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Analysis: SCOOP/STACK operators scale back rig activity by 40% so far in 2019

Highlights

Producers subject to stricter earthquake rules

Production still on track for steady growth

Denver — Operators in Oklahoma's SCOOP/STACK, once one of the hottest US onshore plays outside the Permian, have scaled back on the number of rigs by 40% year to date, while earthquake have caused producers to halt activity in some areas.

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Since the start of the year, the SCOOP/STACK has shed nearly 40% of its wells, going from 105 active rigs in January to 62 rigs as of September 11, according to S&P Global Platts Analytics.

While crude prices have improved in recent months, many operators in the Oklahoma basin continue to struggle with high well costs and varying rock quality. Once dubbed the "Permian Junior," the SCOOP/STACK initially attracted the attention of operators due to relatively cheap acreage, close proximity to the Gulf Coast and Cushing and some promising early well results.

Now, the SCOOP/STACK is finding some of its operators lowering their production guidance, exiting the play altogether or redirecting their focus and capital to other basins, such as the neighboring Permian, where returns are considerably higher and, as importantly, more predictable.

Also, some operators are shifting their attention away from the STACK and toward the slightly oilier SCOOP in hopes of elevating returns. Since January, the number of active rigs in the SCOOP has remained relatively steady, dipping 16% to 36 active rigs. Over the same period, rig activity in the STACK has dropped by more than 50%. Kingfisher County in the STACK has decommissioned the greatest number of rigs, shedding 15 since January. Chesapeake, Cimarex, Devon, Marathon and others have all paused drilling activities in Kingfisher.

However, the STACK actually has higher internal rates of return per well, 17%, based on half-cycle estimates, than the SCOOP at 11%, according to Platts Analytics. Producers are typically prone to grow production when IRRs reach 20% or higher.

While drilling efficiencies have improved in the SCOOP/STACK, overall production efficiencies in the basin have remained stagnate, according to Platts Analytics. Varying rock quality and complexity have made it more difficult for operators in the basin to optimize their drilling and completion programs. Adding to the complex geology in the SCOOP/STACK is the state's strict regulatory requirements around tremor detections.

SHAKE UP

In 2016, Oklahoma enacted new rules (further tightened in 2018 and requiring operators to have access to seismic detectors capable of providing real-time data) to deal with man-made tremors (aka induced seismicity) resulting from hydraulic fracturing.

A new USGS-funded geological study in the Anadarko Basin in Oklahoma expanded on the findings of a 2012 study that linked wastewater injection and seismicity generation. The new study indicates that well completions could also induce seismic activity even years after the work is halted, spurred by the difference in density between the wastewater injected and the existing water underground.

During the fracking process, produced wastewater is typically injected miles beneath the earth's surface via disposal wells. In certain geologic formations, this leads to earthquakes. The phenomenon has also been recorded in North Texas' Barnett Shale and in the San Juan Basin in southern Colorado.

While it is unclear how the results of this study will shape future fracking regulations in the state, several agencies in the US have enacted work suspension requirements upon tremor detections, and have repeatedly enforced those rules, either asking operators to revise their completion plans or suspend work on the well permanently.

Last November, the Oklahoma Corporation Commission ordered Roan Resources to terminate all hydraulic fracturing operations permanently at one of its wells in Grady County following a 3.4-magnitude earthquake. Grady County is the SCOOP's most active area.

In July of this year, Encana's completion operations in Kingfisher County came to a halt following an earthquake measuring at 3.2 in magnitude. By the following day, a stronger earthquake measuring 3.9 in magnitude forced Encana to stop work on the well indefinitely.

Last month, the OCC ordered Trinity Resources to suspend completion operations on a well indefinitely following an earthquake within the vicinity of the well in Quinton, Oklahoma. USGS data reveals at least 37 earthquakes occurred in Quinton since July, with the highest being a 3.7-magnitude quake, which emerged on August 18 and forced Trinity to suspend work on the well.

Despite the ongoing struggles facing the SCOOP/STACK, some operators continue to march on with developing their acreage. At the current number of 62 active rigs, crude production in the SCOOP/STACK is projected to grow 80,000 b/d over the next five years, while gas production is projected to grow about 0.9 Bcf/d, according to Platts Analytics.

-- Brandon Evans, bevans@spglobal.com

-- Edited by Jim Magill, newsdesk@spglobal.com