October 15, 2015
Authors: Per Magnus Nysveen, Senior Partner & Head of Analysis, and Leslie Wei, Analyst, Rystad Energy
Publisher: Oil & Gas Financial Journal, October Edition
The notion that shale could be a swing producer was especially interesting at the end of last year when oil price started to fall. The industry believed that shale producers would stop completion activity, resulting in fast production decline, and the backlog of uncompleted wells would be able to quickly add production once prices increased.
The three big plays, Eagle Ford, Bakken and Permian (Midland & Delaware), make up ~70% of the unconventional light oil production in the US. The inventory of Drilled but Uncompleted wells (DUC) in these plays has steadily been increasing since 2010, reaching a historical peak at the end of 2014. Several major operators (EOG, Anadarko and Exxon) have delayed completion activity for the year, but as a whole the total number of uncompleted wells has dropped significantly for these main plays. Figure 1 shows the uncompleted wells for the top three shale plays from 2010 to 2015, where the inventory is derived using the spud and completion date for each well. Eagle Ford, the largest shale play, experienced a decrease of ~30% in DUCs since the end of last year. Of the top operators, Chesapeake, BHP Billiton, and Marathon decreased its backlog, while ConocoPhillips and EOG have continued to increase their inventory. Bakken experienced the largest drop in DUCs of the three plays, effectively returning to the 2010 level. All the top operators in Bakken reduced the backlog of uncompleted wells during this period, with Continental decreasing the most from 149 wells at the end of 2014 to 49 wells in July 2015. Permian Midland also experienced an overall decline. The initial decline was driven by Pioneer, but the operator began to build inventory in April as it added more rigs. The current decline is driven by Oxy and Apache. Permian Delaware experienced the lowest decline in DUCs, where the top operators Concho, EOG and Oxy retained relatively flat inventory levels through the first half of the year. On average, there was a ~35% reduction in DUCs across the three top plays from the peak in 2014 to July 2015.
The timing of the completion directly affects the play level production. Figure 2 shows the light tight oil production for the same plays forecasted to the end of the year. Instead of cutting production in reaction to low oil prices, operators continued to grow production through the first half of 2015 by reducing the backlog of DUCs. Light tight oil production stopped growing in June 2015 for the first time since shale started producing and is expected to continue declining for the rest of the year.
In order to maintain current levels of production, operators need to increase rig counts. The number of rigs required per play to maintain a balanced production is calculated by combining the rig rates, well performance and legacy production decline. Figure 3 shows the balancing and actual horizontal rig counts for the three main shale plays. The balancing rig rates evolve through time due to improvements in performance, completion technology and focus on sweet spots. In 2014, the three plays delivered strong monthly additions as the balancing rig count was below the actual drilling fleet. Through efficiency gains, the balancing rig counts decreased 30-40% in 2015. However, the actual drop in the number of rigs of 50-60% resulted with Eagle Ford and Bakken below the balancing point and Permian around par. Production output in Bakken for the first five months of the year was supported by the completions of DUCs as seen in Figure 1. A continued reduction of DUCs is not sustainable in the long-run as the inventory becomes depleted. Production in Permian is likely to continue growing but at a much slower pace as the gap between the actual and balancing rig rate closed.
Earlier this year, there was speculation that the large backlog of uncompleted wells would allow operators to quickly react to an increase in oil price, making shale a possible short-term swing producer. Empirical data shows that in reality, operators continued to increase production for a year after oil prices first started to decline. The large number of operators acting independently makes it difficult for shale to respond like a swing producer.
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Per Magnus Nysveen, Senior Partner & Head of Analysis
Phone: +47 24 00 42 16
Mobile: +47 99 16 13 09
Leslie Wei, Analyst
Phone: +47 24 00 42 00
Mobile: +47 90 22 00 76
About Rystad Energy
Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.
Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro), Africa as well as South East Asia.