Oil producers are moving to activate previously drilled but uncompleted wells (DUCs) threatening to place a giant wet blanket on an oil market scratching and clawing to get and keep oil prices above $40 per barrel.
According to data compiled by Wood Mackenzie, an energy researcher — the backlog on natural gas production in areas like Texas’ Eagle Ford or Wolfcamp and Bone Spring has been cleaved by more than 33 percent over the past six months.
“If the number of DUCs brought online is surprising to the upside, that means U.S. production won’t decline as quickly as people expect,” said Michael Wittner, global head of oil research at Societe Generale. “More output is bearish.”
To put that number into perspective, there are nearly 660 untapped wells in Texas capable of pumping out 100,000 and 300,000 barrels per day, according to Ed Longanecker, president of Texas Independent Producers and Royalty Owners Association (TIPRO).
Most of these wells are in Texas, a state with quick access to oil refineries, where producers can put their oil on the market at prices close to the benchmark prices. Insiders believe debt-riddled oil producers may feel compelled to tap the wells and begin producing crude at much higher rates to stave off missing out on debt repayments.
The decrease in DUCs will ultimately threaten to add more oil to an already glutted market. Wood Mackenzie expects oil prices to move back to normal rates by 2017.
Average DUC inventory is around 550 in the Wolfcamp/Bone Spring formations and 300 in the Eagle Ford are, Alex Beeker, a researcher at Wood Mackenzie, estimates.
The excess backlogged shale oil has fallen by more than 150 wells over the past six months, dropping the surplus to about 300 wells in each area.
“We’re just going to be continuously completing the wells there (in the Permian) with our fleets and so you will not see any DUCs in Midland basin,” Tim Dove, the Chief Operating Officer of Pioneer Natural Resources Co, one of the producers activating dormant drills, told reporters during a phone conference.
Still, some analysts believe prices will slowly, by fits and drips, increase, leaving the concern for a continued glutted market unfounded.
“Oil rigs are down 70 percent over the past couple of years,” Dan Kish, the vice president of policy at Institute for Energy Research, told The Daily Caller News Foundation. “So the fear that these natural gas wells will come online over a short period of time and deluge the market is silly.”
“Oil producers don’t simply gather around a large round table and decide to tap their wells and dump natural gas into the oil markets,” Kish said, adding, “each producer has to worry about the pricey relative costs of putting these wells back online.”
The price to yank oil out of a fracked wells is considerable, with costs reaching approximately $65 per barrel for those producing crude from fracked wells. By contrast, wells from the Middle East and Saudi Arabia, where a great deal of the world’s oil is produced, costs only about $10 per barrel to produce.
Continental Resources Inc. (CLR.N), which has natural gas wells in the Bakken, has said it would continue to hold off pumping out fracked oil until prices rise.
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