Over 5,000 DUCs await completion in U.S., EIA says

[Kaliboo]

I think around a year to a year and a half ago we first started hearing about the US domestic DUCs.  That's Drilled but UnCompleted wells.  That's a relatively new phenomenon for the domestic industry; at least at this scale.  Back then articles were noting that this huge inventory was about 3000 wells.  Now it's estimated at over 5000 in this article below.  Also since then drilling and completing costs per well have plummeted while initial production rates and recoveries per wells have significantly improved.  Also the Permian Basin has exploded as costs are perhaps lower there than anywhere in the country per barrel produced.  I recall just 2 or so years ago my company was doing 15 fracs per horizontal well, and I thought that was amazing.  Now  industry is doing 30+ fracs and horizontal sections exceed a mile in length.  That is just amazing, but it is what this industry has always done - amazing things.

These 5000+ wells are just sitting there waiting for the right price.  In most if not all cases, they don't need a drilling rig to complete them.  Wireline and maybe a small truck mounted unit to run tubing, if they run tubing, and lots of frac equipment, water and sand is all it takes, assuming the midstream facilities are mostly in place.  With 4100 oil wells and the rest gas wells, wells might have average intial rates of several hundred barrels a day.  Thanks to the longer wells and more fracs, decline rates are much improved.  Do the math with a 400 BOPD initial rate.  That's over 1.6 Mln bbls/day of supply that could be added in a few short months, maybe a much higher volume.  And that is without drilling a single well!

So the global supply/demand rebalance has its work cut out for it.  Severe underinvestment should eventually hurt supply enough to start driving prices up, but there are 3 gluts to work off - (1) Current production capacity of existing and newly added wells, (2) record volumes in storage, and lastly (3) the DUC glut.  But while these are being whittled down, a drilling boom will try to resurrect itself if prices hold up.  However, it is now 2 years and 2 months since prices peaked.  More staff cuts continue.  Almost no permanent hiring, although offers are being extended to summer interns.

The price recovery slope will increase with (1) demand growth, (2) cumulative underinvestment, (3) time elapsed since July 2014, (4) the inverse of supply growth.   Of course supply growth depends on investment. The triple gluts, especially with countries like Iran and Mexico in process of ramping up production (Iran nearly there; Mexico just starting) are a serious hurdle, but the effect of these may work to make the future shortage much more severe AND price rebound much steeper and much higher in crude oil as the triple gluts diminish.  Gas is less clear, but the DUC count is getting smaller already.  While the recovery may take longer, I still contend that as the triple gluts are worked off, prices could rise rapidly due to shortage of skilled, experienced technical staff.    The people shortage will significantly limit indistry's ability to restart severely curtailed exploration and development programs, meaning suppy could quickly fall further and further behind demand, unable to catch up and leading to very high $100+ per bbl.

This dynamic will be interesting to observe.  The triple gluts add an elasticity to supply and demand that never previously existed outside of OPEC.  A marginal price improvement can quickly result in marginal supply improvement and the opposite can occur.  In such a case one can envision that this throttling up and down could last a long time and keep prices in the $30-$60 limbo zone.  At some point it will have run its course if demand keeps an upward move and underinvestment, decline of older fields, and personnel shortages take their toll.  Recent announcements of slowing demand growth are another indicator of a longer rebalance period.  Also other things are going to happen as higher cost companies get more desparate while paying gigantic dividend payments.  Hard decisions will have to be made.  More capital cuts mean more people sitting around with nothing to do.  Cutting those people could neuter the companies ability to recover.

In 1989 it appeared the domestic onshore industry was nearing its death as fields and volumes were too small and costs were too high for major players.  Deepwater GoM looked like the last domestic opportunity but it was an unproven wild card at that point.  If there was to be any future for a major oil company operating in the USA, deepwater was the only hope.  Here it is 27 years later and the situation seems to be almost the opposite.  Lowest cost and opportunity now seems greatest in the onshore domestic plays.  Deepwater is excessively costly and riskier than ever, but still has great opportunities.  The industry has rapidly changed, and rapid change will continue.

Over 5,000 DUCs await completion in U.S., EIA says

WASHINGTON, D.C. -- The U.S. Energy Information Administration’s (EIA) monthly Drilling Productivity Report (DPR), released Monday, now includes a supplement that provides monthly estimates of the number of DUCs in the seven key oil and natural gas producing regions covered by the report.

Image: EIA Drilling Productivity Report.

Current EIA estimates show DUC counts as of the end of August totaling 4,117 in the four oil-dominant regions and 914 in the three gas-dominant regions that together account for nearly all U.S. tight oil and shale gas production. In the oil regions, the estimated DUC count increased during 2014-15, but declined by about 400 over the last 5 months.The DUC count in the gas regions has generally been in decline since December 2013.

