US oil producers have all their DUCs in a row: Fuel for Thought

With all the talk about sanctions, conflict and nationwide implosions, stakeholders could be overlooking a potential sleeper for the US oil market: DUCs--drilled but uncompleted wells.

Many observers are wondering, with oil prices topping $70/barrel and flirting with $80/barrel, why aren’t US producers drilling more wells to capitalize on commodity revenue gains.

A good deal of that perception is based in an apparently short-sighted fixation that the rig count equals more wells, which equals more production.

But focusing on the rig count without context can be misleading.

US active land rig counts spiked by 56% in the first half of 2017, according to S&P Global Platts’ RADAR methodology, as oil prices climbed about 6% from $47/barrel to $50/barrel.

But the rig tally gained just another 14% in the second half of the year as oil prices continued to rise.

Late in the year, many more wells were spudded, or just started. New wells drilled--which are not included in the rig count--increased by 17% in the second half of the year compared to the first, while the number of active rigs stalled--averaging 924 rigs in Q3 and 906 rigs in Q4. All that drilling activity came as oil prices rose by another 4%.

As market confidence grows, however, a new circumspect approach has operators high-grading prospects for the best return instead of drilling mainly for growth’s sake, even with oil prices up an average of 19% year over year.

But that was $20/barrel ago. And now with some investment banks and industry executives talking about $80-plus/b this year, the average rig count through the first quarter of 2018 is up by just 4% compared with the H2 2017 average, while oil prices ratcheted up another 21%.

The rig count boom is more of a boomlet so far.

With a capability to move quickly across a drill pad, AC-powered, 1,500-horsepower rigs are continuing to expand their market dominance. Their consequent greater efficiencies helped the number of new well starts rise by 13% in Q1 over H2 2017’s average to top 5,000 for the first time since Q1 2015.

But many of those new wells were not completed. The number of DUC wells rose steadily throughout the period, not by as much as the number of new wells spudded--or 37% versus 45%--but by more than the rig count gain of 32%. (A caveat: The data for DUCs lags the well and rig counts because of the nature of the data.)

CHANGE IN FOCUS

The new DUC numbers also reflect a spike of more than 80% in Bakken DUCs in the early part of this year, a reflection that Bakken drilling is spreading outside the sweet spots and that deferred completions there are pending better well economics. Generally speaking, DUC growth elsewhere was much more modest.

With that said, oil production growth proceeds largely unfettered. US oil output increased by another 6% year over year in 2017 and has risen by another 14% in Q1 2018 compared to 2017’s overall average, according to the US Energy Information Administration.

The number of wells per rig and the proportion of growth in the DUC inventory relative to those new wells have both inched up fairly steadily in the past five quarters; however, both were substantially outpaced by the rate of increase in crude production.

That suggests even with their new circumspection, US operators cannot help but boost crude production. As other maturing tight oil plays follow the Bakken’s lead, the DUC inventory could grow further, even with relatively modest gains in rig counts.

While that might flatten the production growth curve a bit, it also increases the overhanging potential of added oil supply in the US, which may by itself help rein oil price spikes in an increasingly volatile world.