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Keeping DUCs in a Row

While the US Energy Information Administration (EIA) has been reporting a drop in the Lower 48 inventory of drilled and uncompleted (DUC) wells in the last three months, new data technologies show the opposite is true: the DUC backlog actually rose by 5% over that period to its highest level since March 2016. A DUC is born when a rig leaves a pad after the drilling crew has completed its work but is not followed by a fracking crew, thus leaving the well uncompleted โ€” and unproductive. The DUC inventory is sometimes interpreted as a form of storage โ€” in effect crude oil waiting to be brought on line as soon as price signals call for it โ€” though that interpretation is subject to debate.

The disparity between the two counts reflects a difference in methodologies: on the one hand, the old fashioned way of compiling statistics from self-reporting by companies, and on the other hand the cutting-edge approach based on direct measurements enabled by recent advances in technology, data storage and computing capacity. The EIA has moved mountains to keep track of US production and other metrics through a period of rapid, far-reaching transformation in the US oil industry. As US light tight oil production expanded in recent years, so has the USโ€™ ability to monitor its growth through dedicated reports and surveys. But surveys based on self-reporting by companies only go so far. Satellite-based measurements show many light tight oil producers fail to report their well completions to FracFocus and state commissions in a timely manner, if at all. This has led to significant undercounting of well completions in EIA data that are widely used and considered reliable by industry analysts. In 2018 alone, in the Permian, more than 20% of wells went unreported to FracFocus or state commissions.

The surge in DUCs since the beginning of the year spans all tight oil basins save the Anadarko.

The surge in DUCs since the beginning of the year spans all tight oil basins save the Anadarko. The increase came from a much lower base than estimated by the EIA, however. The DUC inventory rose by nearly 600 wells across the five largest US tight oil basins from end-2018 to end-August 2019. As the most prolific basin, the Permian naturally led the trend. Operators in Colorado and Wyoming โ€” including the DJ, Powder River, and Piceance basins โ€” followed suit. While the Anadarko โ€” including the SCOOP play โ€” bucked the trend, the drop was not quite as steep as reported by the EIA. In the June-August period, the aggregate increase in the DUC count came to 160 wells, again led by the Permian. Only operators in the Anadarko and Williston Basins have drawn down DUCs in that three-month period.

The buildup in the DUC inventory reflects in part faster declines in the number of active frac crews than in the rig count. In a bid to cut costs, companies have slashed both their rigs and their frac crews, but, perhaps because the latter tend to be more capital intensive, their number has fallen faster. This steep decline has not left enough active frac crews around to keep up with drilling. The impact on frac crews from financial pressures and investor demands for budget discipline and free cash flow crews may be particularly acute towards the second half of the year, when companies might not be able to book enough profits from recently completed wells to offset fracking expenditures by the turn of the year.

Even more importantly, drilling rigs are operating more efficiently. The best way to reduce expenditures is through efficiency gains, and those have been steeper on the drilling side than on the fracking side of tight oil operations. Though operators dropping frac spreads faster than rigs is certainly a driver for the DUC count climbing in 2019, efficiency gains by operators and oilfield service providers may be a more significant factor. While the average number of days it takes to frac and complete a well in the five largest US tight oil basins has remained relatively flat in 2019, rigs are drilling wells much faster. Rigs drilled wells in less than 18 days on average in August, more than 3 days faster than in May 2019, while it took frac crews only 0.2 days less than in May to complete a well.

In the most recent installment of the Energy Digest, we noted that new data technologies helped provide independent validation of Saudi Aramco messaging regarding the impact of the recent attack on the Abqaiq crude processing center. More often than not, however, the value add of new data technologies is not to merely confirm publicly available data, but to correct their inaccuracies and fill their many gaps. The US DUC inventory is a case in point. Independent measurements show the backlog of uncompleted wells is actually creeping up, not sliding down as reported โ€” whether due to negative drivers such as financial pressures and investor demands or positive ones such as improvements in operational efficiency. That buildup in the DUC inventory could lead to a rebound in production gains further down the line, assuming the fracking capacity is there to bring the wells on production in due course.

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