Favorable Oil, Gas DUC Economics Could Heal Wounds

More than 250,000 barrels (bbl) and 4 billion cubic feet of additional daily oil and gas supplies could be unleashed from more than 2,000 drilled but uncompleted (DUC) wells in the Lower 48 as operators look to a commodity price rebound to hasten their recovery.

But don’t expect operators to simply flip a switch and let it all flow overnight.

This is according to analysts at Wood Mackenzie, which recently gave insight on what could be on the horizon in terms of DUC inventory in the coming months. Talk about draining DUCs has been resurrected with oil prices above $50/bbl, U.S. oil rig counts growing and OPEC promising to lower production, giving hope that the downturn’s days are numbered.

Spudding a well but leaving it uncompleted can be a capital conservation play for cash flow-constrained companies, considering between 60% and 70% of the well costs come from the completion, R.T. Dukes, an upstream analyst for Wood Mackenzie, said on the company’s “Crude for Thought” podcast.

However, compared to new drill opportunities, drawing down the so-called “abnormal” backlog of DUCs—wells that were drilled but not completed after commodity prices began to fall in 2014—means a better breakeven.

“Because the drilling costs are effectively ‘sunk,’ the breakeven economics can be approximately 30% lower—crude prices or gas prices don’t need to appreciate much more than US$50/bbl or US$2.50 per million British thermal units (MMBtu)MMbtu—than for new drill opportunities,” Wood Mackenzie said. “As conditions improve over the next 18 months, we expect to see operators moving back in to the major oil and gas plays to begin production.”

According to the latest data from the U.S. Energy Information Administration’s (EIA) Drilling Productivity Report, there were 5,069 DUCs in the seven major regions tracked for September 2016. This is 27 fewer than the 5,096 reported in August. Note that DUC estimates vary depending on the source due to different methodologies, operational assumptions and available data.

Although the DUC count remained the highest in the Permian, the biggest drop was evident in the Eagle Ford, where operators cut the inventory of DUCs by 36 to 1,276 for September. Other regions with double-digit decreases in the number of DUCs were the Niobrara and the Marcellus, with the Utica and Bakken regions also seeing fewer wells in their DUC inventories, according to EIA data.

In the oil-dominant regions of Bakken, Niobrara, Permian and Eagle Ford, the estimated DUC count increased during 2014‐2015, but declined by about 400 during the last five months, the EIA said.

Roughly $50/bbl to $55/bbl is needed to generate a 10% return in the Bakken, according to Ryan Duman, a senior analyst for Wood Mackenzie. But the average play-level breakeven drops to about $40/bbl when looking at the DUC economics, mainly because the drilling costs have been sunk, he said during the podcast.

Completing DUCs may be the first option for operators when it comes to responding to higher oil prices instead of bringing in a new rig, he added.

In the northeast, where most of the gas-related DUCs are located, some of the Marcellus sub-plays have breakevens of about $2.50/ MMbtu. But the DUC economics are appealing with breakevens in the low-$2 level, although operators have to consider access to takeaway capacity, he noted.

The DUC count in gas-focused regions, which include the Haynesville, Marcellus and Utica, have fallen since December 2013, according to the EIA.

“Given requirements for planning and scheduling completion jobs, there will always be some DUCs,” the EIA said. “Prior to the decline in drilling activity and increases in the estimated number of DUCs in oil‐dominant plays at the end of 2014, the ratio of DUCs to completions (D/C Ratio) was around 2:1 for oil regions and slightly over 4:1 for gas regions.”

The ratios could be a long-term benchmark that represents the norm when market conditions support steady or growing production, the EIA added.

Analysts expect operators to continue drawing down the backlog of DUCs, but the pace remains to be seen. Additional insight could come soon as oil and gas companies gear up to provide operational updates while releasing third-quarter 2016 earnings results.

Velda Addison can be reached at vaddison@hartenergy.com.