"Meager May" -- July 16, 2019

A reader noted that the Director's Cut for May, 2019, could have been labeled "Meager May" based on both the crude oil and the natural gas production numbers.

Initial thoughts -- not ready for prime time.

I can't disagree. I was expecting more.

It's particularly troublesome that both oil and natural gas production failed to increase significantly when one also considers the number of producing wells:

Producing wells:

• May, 2019: 15,698 (preliminary, new all-time high)
• April, 2019: 15,503 
• March, 2019: 15,353 -- well below the all-time high of 15,409 in January, 2019
• February, 2019: 15,154
• January, 2019: 15,409 

That's huge. A jump from 15,503 to 15,698 is an increase of 1.26%.

So what happened?

First, expectations.

I think a lot of us, including me, forget these are May, 2019, numbers, not July numbers. Huge spring rains resulted in the typical and not unexpected road restrictions. It's one thing to drill a well to depth; it's quite another thing to put all those water and sand semis on the road during the monsoon season in North Dakota. In addition, I'm convinced the counties are much more aggressive in "declaring" and enforcing road restrictions (and there's nothing wrong with that).

Now, the other reasons.

I think folks forget that operators can control individual well production from corporate headquarters electronically.

Look at the price of oil in May, and more importantly, look at the trend: the price of oil (WTI) was lower in May ($50.50) than in April ($52.50) and it was even lower in June ($43.10).

Oil companies contract with refiners six months out. Once operators meet their commitment, they can adjust additional production based on price and refiners' needs. My hunch is that Bakken operators are easily meeting their commitments to refiners and are adjusting their production accordingly.

Some operators may even find it advantageous to store their oil (via DUCs) and buy "cheap" oil on the spot market to meet commitments to refiners. This is getting way beyond my headlights, but the bottom line for me is this: the production capacity is well beyond just what takeaway capacity is.

But this might be the biggest reason for "Meager May": we are in the "manufacturing" phase of the Bakken, no longer the boom. The Bakken has moved dramatically from single well to multi-well pad production, and when a new well is drilled, not just one neighboring well comes off line during new operations, but an entire pad "goes down."

It doesn't take the "loss" of many pads to have an incredible effect on overall production.

From the Director's Cut, the number of wells that were off-line for operational reasons:

• awaiting completion (DUCs): up by 23 to 985
• estimated inactive well count: down 69, to 1,556

The "raw data" for DUCs and inactive wells is tracked here. 

New wells (or DUCs), on a well-by-well basis, contribute much more to overall production than legacy (older) wells.

My hunch: the significant increase in number of DUCs is the major reason for "Meager May," and the significant increase in DUCs could have been due to rainy spring road restrictions as much as anything else.

I will be interested in what professional analysts have to say. 

You can bet Wall Street pundits will have lots to say about this, and even The Bismarck Tribune will voice concern.