When producers are under stress, as has been the case following the large decline in oil prices since mid-2014 that triggered a significant slowdown in drilling and completion activity since late 2014, changes in the number of DUCs can provide useful insight into upstream industry conditions. A high inventory of DUCs also has potential implications for the size and timing of the domestic supply response to a persistent or significant rise in oil prices, since completions of existing DUCs can provide an increase in production with or without any significant changes in the rig count.

While both drilling and completion activity have declined since late 2014, completions have experienced a deeper decline than drilling in the four DPR regions (Bakken, Niobrara, Permian and Eagle Ford) that account for nearly all tight oil production, resulting in a growing inventory of DUCs. The differential reduction in drilling and completion rates in these regions may be attributed to several factors, including long-term contracts for drilling rigs and lease contracts that mandate drilling and/or production in order to fulfill commitments made to the landowners and mineral-rights owners. The situation appears to be somewhat different in the other three DPR regions (Marcellus, Utica, and Haynesville) where the production mix skews heavily towards natural gas, in which significant price declines began as early as 2012.

[Putncalls]

The DUCs are already in a lot of financial models. RJ provides DUC status monthly. The US has to cover the production declines in the most of the world except the Middle East.

[Stavros]

Some things to also consider:

1. There are many MANY operating wells that get closer to full depletion every day. They will all eventually be shut in and must be replaced. That's why the DUC count is being constantly reduced.

2. There are many oil and gas fields worldwide that are also being depleted BUT not being replaced. Below is a recent article covering China:

China Crude Buying Seen Buoyed As Output Drop Lures Imports

(Bloomberg) -- China’s crude oil imports may rise further in the coming months as tumbling domestic output leaves refiners looking overseas for supplies, helping ease a persistent global glut.

Imports by the world’s second-biggest consumer may extend last month’s rebound as the country’s oil processors come out of their peak maintenance season while domestic output falls further after sliding to the lowest in more than six years, according to analysts from Natixis SA and Energy Aspects Ltd.

“The extent of decline in crude production is quite astonishing,” Michal Meidan, a London-based analyst with Energy Aspects, said by phone. “Naturally, such a gap in supply will be partly made up with imports.”

Production in August dropped 9.9 percent from a year ago to about 3.89 million barrels a day, the lowest since December 2009, according to Bloomberg calculations of National Bureau of Statistics data released Tuesday. Output is down 5.7 percent during the first eight months of the year.

China, which was the world’s fifth-biggest producer last year, has been pumping less as state-run companies shut fields too expensive to operate after prices fell earlier this year to the lowest since 2003. The country is forecast to lead production declines across Asia, forcing the world’s largest-consuming region to rely more on overseas supplies.

Well Supplied

The impact of rising Chinese imports on the global oversupply could be muted as stockpiles are seen continuing to accumulate, and the surplus is seen persisting into late 2017, the International Energy Agency said Tuesday.

“China will undoubtedly have to import more oil to meet the seasonal increase in refinery runs later this year,” said Abhishek Deshpande, chief energy analyst at Natixis SA in London. “This should not shock the market as the global market is well supplied,” he said.

China’s crude oil imports increased to about 7.77 million barrels a day in August, the highest in four months, according to General Administration of Customs data released September 8. Imports during the first eight months of the year are up more than 13 percent.

“Falling crude production supports rising imports through the rest of this year, coupled with strategic oil stockpiling and increased demand from refiners coming out of maintenance season,” Amy Sun, an analyst with commodities researcher ICIS-China, said by phone.

Aging Oilfields

Production declines will accelerate in the final four months of the year, Sun said, with monthly crude output averaging 16.25 million tons, while oil imports average 32 million tons.

Refinery runs averaged 10.47 million barrels a day in August, Tuesday’s data showed, the slowest in three months as processors shut units during the peak of the country’s maintenance season, which ends in September.

The country’s biggest producer, PetroChina Co., cut its 2016 domestic crude output target to 103 million tons (about 2.06 million barrels a day), a drop of about 6 percent from the previous year, as it shuts some high-cost fields. Production from China Chemical & Petroleum Corp., known as Sinopec, is on track to shrink by a similar amount to about 763,000 barrels a day, company forecasts show.

“China’s crude output won’t see an apparent rebound unless Brent recovers to $60 a barrel level, as most of China’s aging oilfields can’t make a profit below this price,” said Tian Miao, an analyst in Beijing with policy researcher North Square Blue Oak Ltd.

Brent crude, the global benchmark, has lost about half its value in the past two years. Prices have averaged almost $43 a barrel this year, compared with $99 in 2014. The global benchmark was up 0.3 percent at $47.26 a barrel at 10:38 a.m. in Hong Kong.

3. North Sea production increased in 2016 due to previous high exploration expenditures in 2014. They will most likely decrease in the future due to low spending in 2015/2016/2017.