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Continental Resources Tells Regulators: Cut Oklahoma Gas Output Levels

The CEO of Continental Resources Inc. last week said he's gotten "a lot of support" from fellow producers since his company asked Oklahoma regulators to reduce natural gas output levels. "Nobody wants to waste a valuable resource," Harold Hamm told NGI.

In a recent filing with the Oklahoma Corporation Commission, Continental Resources requested regulators consider revising downward the maximum open flow rate of gas wells in the state. Operators now are authorized by the OCC to produce gas at up to 65% of the maximum flow rate, or 2 MMcf/d, whichever is higher. Continental wants the rate cut to 25% of the maximum, or 1 MMcf/d.

"Oklahoma needs to do its part, [and] other states need to do theirs," Hamm said during an interview. It's the only way to bring U.S. gas supplies back into balance and increase prices, he said. "It's not anything unusual for a filing to be made on prorationing...We're not asking the commission in Oklahoma what they haven't done all along, and that is prorate gas to market. We think something should be done. We don't want to overproduce Oklahoma gas that the market can't handle. That would result in a lot of waste."

The filing was necessary, said Hamm, because the OCC determines the flow rates only twice a year, and this year the first determination was made in January. Although the gas rig count across the nation already had fallen in early 2009, now it has dropped even more. Oklahoma lost six more rigs for the week ending March 27.

"The [OCC] hearings are held twice a year, and this last one was in January," said Hamm. "It was a little bit untimely, with all of the information that needed to be inputted on market conditions...The market has undergone tremendous changes due to demand destruction and the economic recession that's gone on. The filing is just an action that's necessary to get back in front of the commission to get action in Oklahoma to meet the changed conditions."

Hamm said he hasn't gotten any feedback from the OCC yet. "It certainly wouldn't be appropriate for the commission to have any reaction to this point, with no testimony yet." A hearing has been scheduled before an OCC administrative law judge (ALJ) later this month, and then the ALJ will issue its findings to the OCC.

"A lot of people across the state have shut in production due to a lack of demand, and we've heard from several instances there wasn't any demand for gas at that particular market because market conditions have deteriorated such that it makes it necessary for Oklahoma to act accordingly," he said. "We have a valuable resource here. We can't just give it away."

In some "extreme situations," Hamm said he's heard of wellhead gas being sold in Oklahoma for "less than $1 [Mcf], but for most of the markets, I've heard something like $2-3, but that varies from one side of the state to the other, and also in regard to which pipes [the gas] is on..."

Continental had six to eight rigs running in Oklahoma a year ago, but "we're down to a couple at this point," said the CEO. "You kind of ask yourself, 'Why do we even have any rig operations at these economics today?'" The few rigs it still has in operation in the state are because of lease obligations, but even with fewer rigs, Continental's gas production is higher now than it was at year-end 2008, he said.

In the Arkoma Basin's Woodford Shale play, Continental exited 2008 averaging 26.4 MMcf/d, which was three times higher than the average production of 8.4 MMcf/d in December 2007. The company controls another 117,000 net acres of the Woodford Shale in the Anadarko Basin, and it has about 28,000 net acres in the emerging Atoka Shale play, which is also in the Anadarko Basin.

Hamm said he wouldn't be surprised to see other state commissioners reset the gas flow rates. The Railroad Commission of Texas has reset gas flow rates before, but there appear to be no filings to request a decrease, a spokeswoman told NGI.

The Continental chief doesn't think it will take long for the gas market to rebalance. "We've been a lot of demand destruction, probably 5 Bcf/d is pretty evident, and that's quite a bit," he said. "As the economy improves, natural gas will be more in demand and it should make a turn. A lot of producers are acting very responsibly, and they are not drilling a lot of wells that are unnecessary...

"It will correct a lot quicker than people think," Hamm said of the domestic gas market. "With crude oil, that's going to correct itself very quickly. We think supply is drying up right now, and by the time the second quarter ends, we should see prices rebound greatly."

Hamm said producers have to remain vigilant to balance their growing domestic gas output with demand.

"We have brought about a new phenomenon, if you will, of natural gas in America. With shale gas, it's been brought on in the last several years and it has improved supply tremendously. That's something industry has done that's quite exceptional."

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