Tuesday, October 6, 2020

US Shale Production Dependent on DUC Inventory?

OilPrice had a recent article up from Rystad Energy that discussed how US shale production is dependent on drilled, uncompleted wells (DUC). I find the DUC topic interesting and last mentioned it in this July blog post. I find it interesting for a few reasons:

1. Why do oil producers keep so much DUC inventory. Per EIA, DUC wells have been in the 7,600 range this whole year. Why keep spending capital on weekly rigs when you can easily draw down on these sunk costs.

2  Thinking about point 1, how much of this 7,600 DUC inventory is just not worth turning into productive wells? You've already spent the capital so why not just get the wells producing? Maybe it isn't worth it?

3. With weekly rig counts now significantly lower than they were at this recent cycle high, will drillers start to draw down the DUC inventory? In November 2018, weekly rig counts hit 888. From there rig counts gradually declines until March 2020 when they just nose dived due to falling oil demand driven by COVID-19.

4. Based on the EIA data, it really doesn't look like drillers are drawing down their DUC inventory yet. As mentioned above, the numbers have stayed in the 7,600 range for all of 2020.

Per OilPrice, DUC inventories may finally start to decline just to keep production at current levels:

The recovery of fracking operations in the US is happening largely thanks to an unusually high inventory of drilled but uncompleted wells (DUCs), which is strong enough to sustain the current level of fracking without the industry adding more rigs to expand drilling deep into 2021, a Rystad Energy analysis shows. After DUCs run out, however, rig activity in the five key oil regions needs to be in the 280-300 range to maintain flat oil output. Actual rig activity today is almost 50% lower than that requirement, but the industry still has about two to three-quarters of leverage, based on the current DUC count, to achieve a smooth transition from a DUC-driven activity phase to a regular operations mode. 

. . . The nationwide DUC inventory reached a peak of about 5,800 wells before starting to decline in July.

. . . In the Permian Basin, the share of DUCs drilled less than six months ago declined to 55% in July from 72% in the same month a year earlier. The share of DUCs drilled six to 11 months earlier increased to 24% from 9% in the same period. Hence, there are more than 700 Permian DUCs that were drilled in the second half of last year that remains uncompleted as of today – an unprecedented number in the basin’s history.

Immediate fact that I noticed was that Rystad Energy states that there are 5,800 DUC wells. This is versus the EIA that has been in the 7,600 range (7,685 specifically for the month of July). Is the almost 1,900 different the wells that Rystad thinks won't ever be put into production? Perhaps. That same quote states that DUC inventory is starting to decline in July. I guess I'm going to see what the EIA has for DUC wells as of September and onward. If Rystad is correct, EIA should start seeing a steady decline.

Another interesting fact is that DUCs that are less than six months old are currently 55% of total DUC wells in the Permian. This is a drop from 72%. I guess when you've had a significant drop-off in drilled wells, this is what happens? Newly drilled wells are immediately put into production and DUC wells just keep getting older and older. But then this seems to me that oil producers don't have as much faith in the DUC wells to produce a high quantity of oil.

Finally, the article states that rig activity is 50% lower than that required. Okay, so rig activity is around 180 per week. A 50% increase would get us to 270 so we have a 90 rig count short fall. Rystad actual is saying between 280 and 300 rigs are necessary to keep oil production flat so if we use 290, we have a short fall of 110 rigs. Using 110 weekly rig short fall and the fact that Rystad is saying there are 5,800 DUC wells out there, oil producers could keep rig counts at current levels of around 180 weekly rigs and still keep oil production flat for the next year (5,800 DUC divided by 110 weekly rig short-fall equals 52 weeks).




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