Fracking operations are beginning to recover in the United States, Rystad Energy recently reported, because of an unusually high number of drilled but uncompleted wells (DUCs). This inventory is expected to sustain the current level of fracking without the need to add more rigs to expand drilling deep into 2021, according to the Rystad Energy analysis.
However, rig activity in the five key oil regions will need to be in the 280 to 300 range to maintain flat oil output after the DUCs run out.
Based on the current DUC count, the industry still has about two to three quarters of leverage despite actual rig activity today being almost 50 percent lower than the 280 to 300 required range that would be needed for a smooth transition from DUC-driven activity to regular operations mode.
The recovery in fracking has been most pronounced in the Permian Basin, which can still accommodate 13 months of activity at last month’s pace, according to the September report. The normal DUC-to-fracking ratio of five months implies that Permian operators are carrying an inventory equivalent to eight months of fracking at the current pace.
Therefore, if drilling operations in the basin were to stop completely, Permian fracking can be maintained at about 200 to 250 wells per month through the first half of next year before the inventory size returns to normal.
The nationwide DUC inventory reached a peak of about 5,800 wells before starting to decline in July, Rystad Energy reports.
Drilling activity fell across the Permian, Eagle Ford, Bakken, Niobrara and Anadarko basins from March through May. Fracking hit a bottom in May and stayed there in June, then experienced a sharp recovery in July.
As the rig count fell steadily through early July—with no material efficiency gains realized in the first months of the downturn—total depth count posted a sequential decline in July. There were just more than 200 wells drilled in all oil basins combined.
The oil basin inventory increased by about 650 horizontal wells between February and June, then declined by about 140 in July. The declining trend is expected to last through the rest of this year, reaching pre-COVID-19 numbers across all regions before the end of the year.
Fracking remains far below the pre-COVID-19 level, thus the size of the existing inventory is much higher than what should be expected for the current level of activity, Rystad Energy reports.
The inventory-to-fracking-run-rate ratio hovered at about five months through 2018 and 2019, widely considered a normal level based on the cycle time of a typical unconventional drilling and completion operation. In the second quarter, this ratio increased to an unprecedented level of two to three years of fracking at the current pace in all oil basins. Even after activity recovered in July, the inventory is equivalent to 13 months of fracking in the Permian Basin and 22 months across the rest of the regions.
Today, the oil DUC inventory structure is different from how it looked last year. In the Permian Basin, the share of DUCs drilled less than six months ago declined to 55 percent in July from 72 percent in July 2019. The share of DUCs drilled six to 11 months earlier increased to 24 percent from 9 percent in the same period. There are more than 700 Permian DUCs that were drilled in the second half of last year that remain uncompleted as of today, which is unprecedented in the basin’s history.
A similar picture is evident in other oil basins where the share of young wells (drilled less than six months ago) declined from 62 percent to 36 percent with many wells drilled in the second half of last year remaining uncompleted. Besides the Permian Basin, there is also a material increase in the share of DUCs that were drilled 12 to 23 months ago, from 3 percent to 13 percent. These DUCs, however, faced an unusual challenge of persistent gas infrastructure bottlenecks in the Niobrara region in 2018-2019.
“Fracking activity for the rest of this year and early 2021 will be supported by the existing, abnormally high level of DUCs, though not all DUCs will be brought online quickly. Large, well-established operators will stay committed to capital discipline, only increasing their completion spend gradually in the current price environment,” said Artem Abramov, Rystad Energy’s head of shale research.
But as the DUC inventory gets depleted, Rystad Energy estimates that about 190 rigs will be needed in Permian, out of the nationwide total of about 280 to 300, to maintain flat production next year compared with its current count of about 125 rigs.
As new well performance remains at a record high, maintenance activity requirement will follow the base decline trend. In early 2020, to keep production flat, the industry had to put on production more than 850 horizontal wells across the five major oil regions. Rystad reports that maintenance activity requirements will fall to 450 to 500 wells by mid-2021.