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Why Are Oil Producers Rushing To The STACK?

STACK play

Crude oil prices may be falling again but shale producers are building up their acreage and drilling wells, eying an eventual rebound. Naturally, cash-strapped shale boomers are looking at the most cost-efficient places to drill and a new hot spot has emerged lately in this segment: the STACK play.

STACK stands for Sooner Trend Anadarko Basin Canadian and Kingfisher counties. Despite the eccentric acronym, the play is drawing more and more E&Ps because of high yields and low production costs. Devon recently announced a daily yield of 2,100 barrels of oil equivalent, of them 70% oil. Several months earlier, Continental Resources said it had achieved 2,345 barrels of oil from another STACK well, again 70% of the total output, which is an impressively high portion.

What’s more, as Felix Energy said in a presentation last year, as quoted by Forbes, some wells did not require the use of water, which has to be later disposed of, adding to total production costs (not to mention worry about earthquakes). Also, some new, horizontal wells could yield as much as 50 times more than conventional vertical ones.

No wonder then that Marathon Oil is buying acreage in STACK. The company recently announced the purchase of 61,000 acres from PayRock Energy Holdings for some $888 million. To finance this deal and others like it, Marathon Oil is selling non-core assets, clearly focusing its core operations on the STACK.

In further evidence that the STACK is the new hot spot for shale producers, Hart Energy’s Heard in the Field survey revealed that the STACK was the focus of the most intensive drilling activity in the country for the first half of the year. While it’s true that this activity remained subdued over the first six months of 2016 because of the persistently low oil prices, it was precisely this price trend that determined the attractiveness of the STACK, with its low-cost, high-yield wells. Related: Why Libyan Oil Is Unlikely To Return In The Short-Term

Rig activity started increasing virtually the moment prices started picking up earlier this year. Last week, Baker Hughes reported a 15-rig increase for the week ending July 22. That’s despite a slide in prices, which has come on the heels of the rig number increase and a sense of growing optimism amongst E&Ps.

This optimism may be premature, however, as the latest fuel data from the EIA suggests. Despite nine consecutive weeks of declining crude inventories, the total is higher than a year ago, and by a hefty 60 million barrels. What’s worse than crude oil stockpiles is the fact that this draw we’ve been seeing in the last two months and more has been largely a result of higher refinery demand. Despite strong consumer demand, gasoline inventories remain extraordinarily high.

This means that as driving season ends and refineries begin to shut down for maintenance, the demand that’s been driving the decline in oil stockpiles and kindling the growing optimism in the industry, will disappear. Bloomberg has in fact quoted analysts saying that prices could slump below $40 a barrel yet again. Some wells in the STACK will continue to be profitable at these levels too, perhaps, but not all, which raises the question if the rush to the STACK is not premature.

By Irina Slav for Oilprice.com

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