Just what the crude oil market needs.
By Nick Cunningham, 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. By Nick Cunningham, Oilprice.com
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I wonder how much of the cost of a completed well has been spent when just the initial drilling has been done. This maybe varies a lot from field to field. Does the fracking sometimes cost more than the drilling? No hint from this article. Info about production costs in the shale patch is proprietary and hard to come by.
This pdf has some figures for you
and oilprice has an article on “Saudi vs. shale” for overall costs.
There are a lot and twists and turns in the above post that leave it as a bit of a guess – I would have thought that the main constraint for now is current lack of demand at the cost shale can supply, keeps it simpler :-) . What demand (and global supply) will be over the next few years is a bit of a guess also though :-/.
Roughly 1/2 to 2/3 of the cost is in the frack and after. It is variable on the project most are probably toward the 2/3. So at times it can make sense to wait. There is also the case of having a rig under contract and not being able to afford the track but that is probably not the case.
Adding to this twist here is another. Its a new kind of “offer” for existing oil wells. Existing oil well owners are trying to find a way to get production up on old wells. I was approached by business brokers on an oil deal to drill and frack out an existing producing reserve and then do some water injection into the well like the Saudis do for the ghwar. It is supposed to or forecast to expand production from the same well/reserve 40 barrels a day to 70 barrels a day and still maintain 30 years production. I was like no thanks. Injecting water and upping the reserves at the same time line? This has a bad smell to a highly speculative production but this is floating around. I know it works but how well it works is anyone guess or roll of the dice
“…expand production from the same well/reserve 40 barrels a day to 70 barrels a day and still maintain 30 years production”
That’s the shale miracle! You get increased production AND full duration! NO drawbacks! Nothing fishy about that! Just send us a check for fracking…
WSJ seems to confirm Art Berman’s doubts about the claims of the production of shale oil wells. I wouldn’t say shale oil is a scam but begs the question, why are we producing it now? Why produce it at a loss? Remove shale and what would the price per barrel be today?
Why? Because that’s what Wall Street has been funding: not profits, but production increases — no matter what the cash flow. That type of funding almost stopped in 2016, but then restarted when PE firms piled into the distressed energy debt sector. Now we get to go through it again :-]
Now we get the collapse of Oil and High yields… You obviously trade given your extensive financial knowledge Wolf, I have been watching HYG and JNK since December, there is a serious play being made
Big buyers have been buying a whole lot of Oil and Junk ETF’s while buying a lot of PUT contracts… Just for the March 19 Expiry, I seen someone buying by shots of 25 000 contract PUTs, and one day two weeks ago or so, open volume just for march 19 was 250k +
Once it snaps, added selling pressure will make the collapse quite spectacular but scary… Pension and Mutual funds will get hit really bad, they invested in high yields and corporate bonds too much, something like 80 % of junk is industrial I believe ? That’s crazy, majority of shale is losing money at 60 a barrel, and do OK around 70-80 a barrel… 50 or below is complete annihilation for there cash flow… Once Moody’s junks the first wave of IG, all hell breaks loose in Oil and HY’s
HYG is close to its old high, cheap credit means more wells, more supply, lower prices, greater exports, more pressure on vulnerable EMs, support for the dollar, but fewer jobs in the US industry. Consumers cut back, suppliers lower prices, gasoline at 25 cents a gallon.
The US oil idustry is another ginormous debt bomb waiting to blow.
No idea if this is valid or nonsense, but I’ve read here and there that “word” has come “down” to lenders to go easy on lending to fracking and various oil extraction, because it is National Policy to undermine Russian energy exports because regime change. I give that a bit of credence because I’ve also read for a long time from various sources that this has been an unprofitable endeavor for a long time now.
As it has been pointed out here, Tesla and Netflix operate on the same principle. Netflix burns about $3 billion in cash a year. Last year it borrowed $4 billion to fund this cash burn. This year, it will likely borrow about $3 billion. And investors hand it that money. There are many companies that do this. I wouldn’t see a Russia strategy behind this, but just a plain disease on Wall Street and among investors.
Perfect word for it.
The fascinating irony is that debt-loss-fueled Tesla ultimately creates demand for debt-loss-fueled natural gas production (via electricity). It’s not just Model 3 production … it’s the pressure Tesla puts on other makers to build out their EV capacity too.
Now that the Gigafactories are reaching cruising speed, domestic natural gas demand must rise in step with every automobile battery pack that leaves the assembly line.
Even if Tesla goes belly up, the battery factories don’t evaporate. Panasonic’s expanded capacity remains. Mr. Musk’s success in making EV ownership the “preferred” status symbol has permanently changed the market. EV market share will continue to expand at an exponential rate for some time.
The fracking well calculus could easily flip by 2025 whereby gas is the goal and liquids the byproducts going in search of a market.
Yes, and demand for natural gas in the US has been soaring for years. EVs for now only play a small role in that, but that will change as more EVs are driving around.
But NG production has out-soared soaring NG demand in the US, and will continue to do so until the money stops flowing to these oil & gas drillers.
2025 is a long ways off. The calculus could flip a lot sooner if the money stops flowing to permanently cash-flow negative drillers.
Yeah, enormous debt is the price of growth in the present reality.
” … that’s what Wall Street has been funding: not profits, but production increases — no matter what the cash flow”
Sounds like a certain electric car maker I’ve heard of.
Yes… lot of it going around.
Boom and Bust:
The story of oil ever since Col. Drake.
See your point but if the US can put together this global LNG market that’s a plus. This has been America’s secret foreign energy climate policy for some time, but a bear market in bonds, a bear market in energy, pretty soon you have a bear market in everything, and you must assume the Fed’s inflation targets are bogus – when markets diss the Fed at every turn – so it’s mission accomplished.
Who? Huh? Maybe? What?
A recent report by David Hughes indicates that major US tight oil and shale gas play estimates are hugely overstated. These plays can be overstated by as much as 50%. I ponder, is it acceptable for a particular body to fudge a number hitherto thitherto, because the truth would hurt too much?
This article uses many words to convey no useful information.
The title is a bit bland. Getting The DUCs In A Row maybe?
In the economics discourse there isn’t enough focus on energy, and the overindebted US petroleum industry in particular. Keep it up WR, we absolutely need to stay updated!