Tuesday, 22 January
2019 11.05AM / By Nick Cunningham of Oilprice.com
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."
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.
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.
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