As we move into 2016, official well data from US governmental sources provides sufficient fact-based visibility on drilling and completion trends in 2015. These figures confirm that some operators delayed the completion of a significant number of wells, in an attempt to reduce spending and to build inventory which is easily available once commodity prices recover. Several operators were in addition not interested in increasing their output during low commodity prices.
This inventory of drilled uncompleted (DUC) wells or fracklog is available in Rystad Energy’s US Shale well database, NASWellCube.
Figure 1 summarizes the monthly evolution of horizontal DUC wells for major US liquid basins. Each data point shows how many wells were spudded but not completed as of the end of each month. Back in 2011-2014 an average time from spud to completion was 4-5 months across the US Shale. During this period, the DUC wells increased rapidly, together with increased drilling and completion activity. As of the end of 2014, the DUC inventory contained more than 4,500 horizontal oil wells.
In early 2015, drilling activity showed a faster response to the oil price decline than completion did. This is due to a significant number of rig contracts being terminated before expiration. Thus, despite the completion delays, DUC inventory decreased by 500 wells over the first months of 2015. In the second half of 2015, the decline in completion activity caught up with the decline in drilling and DUC inventory stabilized at the level of 4,000 wells. However, less mature shale areas such as the Permian Basin has shown a different trend from the rest of liquid plays with DUC inventory increasing by 25% from the end of 2014 to the end of 2015, while in other plays inventory contracted by 20-25%. Exit-2015 inventory is equivalent to more than 7 months of drilling activity at the current pace that is a 50% increase from the average in 2011-2014.
Figure 2 examines the significance of DUC inventory from a different angle. It shows the average age of DUC inventory in major liquid plays in the end of 2014 and 2015. The age of each well is measured from the spud date. In 2014, the majority of the wells were completed on schedule (after 4-5 months) so the average age of the DUC inventory ranged from 2.5 to 3.5 months across the plays.
In turn, as of December 2015 a significant portion of the DUC inventory consists of the wells which were drilled in late-2014 or early-2015. Hence, the age of the inventory increased significantly across the entire US Shale during 2015. In the “Big Three” plays (Bakken, Eagle Ford and Permian) this increase is more drastic with an average inventory age of more than 6 months in Bakken and Eagle Ford and almost 5 months in the Permian Basin. Across minor US Shale plays, the average inventory age increased by less than 30% from 3.5 to 4.4 months, given that the majority of operators who followed the strategy of delayed completions focus their activity in the “Big Three” plays. Anadarko could be considered as the only major exception since this company postponed a considerable number of completions in the DJ Basin.
Figure 3 provides an idea of commerciality for the DUC inventory. The Y-axis shows the WTI breakeven price for the DUC wells, while the X-axis shows the potential first year production addition from all DUC wells, which have a lower breakeven price. This chart considers sunk drilling costs for the DUC inventory; thus, the DUC wells have a lower breakeven price than new wells (not yet drilled).
At a WTI of 30 USD/bbl, the DUC inventory exhibits approximately 475 kbbl/d of first year commercial volume. Out of this, 180 kbbl/d are commercial in Eagle Ford, 150 kbbl/d in Bakken, 100 kbbl/d in the Permian Basin and only 45 kbbl/d in the rest of the US Shale. In terms of well count, 475 kbbl/d of commercial volume is translated into 1,400 commercial wells. The exact impact of the DUC inventory on US shale oil production in 2016 will depend on the completion schedule. With the current typical well configuration, 100 completions per month over a year would provide 300 kbbl/d additions to a year’s exit rate. Given that the US shale base production decline from December 2015 to December 2016 is expected to be around 1.6 mmbbl/d, it is clear that the DUC inventory alone is not sufficient to maintain a flat US shale production if the WTI price stays at 30 USD/bbl. Finally, as drilling activity is expected to plunge further at 30 USD/bbl, Rystad Energy expects that US shale oil volumes will decline by 700 kbbl/d from Q4 2015 to Q4 2016 in such scenario.