The Energy Information Authority (EIA) released its monthly Drilling Productivity Report and it showed that the total number of wells drilled but uncompleted (DUC’s) continues to rise.
For July, that total now reached over 7,000 wells for the 7 major onshore producing areas in the lower 48 states. That total has risen by an average of 210 a month in the year to date. However of the increase of almost 1,500 YTD, over 900 are in the Permian basin alone.
There is always a lag of at least 2-3 months between drilling a well and completing it for production. As the chart above illustrates, even throughout 2014, when oil was over $100 a barrel, DUC’s were around 4,000-4,500. As oil prices dropped, a few of the financially stronger E&P companies opted to leave the oil in the ground and wait for higher prices rather than complete and sell their oil when prices were depressed. Many more had to keep the production flowing as they needed the cash flow
The backlog is growing primarily because of a shortage of frac crews in the Permian Basin. On their recent earnings call, Halliburton, the market leader, stated that their frac crews were fully booked for Q3. Following closely behind is that frac fleets are just about fully utilized. Most of the major pressure pumping players have said they have no plans to add capacity as prices need to rise more to justify spending $20 million on a new frac spread.
In theory, the backlog of DUC’s represents an untapped source that could cause production to surge. In practice it is going to take a least a year before the DUC inventory returns to more normal levels, so it won’t be a surge, more of a gradual increase.
Note also that in July, completions topped 1,000 for the first time since August 2015, but they are still a long way off from the peak of nearly 2,000 achieved in October 2014. And while, new wells are more productive than before, so we don’t need to achieve that level of completions it’s also fair to say that the oilfield service suppliers don’t have that capacity anymore either.
Expect to see E&P companies reduce rig count in the latter part of 2017 while they begin to work down their DUC inventory. The CEO of Keane Energy Group said on the company’s recent earnings call that he wouldn’t be surprised if the rig count dropped by 200.
EIA Drilling Productivity Report – Aug 2017