Untapped Energy Wells Stand Ready -- WSJ
October 24 2016 - 03:03AM
Dow Jones News
By Erin Ailworth
U.S. oil and gas companies have drilled thousands of wells they
have yet to tap, creating a ready reserve of fuel that could surge
onto the market when energy prices recover.
As producers report quarterly earnings during the next few
weeks, a question looms: When will they start exploiting these
"drilled but uncompleted" wells?
While the industry often has an inventory of drilled wells
awaiting completion, the backlog has grown significantly during the
past two years as companies such as Continental Resources Inc. and
EOG Resources Inc. deliberately delayed tapping wells to wait for
higher energy prices.
Federal estimates show the number of such wells in the nation's
seven most prolific drilling regions stood at 5,069 in September,
up from 3,768 in January 2014, before oil prices began falling.
Because companies have already spent the money to drill the
wells, known in the industry as DUCs, bringing on the supply they
hold is cheaper than drilling and fracking a new well. That means
DUCs are an economic proposition for many companies, especially
with U.S. crude now trading at around $50 a barrel.
Ryan Duman, a senior analyst at energy-consulting firm Wood
Mackenzie, said he expects to see companies completing many of the
delayed wells in the next 18 months. "You're at a point where
pretty much every DUC that's sitting out there is in the money,"
Mr. Duman said.
Wood Mackenzie estimates that the industry has about 2,000 more
wells awaiting completion than it normally would. Those extra DUCs
are capable of producing more than 250,000 barrels a day of crude
and 4 billion cubic feet of natural gas a day, the firm estimates.
That is equal to roughly half of California's daily oil output in
July and West Virginia's daily gas production the same month.
Mr. Duman called the untapped resources contained in the DUCs a
"meaningful amount of supply" that would have "some implications on
commodity prices." Many of the DUCs, he added, are located in the
Marcellus drilling region of Pennsylvania and the Bakken in North
Dakota.
Companies reporting in the coming week include ConocoPhillips,
Antero Resources Corp. and Cabot Oil & Gas Corp. Continental
Resources is set to report on Nov. 2, and EOG thereafter.
While many companies still expect their DUC backlogs to remain
larger than normal at the end of this year, some have begun tapping
the wells in recent months, or are planning to do so soon. Federal
estimates show that the number of DUCs in the nation's seven most
prolific drilling regions has fallen by about 500 wells since
peaking in January at 5,576 wells.
Executives at Continental Resources, one of the most active
producers in the Bakken, have said they view DUCs as "oil in the
bank" at a cost-effective price. The company expects to have 185
drilled but uncompleted wells in the Bakken at year end, up from
135 at the end of 2015.
"We would likely start working down the DUC inventory when we
see a stable WTI price around $50," said Warren Henry, a
Continental vice president, referring to West Texas Intermediate,
the benchmark price for U.S. crude.
EOG has said it expects to have 200 drilled but uncompleted
wells at the end of 2016 -- down from 300 a year prior -- as it
looks to enter 2017 in growth mode. Analysts said they expect to
hear about companies drawing down their DUC inventories as
producers lay out preliminary drilling plans for 2017 during
third-quarter earnings calls.
"A lot of companies will at least put up some guardrails around
'17 -- 'Well, at this price, we could spend this much; at that
price, we could spend this much,' " said Pearce Hammond, an analyst
at Simmons & Co. International.
David Tameron, an analyst at Wells Fargo Securities, said most
companies will use DUCs to boost their output without spending as
much as they would drilling new wells. That will limit the impact
of new production from those wells on the broader energy
market.
Tim Rezvan, managing director of Americas research at Mizuho
Securities USA Inc., said that while the untapped wells represent a
large resource, it will take time to begin pumping them. "You can't
get those turned on overnight," he said.
Write to Erin Ailworth at erin.ailworth@wsj.com
(END) Dow Jones Newswires
October 24, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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