DUC Inventory | Russell T. Rudy Energy LLC
A recent article in “Rigzone” points out that drilled but uncompleted (DUC) wells, also known as the “fracklog”, are a normally occurring phenomenon. This is because there is often a lag between the time when the well is drilled to total depth, and when it is completed and placed on production. What is abnormal is the current number of DUC’s and the reason for their increase since the oil price collapse. An even more important consideration is how much production will come on stream once the inventory of DUC’s is eliminated.
The cost of land acquisition and drilling is relatively small compared to completion costs. The latter can account for roughly three-fourths of total well costs. Some operators, faced with cash shortages, have chosen to defer these completion costs until prices recover.
Some DUC’s are also the result of long-term, inflexible drilling contracts which incented operators to keep drilling. Contracts for completion services tended to be of shorter duration and their associated costs postponed until better times. Also, some operators kept drilling to take advantage of reduced rig rates, while at the same time temporarily delaying completion costs.
No one really knows how many DUC’s exist. Investment firm Raymond James (RayJa), using data provided to the state of Texas, concludes that there may be more than 2,000 DUC’s in just the Permian Basin of the Western part of the state. However, RayJa will not venture an exact estimate of the national total of DUC’s. They do opine that the number of “abnormal” DUC’s is anywhere from 500 to 3,000 wells, based on their analysis of the Permian Basin, Bakken shale of North Dakota, and the Eagle Ford shale of South Texas.
If the actual number of DUC’s is not known, then we certainly do not know what impact they will have on total oil output when they are put on stream. Consulting group Wood Mackenzie thinks the incremental production would be about 250,000 to 300,000 barrels of oil per day and would not be enough to move the market, increase the glut, and exert downward pressure on prices. With most operators significantly cash constrained, they feel that it is very unlikely that scarce capital would be used to complete DUC’s until there is a significant and sustained price increase.
Michael Byrd, a partner with the law firm of Akin, Gump, Hauer & Feld LLP, agrees. He thinks that even when many of the current DUC’s are completed, it would not result in an overall increase in domestic production. He went on to say “It will take a sustained recovery in oil prices to have that impact. Moreover, many suggest that once prices rebound, DUC’s will get turned on and cause a huge flood of production, meaning that any oil price correction could be short-lived, which in turn, would cause the increase in completions and new drilling to be short-lived.”
To read the article in its entirety, please go to http://www.rigzone.com/news/oil_gas/a/142070/DUC_DUC_Production_Boost/?all=HG2 .
