Texas DUC Season – Production Surprises Ahead?

Inventory estimates abound with Halliburton quoting a 3rd party source estimate of over 4,000 drilled but uncompleted wells (drilled uncompleted (DUC)) during their 1Q2015 earnings call. We have long been doing an estimate of the inventory of wells waiting in the wings in the Northeast as pipeline and processing infrastructure bottlenecks have generated an extensive backlog of wells. With contango driven out of the forward curve for oil, we wanted to take a deeper dive into just how much uncompleted well inventory could be waiting in the wings in other plays. Today, we’ll take a look at the entire state of Texas.

Historically, horizontal completion activity has lagged horizontal drilling activity, and the lag has increased over time as producers moved from drilling single horizontal wells to multiple horizontal wells on a pad.  From 2006-2008 producers ramped up activity in the Barnett shale faster than service companies could deploy completion crews and midstream infrastructure could be developed.  With the commodity crash in 2009, producers had an opportunity to complete previously drilled wells as new drilling activity slowed, bolstering production.

New Wells and Completions

Following the commodity crash, producers shifted from the Barnett to the Haynesville, Eagle Ford, and finally the Permian basin.  As activity ramped up in all of these plays, completions again lagged the pace of horizontal drilling from 2010-2012 and not until natural gas prices crashed in 2012 did completion activity catch back up, stabilizing the growing inventory of wells across Texas. However, by 2013, the surge in oil related activity combined with infrastructure bottlenecks in the Permian and Eagle Ford, again led to a divergence of completion activity and drilling activity.

To calculate the change in drilling inventory in these plays, we started with the number of wells drilled and subtracted the number of completions in each month, and summing the result over time.  We do know that not every horizontal well drilled is completed for a number of reasons– including the well not encountering commercial volumes of oil & gas resulting in a dry hole, a mechanical failure, or change in commodity prices after the well was drilled but before the well could be completed. For these reasons we have assumed that 2.5% of horizontal wells drilled each month in the state of Texas are never completed.

In addition to calculating a total inventory of wells drilled and not completed at any time, we need to know what a normal working inventory of drilled and uncompleted wells would be.  For this analysis we have estimated that a normal working inventory should correspond to the number of horizontal wells drilled over the last 3 months.

Drilling Inventory

The result?  We estimate that by the end of 2014 the total inventory of uncompleted wells in Texas skyrocketed to more than than 3,000 and exceeded normal working inventory by 760 wells. With the dramatic slow down in drilling that has occurred over the last six months we expect that margin has doubled to nearly 1,500 wells above normal working inventory limits. With oil prices stabilized for now, producers are looking to hedge out future production from these wells and bring them to market beginning in the 3Q2015. Just how quickly producers bring these wells to market could provide an unexpected surge in production to market.

Interested in tracking this dynamic?  Check out BTU Analytics’ Well Count Forecast in our Data Offerings.

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Anthony (Tony) Scott has built an in depth understanding of the North American energy market by providing investment advisory services and leading teams of analysts focused on the North American energy complex. Mr. Scott has conducted hundreds of consulting engagements assisting producers, marketers, midstream, refiners and private equity understand how rapidly changing natural gas, natural gas liquids, and crude oil markets in North America would impact their assets.

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