Huge 300,000 Bpd Fracklog Could Derail Oil Price Recovery

Tyler Durden's picture

Authored by Nick Cunningham via OilPrice.com,

Thousands of drilled shale wells are sitting idle, unfracked and uncompleted.

The backlog of drilled but uncompleted wells (DUCs) grew dramatically beginning in 2014, as low oil prices forced drillers to hold off on completion in hopes of higher prices at a later date. After all, why bring production online in a low price environment when the same oil could earn more in the future if prices rebound. That calculation is particularly important given that a shale well typically sees an initial burst of production in its first few months of operation followed by a precipitous decline in output.

The surge in DUCs created an enormous backlog of wells awaiting completion. This “fracklog” loomed over the oil market, threatening to derail any sign of an oil price recovery. As soon as oil prices rebounded to some higher point, the shale industry would bring thousands of already-drilled wells online, and that sudden rush of new supply would push prices back down.

But that was a necessary process in order to shrink the huge inventory of DUCs – and that’s exactly what started to play out last year. As oil prices moved up from $27 per barrel in February 2016 to around $50 per barrel by early summer, the industry began completing a lot of wells. The DUC inventory fell from over 5,600 to just over 5,000 between January and August, a decline of 10 percent, according to the EIA’s Drilling Productivity Report.

 

By late November, when OPEC announced an ambitious plan to take 1.2 million barrels per day off of the market, combined with nearly 600,000 bpd of non-OPEC cuts, oil prices shot up. One would have thought that the DUC inventory would see another round of completions, reducing the backlog even further.

But that didn’t happen. The DUC list has grown since then, increasing to 5,443 as of February 2017, an increase of roughly 8 percent since October. Why did this happen even though WTI and Brent moved up well into the $50s per barrel? The rig count has increased sharply since the OPEC deal was announced, but why are companies adding rigs back into operation if they are not completing the new wells that they are drilling? For example, in the Permian Basin, the industry drilled 395 new wells, but they only completed 300 of them.

 

Reuters interviewed industry experts and lawyers and found that a lot of companies are drilling new wells because the terms of their leases require drilling by a certain date or else the companies forfeit their rights to the acreage. Standard leases typically have three-year terms, Reuters says, with an option for a two-year extension. They can drill the wells, but keep them uncompleted and still comply with the terms of the lease, allowing the companies to hold onto the acreage and then come back at a later date to complete the well.

Holding onto land is particularly important these days because land prices in West Texas have skyrocketed, with acreage costing five times as much as it once did a few years ago. Nobody wants to forfeit any prospects amid such a land rush.

Another element contributing to the DUC buildup is that market for fracking crews is tightening, according to Reuters. After a well is drilled, producers contract with fracking crews to complete the well.

"There were a number of completions that were originally scheduled in first quarter and you've seen those slide to Q2 and that's really being driven by...access to service crews and things like that," Tom Stoelk, the CFO and interim CEO of Northern Oil & Gas Inc, told Reuters. So the uptick in the backlog could just be temporary.

But with drilling activity picking up, oilfield services companies are seeing such an uptick in demand that they are charging more. The rising cost of frac sand, well completions, drilling rigs and even labor are leading to cost inflation across the industry, cancelling out some of the “savings” achieved since the market downturn began in 2014. As such, some companies might be waiting for higher prices.

Once the DUCs are completed, new production will come online. And just as before, that backlog still weighs on the market. Wood Mackenzie estimates that if the Permian Basin’s DUC list was completed, it would add 300,000 bpd in new supply.

That supply sitting on the sidelines will put downward pressure on any new oil price rally.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
buckstopshere's picture

Maduro's time on earth is now measured in weeks.

JRobby's picture

(Laugh Track Deafening !!!!!!! The Announcer is Drowned Out)

Announcer: "How did thousands of oil analysts world wide get it so wrong?"

orangegeek's picture

Supply / demand has been irrelevant for oil - CBs have this, like a few other commodities, bid - and who knows where they are putting deliveries.

 

CBs are murdering the planet.

flaminratzazz's picture

It is all lies

DEATH TO THE MONEY CHANGERS

A. Boaty's picture

I can take 2 or 3 bbl for delivery, if it will help.

flaminratzazz's picture

40 buck oil will be just fine with me.. i want 1 buck gas.

