DUCs -- It's Complicated -- January 20, 2019

Nick Cunningham over at oilprice suggests that DUCs will make crude oil production hard to forecast going forward. One could argue that's been a problem for quite some time.

I doubt we will ever be able to find out who coined the "DUC" acronym but without a doubt Lynn Helm was the first to use it on a regular basis when talking about the Bakken. DrillingInfo takes the acronym back to 2014, at least in the archives at the link.

I have a tag for "DUCs" but I don't use the tag much any more, most recently November 24, 2018.

Anyway, back to Nick Cunningham and DUCs. Here's the link

The number of drilled but uncompleted wells (DUCs) in the U.S. shale patch has skyrocketed by roughly 60 percent over the past two years. That leaves a rather large backlog that could add a wave of new supply, even if the pace of drilling begins to slow.
The backlog of DUCs has continued to swell, essentially uninterrupted, for more than two years. The total number of DUCs hit 8,723 in November 2018, up 287 from a month earlier. That figure is also up sharply from the 5,271 from the same month in 2016, a 60 percent increase. The EIA will release new monthly DUC data on January 22, which will detail figures for December.

Some level of DUCs is normal, but the ballooning number of uncompleted wells has repeatedly fueled speculation that a sudden rush of new supply might come if companies shift those wells into production. The latest crash in oil prices once again raises this prospect.

The calculus on completing wells can cut two ways. On the one hand, lower oil prices – despite the recent rebound, prices are still down sharply from a few months ago – can cause some E&Ps to want to hold off on drilling new wells. That may lead them to decide to complete wells they already drilled as a way of keeping production aloft while husbanding scarce resources. Companies that are posting losses may be desperate for revenues, so they may accelerate the rate of completions from their DUC backlog.

North Dakota allows two years from spud to completion; it used to be a year. I don't know what the rules are in other states. But North Dakota will permit DUCs to exceed two years but require a waiver. Those are rare.

But completing DUCs is low-hanging fruit. The cost of drilling a well accounts for 30 to 40 percent of the total cost.

As a result, companies deciding on whether to bring a DUC online has already incurred the drilling costs. A shale company may decide to scale back on new drilling this year because of low prices, but the rush of fresh supply from DUCs may allow output to continue to grow. Of course, any decline in new drilling will eventually be felt in the production data, but that may not show up until somewhere down the line. More completions from the DUC backlog could keep near-term production figures on the rise.

How this shakes out is anybody’s guess, but at a minimum, the explosion in DUCs over the past two years complicates oil production forecasts for this year.

By the way, that data point that the cost of drilling a well accounts for 30 to 40 percent of the total cost is an interesting data point. I had thought the same thing. During the early days of the Bakken boom, drilling/completion were closer to 50/50 but drilling is now incredibly less expensive.