Tuesday, December 15, 2015

DUCs -- Rigzone Analysis -- December 15, 2015

This is an interesting analysis by the Rigzone staff with regard to DUCs. There are many story lines. This analysis focuses on how fast and how much oil can be brought to the market if the price of oil makes it economical to complete these DUCs.

It's an interesting analysis but I think it has very little to do with the Bakken. Read the analysis and decide for yourself.

But here are my thoughts. (As you read through this, remember that fracking naturally slows during the very, very cold months of winter, and then again during the spring thaw.)

1. They assume the DUCs will all be completed (why would a company drill a well if they did not plan to complete it) but with the caveat that if the price does not support completing these DUCs, some may not be completed. When I first started blogging, the completion (fracking) accounted for about half the total cost; drilling vertically and then drilling horizontally to "total depth" accounted for the other half. With drilling becoming much more efficient and fracking now involving many more stages, more sand, and more water, the costs of fracking have gone up in proportion to drilling. Rigzone puts the total cost at 1/4th for drilling and 3/4ths for fracking.

What they do not mention is that the upfront costs of a) building the road to the pads; b) building the pads; c) laying the pipeline -- water, wastewater, oil -- in some cases; d) paying the upfront lease money for the initial well; e) putting in the storage tanks; f) doing the survey studies from scratch; etc., has all been done. Those were significant costs; if anyone has seen the miles of roads the oil companies have built in the Bakken, they know this is a great expense to have behind them. Yes, I know there are maintenance costs and the roads are probably still being paid off, but ... whatever.

But the biggest factor affecting whether to complete or not complete a well is knowing that these wells will be productive. It's not like these are wildcats and they don't know whether they will have a well or not.

One might want to take a look at the price of oil in 2000 - 2004 when the Montana Bakken boom began. 

2. Rigzone suggests that in one scenario operators will leave the DUCs uncompleted until the price of oil makes them economical, and then at that time, there will be a "mad rush" (my words, not Rigzone's) to complete the DUCs.

NDIC has not given the operators an "infinite" amount of time to complete these wells. In North Dakota, operators have been given an additional year to complete wells, going from one year to two years. I update the status of wells periodically, and note that DUCs are being completed on an ongoing basis. When wells come off the confidential list, whether they have an IP or go to DRL status or become a DUC, I post them at the "news wells reporting" page. DUCs are indicated by SI/NC. When I go back and update the wells, if a well that was previously on the SI/NC list (a DUC), I put the IP in bold blue to show that it was a completed DUC. If it was completed when it came off the confidential list or if it went to DRL status before being completed, I left the IP in bold red.

In the last calendar quarter (3rd quarter 2015) one can see that BR is completing their DUCs in a timely manner. When one looks at 2nd quarter 2015, one can see how few DUCs really remain compared to all the wells that have been drilled. Again, IPs have been put in bold blue if they were previously on the DUC (SI/NC) list. Note how many wells previously on the DUC list as recently as the 2nd quarter 2015 have now been completed. BR and Oasis are completing their DUCs in a timely matter. It appears CLR completes about half their DUCs as quickly as BR and Oasis. Zavanna is not completing their DUCs as quickly; same with EOG for the most part. EOG also tends to put their wells on the TATD list. 

How TATD differs from SI/NC I do not know.

3. Rigzone suggests no one really knows how many DUCs there are. That may be true in states where reporting is not required as frequently as in North Dakota. North Dakota's reporting guidelines probably allow for the most transparency of any state in the union. I think Lynn Helms and the NDIC know within 10% how many wells are on DUC status. We've talked about the reporting regulations many times before.

4. I can't speak to the extent this is true in the Permian or the Eagle Ford, but Bakken DUCs are being placed in the very spots in the basin. The boom went on long enough that the operators know precisely where the best middle Bakken wells are. They did not quite map out the upper Three Forks to the same extent. And the lower benches of the Three Forks have not been mapped out at all, at least in the big scheme of things, or compared to the middle Bakken. These DUCs are all expected to be big wells.

5. The other thing about these DUCs is that they are being placed where there are already any number of wells already producing. It appears there is a halo effect with fracking, and operators may be enjoying some increased production from existing, neighboring wells with a DUC is completed/fracked.

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