Thinkpad's picture

Hopefully but will be for different reasons he'll probably get butchered for food by his starving population. Breakeven for US fracking plays is 75-77 a barrel so no surprise the space has been idled. Additionally they have high cost of capital as most are in the high yield market. Vene oil breakeven is about 28 bucks a barrel so ways to go before it's unprofitable for Vene to extract refine and sell oil. Maduro's time on earth is measured by when he defaults on his 5 billion dollar collateralized loan from Rusiia in January. Those guys don't mess around when it comes to money.

Gator05's picture

This is way misleading; perhaps the average breakeven for the whole US shale "play" is 75-77 a bbl.  Permian basin average is in the mid to high 30's with sweet spots and vast horizontal targets in the low 20's.     

Joe Sichs Pach's picture

"Drilled but Uncompleted"

 

That's what she said.

Thinkpad's picture

More like failure to lsunch

Thinkpad's picture

More like failure to lsunch

flaminratzazz's picture

Where do they want oil to "recover" to?

140 a barrel with 4 bux gas?

That worked out so well last time.

add in Obungholer care and we will all be totally fvkin broke.

sfjsynfuels's picture

300,000 BPD could de-rail the recovery? With global demand growth of 1,400,000 BPD/year (not to mention 3,600,000++ BPD of natural decline to offset) de-rail for, for what, 1 month? Maybe 1 quarter (if you could frack them all at once which you cant), and then there is no more "fracklog" and the players will have to stop using canibalized parts left over from collapsed debt stacks and pay up sustainable service costs, which will wipe out 70-90% of the "technical innovation" cost reductions they are crowing about?

This is the flea on the dogs tail declaring victory becuase the dog walked in the direction the flea wanted to go.

A. Boaty's picture

Does your analysis take into account 1 billion bbl in storage?

gdpetti's picture

Not sure, but I bet it doesn't take into account the cost of cleanup... who usually pays for that??? Not to worry in a bankrupt nation, right? Take the money and run, only a small 'donation' to corrupt politicians is required.. those guys are so cheap... and that defines the American Dream.... because the you can afford to leave all this crap behind and enjoy life on some beach that hasn't been totally polluted yet... but even those are hard to find.. maye a mtn retreat?

Ecclesia Militans's picture

Per HRE (whatever) the former Qatari Energy Minister, US is now seeing massive investment by Saudi, Qatari, Chinese and Russian IOMs simply because shale plays work, they're cheaper, and US is next in line to replace Saudi Arabia as swing producer long enough to really bring the pain.  Also ALL US terminals are being reconfigured from petroleum import to export.  Now Tillerson as SecState is starting to make sense, and the list of peeps looking for a meeting with him is huge.

LNG will be open market by 2020 according to this guy (Abdullah al Attiyah) and the cartel is scared.

Gator05's picture

This correct, we are seeing a 10 - 15% increase is frac and drilling service company charges in the Permian, frac dates are harder to secure.  The comment about honoring drilling lease agreement is spot on.  Companies are continuing to drill single wells to meet 60 and 90 drilling contracts on acreage leases.  These DUC's are not always completed.

"But with drilling activity picking up, oilfield services companies are seeing such an uptick in demand that they are charging more. The rising cost of frac sand, well completions, drilling rigs and even labor are leading to cost inflation across the industry, cancelling out some of the “savings” achieved since the market downturn began in 2014." 

Gator

innertrader's picture

Great article and great response Gator.  I'm not in the oil business, but I've been watching this "deep" wells being drilled the last few years in my area.  I had "assumed" that they were drilling them due to a reduction in cost, but I hadn't realized the lease time limit... now I see a more complete fundamental picture! Kool!

 

TRIUMPH with TRUMP!!!

sinbad2's picture

No way will the Russians and Iranians allow the US to get out of the grave the US dug for itself.

When the US and its obedient servant Saudi Arabia crashed the oil price, American authorities were dancing like Jews at 911. The Russian economy will collapse they claimed, victory is ours, USA USA USA.

A couple of years later, and the Russians are recovering, whilst Americans are obsessed with getting the oil price back up, even though they claim that American oil is still highly profitable, yeah sure.

Sapere aude's picture

Fake news again

 

How on earth can anyone quantified wells that have not even been fracced anyway, and the chances are that many of them did not exhibit the right geology during drilling so there was no point in spending more good money after bad.

