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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Huge Backlog Could Trigger New Wave Of Shale Oil

The number of drilled but uncompleted wells (DUCs) in the U.S. shale patch has skyrocketed by roughly 60 percent over the past two years. That leaves a rather large backlog that could add a wave of new supply, even if the pace of drilling begins to slow.

The backlog of DUCs has continued to swell, essentially uninterrupted, for more than two years. The total number of DUCs hit 8,723 in November 2018, up 287 from a month earlier. That figure is also up sharply from the 5,271 from the same month in 2016, a 60 percent increase. The EIA will release new monthly DUC data on January 22, which will detail figures for December.

Some level of DUCs is normal, but the ballooning number of uncompleted wells has repeatedly fueled speculation that a sudden rush of new supply might come if companies shift those wells into production. The latest crash in oil prices once again raises this prospect.

The calculus on completing wells can cut two ways. On the one hand, lower oil prices – despite the recent rebound, prices are still down sharply from a few months ago – can cause some E&Ps to want to hold off on drilling new wells. That may lead them to decide to complete wells they already drilled as a way of keeping production aloft while husbanding scarce resources. Companies that are posting losses may be desperate for revenues, so they may accelerate the rate of completions from their DUC backlog.

On the flip side, producers don’t exactly want to bring production online in a market that is subdued. “The lower oil price raises some questions about whether you go ahead with completing these wells,” Tom Petrie, head of oil and gas investment bank Petrie Partners, told S&P Global Platts. “Some companies want to get them in a producing mode; others say they won't get an adequate return right now, so they'll wait.” Related: US Oil, Gas Rig Count Plummets As Oil Prices Surge

Rob Thummel, managing director at Tortoise Capital Advisors, told S&P Global Platts that companies may have already started to work through some of their DUC inventory late last year. He suggests that the explosive production figures in 2018 seem higher than last year’s rig count justified. A higher rate of completions from already-drilled wells may explain the higher output levels.

However, the pipeline bottleneck in the Permian – which, to be sure, has eased a bit as some additional capacity has come online in recent months – could prevent a sudden rush of DUC completions. After all, the soaring number of DUCs was itself at least in part the result of the pipeline bottleneck.

A handful of new pipelines will add significant new pipeline capacity in the second half of 2019, after which more DUCs could be completed. Last summer, Pioneer Natural Resources’ CEO Timothy Dove warned in a conference call that oilfield services costs could increase when those pipelines come online because producers may rush to complete DUCs all at once.

“[T]hat could be another period of inflationary activity to the point where everyone is trying to get their DUC count reduced,” Dove said last August. “And so I would say the bigger risk inflation-wise is really past 2019. It's really 2020 and 2021.”

The prospect of higher completion rates has ramifications for U.S. production levels. DUCs may keep U.S. oil production aloft at a time when low prices are starting to curtail drilling activity. The rig count has been flat for a few months, production growth has slowed, and growing number of companies are detailing slimmer spending plans this year. Related: Oil Prices Jump As China Seeks To End Trade War

That may ultimately translate into disappointing production figures. “As a result of the slide in oil prices over the past three months, operators have already started to guide down activity for 2019 compared to their initial plans to ramp up activity,” Rystad Energy wrote in a recent commentary. “Consequentially, we have lowered our expectations for oil production growth by about 500,000 bpd for 2020 and 2021, implying less need for takeaway capacity.”

But completing DUCs is low-hanging fruit. The cost of drilling a well accounts for 30 to 40 percent of the total cost, according to S&P Global Platts. As a result, companies deciding on whether to bring a DUC online has already incurred the drilling costs. A shale company may decide to scale back on new drilling this year because of low prices, but the rush of fresh supply from DUCs may allow output to continue to grow. Of course, any decline in new drilling will eventually be felt in the production data, but that may not show up until somewhere down the line. More completions from the DUC backlog could keep near-term production figures on the rise.

How this shakes out is anybody’s guess, but at a minimum, the explosion in DUCs over the past two years complicates oil production forecasts for this year.

By Nick Cunningham of Oilprice.com

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  • Leslye Robinson on January 20 2019 said:
    I've been hearing about the DUC's for a couple of years from someone in a oil service company. On top of that REFRAC&'s will also complicate the production numbers. If what I've heard is correct the combinations of longer laterals new propants are rejuvenating older wells. I'm pretty sure we haven't seen peak US oil production.
  • J Karole on January 21 2019 said:
    Ever wonder why the number of DUC's has tripled over the last 3 years?

    If the cost of completing an already drilled well (that would result in production) is about equal to the cost drilling another well that must also be completed, why not just complete an already drilled well; where the drilling cost has already been sunk.

