Oil: Shale News - Production Constraints, Actual DUCs

I think many of us are aware that as much of the world comes out of the COVID-19 pandemic, there is a supply crunch on many goods and services. The most high profile is probably the semiconductor chip shortage. This supply shortage is also hitting shale oil. OilPrice (Jun 7) reported on this recently:

As the prices of steel, cement and other raw materials climb higher and higher amid tightening supply, drillers in the U.S. shale patch are facing higher production costs, Bloomberg reports, citing Citigroup analysts.

Bloomberg via World Oil (Jun 6) reported:

Inflation could reach 12% or more by the end of this year for the sector in North America, analysts including Scott Gruber wrote Friday in a note to investors.

. . . Service providers have found it difficult to hike pricing in North America, where competition is more fierce than it is in international markets. It’s one reason the world’s biggest oilfield contractors are pivoting away from the U.S. and Canada in search of growth overseas.

Even though costs are rising dramatically that isn't stopping shale producers from expanding their oil rig counts. After hitting a low of 172 in August 2020, weekly rig counts are at 387.

That last Bloomberg quote regarding service providers looking into international markets is interesting. Does that hint that there could be further constraints on shale as contractors shift to the International market or does that just mean that suppliers that remain will just get more profitable? 

DUC INVENTORY

Natural Gas intel (Feb 9) reported:

The EIA in the most recent Drilling Productivity Report for December said the total DUC inventory across seven main Lower 48 regions stood at 7,298, down from 7,443 in November.

However, the EIA’s DUC count is 22% “too high and contains many older wells that are likely to never be completed,” according to Freeman.

The federal data contains a “plethora of DUCs drilled back as far as 2014 that are ‘dead in the water.’” Even if the older DUCs were to be finished, they “would not produce at near the rate as wells drilled with cutting-edge technology and lateral lengths.”

The article mentions that Raymond James & Associates Inc. believes that more "normal" DUCs levels will be reached by the end of this year. What is the definition of "normal" when it comes to DUCs? The article doesn't state. Here is my attempt to come up with that "normal" number:

In July 2020, DUC wells were at the highest level since the start of the pandemic. Raymond James' estimate of 22% indicates that there are about 1,619 DUCs out there that will never be completed. So in July 2020, there were about 6,066 wells that could be completed. As of June 2021, that number had dropped to 4,633 (or a 24% decline). If the drop in DUCs continues at a similar pace, it would indicate that by the end of 2021, DUCs would be in the 4,000 range. I wonder if they consider that a "normal" DUC level.

HOW MANY RIGS ARE NEEDED TO KEEP PRODUCTION FLAT?

Reuters (Apr 9) had this interesting quote:

Analysts at Goldman Sachs forecast the total U.S. rig count would rise to an average of 480-500 rigs by the fourth quarter of 2021 with most of that increase coming from the Permian (35-45 rigs), Eagle Ford in Texas (5-10 rigs) and Bakken in North Dakota (3-5 rigs).

"We believe that the U.S. needs a total of about 500 active rigs to keep production flat," Goldman Sachs said.

This aligns with what Rystad Energy (Sep 4, 2020) said back in Sept 2020:

In early 2020, the industry had to put on production more than 850 horizontal wells, across the five major oil regions, to keep production flat. We anticipate that the maintenance activity requirement will fall to 450-500 wells by mid-2021.

In the Bloomberg article above, it mentions that service providers are finding it difficult to compete in the United States and are looking to shift their focus to the International Market. Note how Rystad is stating that the need for horizontal wells just to keep production flat is dropping from 850 to 500. I wonder if that efficiency is what is driving service providers to focus on the International Market. Their services just aren't needed to the extent they once were.

Now there are still another 100 wells that could be drilled on a weekly basis before shale stabilizes production. The question is: once they get to that point, will they keep increasing weekly wells above 500. That is something to keep an eye on as that could result in an global over-supply.