U.S. oil production has fallen more than 2 million barrels per day since March 2020. Many reasonably expect that DUCs (drilled uncompleted wells) provide a solution to output falling further.
There are about 5,800 DUCs in the main U.S. tight oil plays. These are already drilled and could be converted into producing wells for the cost of completion which is about half the total well cost.
Most DUCs, however, are uncompleted for a reason namely, that their owners don’t believe that their performance will be as good as wells that they chose to complete instead.
Even assuming similar performance, the larger problem is that large numbers of DUCs are already being completed and official EIA 914 production remains less than 10.5 mmb/d.
North Dakota publishes monthly data on DUCs that can be compared with active, producing wells.
DUCs currently account for about 35% of new Bakken producing wells and about 25% of completed wells since March have been DUCs (Figure 1).
During the 2015-2016 oil price and production collapse, DUCs in the Bakken reached about 40% of completions. It is, therefore, reasonable to expect that current DUC levels may be close to a maximum. Whether Bakken data applies to other plays is, of course, unknown.
More importantly, there are just too few wells being completed to expect U.S. production to maintain 11 mmb/d EIA forecast for 2021.
Five key regions of the United States—Texas, North Dakota, New Mexico, Oklahoma and the offshore Gulf of Mexico—account for 80% of total output. Figure 2 shows incremental new wells and new production for those regions from 2014 through July 2020 (12-month average).
At least 400 new wells must be added each month to offset declining legacy production and maintain 11 mmb/d for the U.S. Instead of adding new wells, fewer wells were drilled in each successive month after March 2020. Not surprisingly, incremental monthly production has been falling and that is completely consistent with declining overall production levels.
It doesn’t matter whether wells are newly drilled and completed or DUCs—there are simply too few wells being added to maintain present levels of production.
How Far Will Production Fall?
The good news is that well completions and rig counts have turned around and are now heading in the right direction. The bad news is that it will take many months before drilling and production equilibrate. How far will production fall?
The truth is that no one knows. Oil production is part of a complex system. Its interdependencies and feedback loops make it dynamic and adaptive. There are unresolvable uncertainties. The best approach is to identify and describe the key patterns that characterize present state: rig count, decline rates, lags and leads, completions and incremental production rates. These offer the most probable but only notional projections of those trends.
In Figure 3, I show three scenarios based on rig count and I also show EIA’s production forecast for 2021. These should be viewed as trend lines rather than forecasts.
In the base case, output begins to decline in April 2021 and decreases to 9.1 mmb/d by September 2021. In the low case the production minimum is estimated at 7.8 mmb/d and in the high case, 9.9 mmb/d.
Whatever the magnitude of production decline or its precise timing, it is important to recognize what is coming. The lower-for-longer ruling paradigm has been accurate and useful since the oil-price collapse in 2014. What is happening now is different.
It is unlikely that the tight oil business will recover from the effect of Covid-19 and lower oil prices. Markets will continue to send higher price signals until rig counts recover to the 800 or so rigs needed to support EIA’s 11 mmb/d forecast.
The public and many investors have the peculiar belief that the world will be just fine without oil. The world will be fine. It has survived meteor impacts and mass extinctions but humans are more fragile. Higher oil prices are the last thing the global economy needs right now.
For a more detailed version of this story, go to artberman.com