    Makes absolutely no economic sense; or could it just possibly be many of these DUC's are simply not attractive production completion candidates? If so, perhaps many of these DUC's are part of the "All In" cost of Shale drilling; or like a Dry Hole cost.
  • Mamdouh Salameh on January 21 2019 said:
    Rather than triggering a new wave of shale oil production, the huge backlog of drilled but uncompleted wells (DUCs) is kept in reserve ready and waiting so as to keep the US shale oil producers afloat and avoid a steep decline in US shale production.

    Shale wells suffer a steep depletion rates estimated at 70%-90% at the initial stages of production. This necessitate the drilling of more than 10,000 new wells every year at an estimated cost of $50 bn just to maintain production. Having DUCs ready to be quickly completed is like having an insurance certificate against a sudden steep slump in shale oil production.

    Moreover, with oil prices currently at the lower $60s a barrel, it doesn’t make sense to complete these wells when the breakeven prices for most shale oil producers is estimated at $60-$70 a barrel.

    Another possible explanation may relate to the many reports about a slowdown in US shale oil production coming fast and thick from different reliable sources. These reports from the Wall Street Journal (WSJ), International oil service companies such as Schlumberger and Haliburton and other authoritative organizations including MIT are talking about declining well productivity, depletion and rising drilling costs and therefore can’t be ignored.

    Still, US shale oil producers will never stop production for two reasons. The first is that the US shale oil industry is not judged by standard criteria of economics and profit that govern conventional oil companies otherwise it would have been declared bankrupt years ago given the hundreds of billions of dollars it owes Wall Street. They have to keep producing otherwise they will not be able to borrow to remain afloat.

    The other reason is that despite being very deeply in debt, the US shale oil industry will continue operating because it gives the United States a say in the global oil prices and markets along with Russia and Saudi Arabia.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Carlos Perdue on January 22 2019 said:
    "the huge backlog of DUCs is kept ready & waiting so as to keep the US shale oil producers afloat and avoid a steep decline in US shale production."

    This defies marginal cost/benefit theory etc, implies group decision-making by competing US shale producers - not happening.

    J Karole's right. Ceteris paribus, the most economic wells will be done first. DUC drilling cost is sunk cost and DUC marginal cost is only completion cost, whereas the cost of completing a new spud is drilling AND completion. If DUCs weren't relatively bad wells they'd be completed first, before drilling & completing new wells from scratch.

    If a company decides to drill & complete a well from scratch rather than complete one that's already drilled, it means the DUC is expected to be inferior to their expectation for the spud and to what was projected for the DUC before it was drilled, but it does NOT necessarily mean it's *economically* inferior to the new spud on a go-forward basis.

    Sophistry may be offered to investors and analysts to explain holding back DUCs that are actually economically *superior* to new spuds. If a company were to complete thousands of dog DUCs that produce a lot less than predicted -- even though they're economically superior due to most of the cost being sunk and relatively small incremental cost of completion vs a brand new drill & complete -- it would undermine the borrowing/capital base by exposing optimistic projections about investment productivity, IPs, decline rates, tails, etc. So they don't *dare* complete those dog DUCs.

    As Art Berman observes, ”Shale Oil companies in business to take money not make money.”
    www.peakprosperity.com/podcast/114710/art-berman-exposing-false-promise-shale-oil

    "Having DUCs ready to be quickly completed is like having an insurance certificate against a sudden steep slump in shale oil production."

    More like an ENSURANCE certificate - ENsuring prices stay depressed and the industry never makes money. Again, we see rank confusion between individual optimization vs group collaboration. Is a company with thousands of wells so incompetent in its projections that it needs insurance against an unexpected collapse *in its own* production? Or is each company sabotaging its own interests by making decisions for the benefit of the oil buyers? A collapse in aggregate production is GOOD for shale producers - higher prices.

    Translation: "Ask not what the market can do for you, but rather ask what you can do for the market." Like a socialist twist on the invisible hand.

    "US shale oil producers will never stop production for two reasons. first...the US shale oil industry is not judged by standard criteria of economics and profit that govern conventional oil companies otherwise it would have been declared bankrupt years ago given the hundreds of billions of dollars it owes Wall Street. They have to keep producing otherwise they will not be able to borrow to remain afloat."

    Implication: Shale companies are a new paradigm, requiring new economics, new laws of physics even. You know, like dotcoms. Shale investors will always ignore such boring, old-fashioned considerations as Risk-Adjusted Return on Investment, NPV etc. They don't even care about Return OF Investment, let alone Return On Investment.

    REALLY?

    "despite being very deeply in debt, the US shale oil industry will continue operating because it gives the U.S. a say in the global oil prices and markets along with Russia and Saudi Arabia."

    This assumes some weird neomercantilist group collaboration by competitors, implies that oil companies are not acting in their own and investor interests, but instead are acting as a group to harm their investors by keeping oil prices low.

    Translation: "Ask not how you can maximize profits and shareholder returns, rather ask how you can screw yourself to have a say in global oil prices and market."

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