All drill, no frack: U.S.
shale leaves thousands of wells unfinished
Send a link to a friend
[March 24, 2017]
By Devika Krishna Kumar
YORK (Reuters) - U.S. shale producers are drilling at the highest rate
in 18 months but have left a record number of wells unfinished in the
largest oilfield in the country – a sign that output may not rise as
swiftly as drilling activity would indicate.
Rising U.S. shale output has rattled OPEC's most influential exporter
Saudi Arabia and pushed oil prices to a near four-month low on
Wednesday. U.S. production gains are frustrating Saudi-led attempts by
the world's top oil exporters to cut supply, drain record-high
inventories and lift prices.
Investors watch data on the number of rigs deployed in North American
oil and gas fields as a leading indicator for output. But the rising rig
count and frenetic drilling activity in the Permian Basin in West Texas
is not all about pumping oil.
During the 2014-2016 downturn in global oil prices, the number of wells
left incomplete grew as companies shut down rigs, laid off workers and
retreated from the fields. When prices picked up, operators were
expected to pump the oil from those incomplete wells before spending
money on drilling new ones.
Instead, the number of incomplete wells has risen. A record 1,764 wells
were left unfinished in the Permian in February, according to U.S.
government data going back to December 2013. In February alone, 395
wells were drilled and only 300 completed. That was the highest drilling
rate in the Permian in two years.
The surprise surge in unfinished wells indicates that investors, traders
and oil market players may need to reinterpret rig count data.
"You would now be looking at the number of wells drilled and the
uncompleted wells and not necessarily the rig count," said Bruce
Bullock, director of the Maguire Energy Institute at Southern Methodist
University in Dallas.
Reuters interviews with more than a dozen well completion service
providers, oil and gas lawyers and industry experts show that some
operators are drilling because their leases require them to do so within
a specified time limit to keep their leases. But they may not be
required to actually pump the oil immediately after they have drilled
(For a graphic on the number of incomplete wells, click: http://tmsnrt.rs/2mYJlgN)
To complete a well, shale producers stuff the hole with sand, water and
chemicals at high pressure until the rock fractures and releases the oil
contained in its pores.
There is typically a lag of a few months between drilling and completion
in government data, so some of the increase in unfinished wells can be
explained by rising activity.
Some leases do require firms to produce a minimum volume of oil. On
those leases, many firms will frack one well and leave others
incomplete. That allows them to meet their contracts with land holders
but gives them flexibility to come back and pump the oil later.
LEASE VALUES JUMP
The value of land in the Permian has rocketed as oil prices recovered to
around $50 a barrel, so oil firms are now scrambling to do the required
drilling to keep leases they had left dormant.
"During the period where we had the downturn in price, there were a lot
of leases that were in danger of being lost ... they had to drill a well
to maintain it," said Michael Stoltz, an attorney who represents energy
firms in Texas for Stubbeman, McRae, Sealy, Laughlin & Browder Inc.
[to top of second column]
A pump jack stands idle in Dewitt County, Texas. REUTERS/Anna Driver
A new lease could cost the operator as much as five times more than a
few years ago, said Joe Dancy, an oil and gas lawyer, who helps
negotiations on such deals. Drilling costs are also on the rise, adding
to the rush by producers trying to stay ahead of price inflation.
Fracking is more expensive than drilling and is time consuming. As much
as 70 percent of well completion costs are tied to fracking, while 30
percent is for drilling, experts say.
Fracking crews are in short supply, which is another reason that oil
firms have delayed completion.
As activity has picked up in the Permian, the labor market has
tightened. Many oil workers found jobs elsewhere during the downturn, so
rebuilding the workforce is taking time.
"There were a number of completions that were originally scheduled in
first quarter and you've seen those slide to Q2 and that's really being
driven by ... access to service crews and things like that," said Tom
Stoelk, the CFO and interim CEO of Northern Oil & Gas Inc, a producer
focused on the Williston Basin in North Dakota and Montana.
The number of incomplete wells could complicate OPEC's attempt to
balance markets, as they could be completed relatively quickly if the
oil price rises.
Saudi Arabia is targeting a $60 per barrel price, and that could trigger
those well completions and bring a new wave of supply to the market.
If all the incomplete wells in the Permian pump instantaneously, output
from the field could jump as much as 300,000 barrels per day (bpd),
according to consultancy Wood Mackenzie.
In February, the field accounted for about 2.1 million bpd, or about 23
percent of total U.S. crude output of about 9 million bpd, according to
U.S. government data.
LOCKING IN LEASES AND COSTS
Landowners lease their land to energy companies for an upfront lump sum
or signing bonus and subsequent royalty payments.
A standard lease lasts three years, with an option to extend for another
two years, said sources who work with companies on such agreements.
Leases vary greatly. Some require drilling but no production, others
require production, and some require a well every six months. None of
them require firms to complete all the wells they drill.
Continental Resources Inc, which has about 185 such drilled but
uncompleted wells (DUCs) in the Bakken in North Dakota, says that
innovation during the downturn meant it could now complete those wells
more cost efficiently.
"We're glad we saved all those wells," CEO Harold Hamm said at an
industry conference this month.
(Additional reporting by Ernest Scheyder in Houston and Swetha Gopinath
in Bengaluru; Editing by Simon Webb and Paul Thomasch)
[© 2017 Thomson Reuters. All rights
Copyright 2017 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.