In Oil & Companies News 22/07/2016
The number of dormant U.S. oil and natural gas wells is poised to fall sharply, and bulls who think production will continue to slide should be worried.
The number of wells left idle for more than three months after being drilled ballooned to 3,527 as of April 1, according to a report Wednesday from Bloomberg Intelligence. Some producers began reducing the number of drilled but uncompleted wells, or DUCs, in February as oil prices began to recovery. Others added to the inventory, or fracklog, according to the report.
Clarity is on the way. Producers are expected to begin tapping DUCs in coming months, boosting oil and gas output, according to Bloomberg Intelligence analyst Andrew Cosgrove. If crude prices remain around the $40 to $50 a barrel range, most of the DUCs in the Permian basin and as many as 70 percent in the Eagle Ford will likely be gone by the end of 2017.
“Commodity prices have improved which is leading to an incremental pickup in U.S. completion activity,” Cosgrove said in an interview. “We think that by the end of the third quarter, beginning of the fourth quarter, the bullish catalyst of falling U.S. production will be all but gone and that you’ll start to see U.S. production flat lining.”
Drillers that expanded operations in U.S. shale fields found that sidelining wells was the easiest way to cut costs when oil and gas prices plunged. Bringing those wells online is the quickest, least expensive way to take advantage of higher prices.
“There are a number of drilled but uncompleted wells just sitting around, basically waiting for a better price to come along,” said Het Shah, an analyst at Bloomberg New Energy Finance.
U.S. oil producers extended the biggest shale drilling revival since last summer as rigs targeting oil and gas in the U.S. rose by 7 to 447 last week, according to Baker Hughes Inc. Dave Lesar, chief executive officer of Halliburton Co., the world’s largest provider of hydraulic-fracturing work, said Wednesday the market in North America has turned and that he expects a “modest uptick” in drilling in the second half of the year.
$50 Oil
Still, while crude rallied from a 12-year low in February to over $50 a barrel last month, prices have since stabilized. That has led some producers to bring DUCs online and others to add to the backlog of dormant wells.
West Texas Intermediate, the U.S. benchmark grade, fell 19 cents, or 0.4 percent, to $44.75 a barrel on the New York Mercantile Exchange Thursday. Oil is down about 12 percent since touching $51.67 a barrel on June 9.
“With oil hovering below $50, decisions on whether to tap the idled supply are increasingly driven by local well economics and company-specific factors,” Bloomberg Intelligence analysts Cosgrove and William Foiles wrote in the report.
EOG Resources Inc. began reducing its inventory of DUCs in early February. The company is focusing on completing dormant wells and has said it plans to trim its backlog to 230 from 300 this year.
Meanwhile, Continental Resources Inc. added 78 dormant wells in the Bakken oil basin, where it’s the biggest leaseholder, from September 1 to April 1 — more than all the drillers in the play combined. The company had more long-term rig contracts and likely has the capital to complete wells as prices rise, Foiles said.
“It shows management is pretty confident in their situation,” he said.
Major Plays
Among the three major oil plays, the Permian, the Eagle Ford and the Bakken, DUCs increased the most in the Permian, which saw a 12 percent jump in the first quarter. That topped the 4.4 percent increase in the Bakken. Dormant wells across the three plays may fall 25 this year, with the Permian leading the way.
“The Permian drawdowns will continue to trump those you see in other basins,” Cosgrove said.
New output from DUCs will equal the decline from older wells in four shale oil basins, according to Everscore ISI. That means tapping dormant wells will only temporarily stem production declines.
And while dormant wells “coming online may cause prices to remain flat” until the end of the year, sometime in 2017 prices will gradually improve, said Brian Youngberg, an energy analyst at Edward Jones.
Source: Bloomberg