There are unfracced wells, but these are mainly due to lease requirements, as if you don't drill you might lose the lease.

This 300k bopd, is pure conjecture.

None of these shale companies can afford to leave decent wells uncompleted, as even at a loss they produce cashflow to help service the growing debt pile.

FAKE NEWS SEEMS TO BE THE ORDER OF THE DAY WHEN IT COMES TO SHALE

 

 

Sapere aude's picture

Gator5. You show me ONE shale company even in the Permian who can actually demonstrate in their accounts that they are making a profit on even $50 oil!

They didn't even make money at $80!

Instead of listening to the fairy stories research it yourself, don't listen to CEO's trying to get more and more money chasing less and less oil.

Pioneer Natural Resources lost $44,000,000 just for 4th Q 2016

Occidental petroleum lost $574,000,000 just for 4thQ 2016

Chevron made NOTHING in 4th Q 2016 on their shale

Apache net loss $182,000,000 with a full year loss of $1.4BILLION. They reduced wells to 17 for the quarter compared with 29 previous. OBVIOUSLY BECUASE THEY WERE MAKING SO MUCH MONEY ON THEM? Oil production was dropping in the Permian!

THEY WILL NOT EVEN GIVE A BREAKDOWN OF HOW MUCH THE PERMIAN OIL HAS LOST THEM!

IS THERE EVEN ONE COMPANY INVOLVED IN SHALE WHO MAKES A PROFIT. All this talk of $20 or $30 breakeven is just TALK.

There accounts show a completely different picture, and that's hedging oil, and an oil price that was $50

 

 

 

 

 

Putrid's picture
Putrid (not verified) Sapere aude Mar 31, 2017 11:15 AM

Sapere I've been following your analysis of shale, quite interesting. I am thinking of using some of your output. Check out the recent oil analysis here www.beforethecollapse.com and then write me.

Best
Putrid

Sapere aude's picture

Putrid: I see others are starting to see through this Shale ponzi.

Ironically its on ZH.

Never trust anything without researching it yourself and the fact you appear quite interested is credit to you.

Sadly many of the posters on this board post with emotion rather than facts.

https://srsroccoreport.com/media-deludes-americans-shale-oil-production-...

Sapere aude's picture

Have read the article, but my comment on that is sadly the idea of WW3 is too late, its already underway...the oil price is part of it.

But don't write the USA off its a fantastic country with super potential, but all the time these silly games are played with commodities, or false figures on oil production, etc. etc., it stops the USA doing wonderful things for its people and keeping its position in the world.

USA excells in technological advancement and food production, but all the time we spend playing games to keep ahead, we fall further behind.

The USA tried to get the whole world to reject Communism and admirable, but instead of embracing Communist countries that turned to capitalism, albeit derivations of that, the USA now seems to be rejecting capitalism too.

What should matter is trade, keeping the wheels of capitalism working to benefit all, and by all I mean every country in the world, and that oils the wheels of capitalism. instead we see more and more proxy wars, more and more suffering and a less safe human race.

Its also ironic that the pseudo climate change science is used by some who have no problem in dropping hundreds of thousands of munitions in these proxy wars, without a care for the cost in terms of humanity, and in terms of what that does to the environment, yet the same people are the first to shout about carbon dioxide, whilst ignoring high explosives contamination.

Its sad to see the USA taking its eye of the ball, because what it does superbly, is just as valuable as oil, and other countries know that. But constantly engaging in fake price discovery, or price suppression is contradiction to the free market it purported to fight for, or the Capitalist system. Capitalism isn't rigging the silver price, isn't rigging the gold price, isn't rigging the oil price, that is no different to totalitarian control we complained about in the Soviet Union model.

When the Soviet Union was dismantled we all made a serious mistake. We had the seeds of a world where all could be encouraged to join the same game...Instead we tried to rub Russia's nose in it, and to rule by subterfuge which kept all sides fighting the same old same old. With all ordinary working people paying the cost.

I'm not too good on the politics though, but oil I know!

Putrid's picture
Putrid (not verified) Sapere aude Apr 1, 2017 1:27 AM

I may want to consult you concerning oil analysis so drop me an email and I'll get in touch. I have all your old posts saved and may post an analysis using such.

Best
Putrid
Haughian@hushmail.com