U.S. shale producers are drilling at the
highest rate in 18 months but have left a record
number of wells unfinished in the largest
oilfield in the country – a sign that output may
not rise as swiftly as drilling activity would
indicate.
Rising U.S. shale output has rattled OPEC's
most influential exporter Saudi Arabia and
pushed oil prices to a near four-month low on
Wednesday. U.S. production gains are frustrating
Saudi-led attempts by the world's top oil
exporters to cut supply, drain record-high
inventories and lift prices.
Investors watch data on the number of rigs
deployed in North American oil and gas fields as
a leading indicator for output. But the rising
rig count and frenetic drilling activity in the
Permian Basin in West Texas is not all about
pumping oil.
During the 2014-2016 downturn in global oil
prices, the number of wells left incomplete grew
as companies shut down rigs, laid off workers
and retreated from the fields. When prices
picked up, operators were expected to pump the
oil from those incomplete wells before spending
money on drilling new ones.
Instead, the number of incomplete wells has
risen. A record 1,764 wells were left unfinished
in the Permian in February, according to U.S.
government data going back to December 2013. In
February alone, 395 wells were drilled and only
300 completed. That was the highest drilling
rate in the Permian in two years.
The surprise surge in unfinished wells
indicates that investors, traders and oil market
players may need to reinterpret rig count data.
"You would now be looking at the number of
wells drilled and the uncompleted wells and not
necessarily the rig count," said Bruce Bullock,
director of the Maguire Energy Institute at
Southern Methodist University in Dallas.
Reuters interviews with more than a dozen
well completion service providers, oil and gas
lawyers and industry experts show that some
operators are drilling because their leases
require them to do so within a specified time
limit to keep their leases. But they may not be
required to actually pump the oil immediately
after they have drilled the hole.
To complete a well, shale producers stuff the
hole with sand, water and chemicals at high
pressure until the rock fractures and releases
the oil contained in its pores.
There is typically a lag of a few months
between drilling and completion in government
data, so some of the increase in unfinished
wells can be explained by rising activity.
Some leases do require firms to produce a
minimum volume of oil. On those leases, many
firms will frack one well and leave others
incomplete. That allows them to meet their
contracts with land holders but gives them
flexibility to come back and pump the oil later.
LEASE VALUES JUMP
The value of land in the Permian has rocketed
as oil prices recovered to around $50 a barrel,
so oil firms are now scrambling to do the
required drilling to keep leases they had left
dormant.
"During the period where we had the downturn
in price, there were a lot of leases that were
in danger of being lost ... they had to drill a
well to maintain it," said Michael Stoltz, an
attorney who represents energy firms in Texas
for Stubbeman, McRae, Sealy, Laughlin & Browder
Inc.
A new lease could cost the operator as much
as five times more than a few years ago, said
Joe Dancy, an oil and gas lawyer, who helps
negotiations on such deals. Drilling costs are
also on the rise, adding to the rush by
producers trying to stay ahead of price
inflation.
Fracking is more expensive than drilling and
is time consuming. As much as 70 percent of well
completion costs are tied to fracking, while 30
percent is for drilling, experts say.
Fracking crews are in short supply, which is
another reason that oil firms have delayed
completion.
As activity has picked up in the Permian, the
labor market has tightened. Many oil workers
found jobs elsewhere during the downturn, so
rebuilding the workforce is taking time.
"There were a number of completions that were
originally scheduled in first quarter and you've
seen those slide to Q2 and that's really being
driven by ... access to service crews and things
like that," said Tom Stoelk, the CFO and interim
CEO of Northern Oil & Gas Inc, a producer
focused on the Williston Basin in North Dakota
and Montana.
MORE INVENTORIES
The number of incomplete wells could
complicate OPEC's attempt to balance markets, as
they could be completed relatively quickly if
the oil price rises.
Saudi Arabia is targeting a $60 per barrel
price, and that could trigger those well
completions and bring a new wave of supply to
the market.
If all the incomplete wells in the Permian
pump instantaneously, output from the field
could jump as much as 300,000 barrels per day
(bpd), according to consultancy Wood Mackenzie.
In February, the field accounted for about
2.1 million bpd, or about 23 percent of total
U.S. crude output of about 9 million bpd,
according to U.S. government data.
LOCKING IN LEASES AND COSTS
Landowners lease their land to energy
companies for an upfront lump sum or signing
bonus and subsequent royalty payments.
A standard lease lasts three years, with an
option to extend for another two years, said
sources who work with companies on such
agreements.
Leases vary greatly. Some require drilling
but no production, others require production,
and some require a well every six months. None
of them require firms to complete all the wells
they drill.
Continental Resources Inc, which has about
185 such drilled but uncompleted wells (DUCs) in
the Bakken in North Dakota, says that innovation
during the downturn meant it could now complete
those wells more cost efficiently.
"We're glad we saved all those wells," CEO
Harold Hamm said at an industry conference this
month.
(Additional reporting by Ernest Scheyder in
Houston and Swetha Gopinath in Bengaluru;
Editing by Simon Webb and Paul Thomasch)
© Thomson Reuters 2017 All rights reserved