CNBC.

Other industry executives, as well as investment banks, also believe that $65 oil and below would present challenges to U.S. shale to keep production steady, let alone “drill, baby, drill.”

Saad Rahim, chief economist at commodity trader Trafigura, told Bloomberg that “$60 feels too low for much of the industry to work.”

With WTI Crude at around $65, the U.S. shale industry would likely hold production flat and shut down 25 rigs, Citigroup analysts Scott Gruber wrote in a note last week carried by Bloomberg.

“A drop into the upper $50s likely results in a bigger psychological impact with the rig count potentially falling ~75 and production down” by more than 300,000 barrels a day (bpd), according to Gruber.

Shale costs will also go up with the U.S. import tariffs on steel and aluminum, executives including Hamm say.

The U.S. has steelmakers “but they can’t supply it all,” Hamm told Bloomberg, referring to the steel pipes the industry uses to drill wells.