Not Ready For Prime Time -- Thoughts On DUCS -- NY Times And Comments -- December 27, 2015

Note: this has been sitting in draft for two months now.  I didn't know what to do with it. It rambles. It is very poorly written. It is not ready for prime time. It was a response to a reader some months ago who sent me a New York Times article. But I'm tired of sitting on it, so I will post it to simply get "rid of it." 

This was my unedited reply to a reader regarding an article in the New York Times on the subject of DUCs. Prior to posting, the reply will be edited for punctuation, grammar, etc., but I plan to keep the basic observations unchanged:

Another great article in the Times. Years ago, once I realized that the front page of the Times was their op-ed page, it was much more enjoyable to read the newspaper. They really do write well, and if weren't so dang expensive (something like $7.00 now) I would subscribe to the Sunday edition.

The Sunday Times was required by our 10th grade social studies teacher for which I am eternally grateful.

Nice, nice article on DUCs. Many, many story lines.

1. This article suggests DUCs can be brought on line quickly; others say not. I'm in the camp that DUCs can be brought on very, very quickly. Anyone who says otherwise, in my mind, has not been paying attention and/or following the Bakken very closely. In this case the Times got it right.

2. The writer says this but I don't think he/she offers his/her own conclusion:

Some analysts say oil companies like Anadarko, EOG Resources and Continental Resources may collectively risk suffocating the very price revival they anticipate by releasing abundant new supplies once prices inch up. Others say the eventual impact would be small and short-lived, but since the industry has never used this strategy before, no one can be sure. 

There are two issues here.

The first issue has to do with profit, price, etc. The price one sells oil for does not matter: the only two things that ever matter is survivability and profitability, and profitability is based on margins, not the price of oil. Right now, the only issue is survivability.

The second issue has to do with volatility of the price of oil and the geopolitics of oil (using oil as a weapon which the Mideast has historically done): the US is now the swing producer for light oil and as such, especially with all those DUCs, and all those fields not now being exploited.

Barring a major geopolitical event anywhere -- but particularly in the Mideast -- and especially now with the ban on US crude oil exports repealed -- it's hard not to see the global oil market as a much more efficient market, responding much better to real supply and demand, rather than responding to rhetoric from self-serving dictators and oligarchies, which was often the norm in the past. Saudi simply had to say it was going to increase / decrease production and commodity markets reacted even before anything "concrete" had happened.

3. I think the Times writer focused on the profitability and survivability of US oil companies (the article is in the "energy and environment section"; it seems as if the article should have been in the business / finance section). In the "energy and environment section" the article should have been focused on a bigger picture -- what DUCs mean for the global energy environment. I have little interest in individual companies in the oil and gas industry (with regard to the blog) except as a means of following the industry to see how this will all play out.

4. I'm surprised we haven't seen more articles on what inexpensive energy means to growing economies and to the US. All this natural gas and all this oil at really inexpensive prices is coming from a reliable source, and from a country with a democratic model of government. This should be an incredibly good news story and yet this seems to be another article on whether individual companies will survive, or how they will survive, and their profitability.

5. I plan to write a post on whether "DUCS" in the Bakken are that big a deal. I was going to post the question / essay this weekend, but I need at least one more month of data from the Director's Cut -- to see the status of Bakken DUCs after another month. As you know, NDIC gave operators an additional year to complete their wells. And yet, after reviewing the SI/NC (DUCS) for the past year, I don't think DUCs mean a thing in reality. Allowing an extra year was incredibly important to the oil companies in North Dakota "just in case," but in fact it appears that companies are not delaying completion all that long. In the good ol' days, they drilled a well and completed it as quickly as logistically possible and NDIC / operators crowed optimistically how fast they could get oil to the market from the initial spud -- often measured in weeks. It looks like the little I know about it, the DUCs are adding a few months; big deal. Not.

6. The DUCs also solved another problem: the perception that the US was running out of storage space. That turned out not to be true, and even if it was, it is now resolved with the repeal of the ban on US crude oil exports. There is a huge amount of storage capacity globally and if Cushing starts to fill up again, there are many places to store it overseas. Vitol with its new storage facilities in South Africa is that story. In the old days, oil arriving at the Gulf Coast, was transported north by pipeline to Cushing. Now, new pipelines and flow reversal of existing pipelines mean that Cushing oil is now going to the Gulf Coast.

7. This is a great story for New Yorkers who had not yet heard of DUCs, unlike those who have been following the US shale story closely. But as the writer said, "... since the industry has never used this strategy before, no one can be sure" -- or another way of putting it: we are in uncharted water.

8. I think it's a fascinating story. At the end of the day, it's not about the price of oil, it's about the margin. This is a great time to be a privately-held company in the oil and gas industry if one has the deep pockets and/or financial backing of bankers/private investors (hedge funds) to keep going for the next year or two. Publicly-traded companies are looking at each quarter and that has to be very, very challenging.