A large inventory of uncompleted wells is expected to smooth the US shale industry’s recovery following the current downturn as producers wait for oil and gas prices to improve before undertaking new drilling.
According to a recent analysis from Rystad Energy, the industry will not need to add any rigs until late 2021 because of an unusually high inventory of drilled but uncompleted wells — or DUCs — that will allow the shale industry to power through into next year.
“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,” Rystad’s head of shale research Artem Abramov said.
New drilling is expected to take a backseat to completion of the existing DUC well inventory, said Enverus director of energy analysis Sarp Ozkan, who does not expect any new rigs to come in until after the wells are drawn down.
The rig count as of the week of 7 September stood at 180 oil rigs and 71 natural gas rigs, according to a weekly tally from energy services company Baker Hughes.
“I think the recovery will start even before we see those rigs start to come back onto those fields. It’s going to still need a higher price point and a bit more assurance from the market for these operators to start completing these (wells),” Ozkan told Upstream.
Ozkan added that the uncompleted well count is substantial enough to make a difference in the trajectory of US production, but that the recovery will first be in gas-directed uncompleted wells.
When shale drillers dropped rigs early in the downturn, associated natural gas volumes from crude wells also dropped.
Crude oil-directed uncompleted wells will probably be drawn down in the middle of 2021, not right away or by the end of this year, Ozkan said.
Frack crews' jobs not back yet
He also noted that fracking crew numbers will see an uptick before rigs do, and that uptick will likely be in gas plays like Appalachia and Haynesville.
“They’re going to need to come back before rigs do, and it’s actually going to be quite a problem, because we have lost so many frack crews. We have decimated a lot of the oilfield services sector during this downturn,” he said.
“Any sort of uptick in demand for frack crews and frack jobs is going to be met with a lack of personnel and capability in the field”.
The lack of crews could also be a factor that slows down the shale recovery and could eventually lead to higher costs and less free cash flow for operators.
New wells matter most to production
IHS Markit’s vice president for North American unconventionals, Raoul LeBlanc, said that, in the end, the wells that shale operators do not drill will have more of an impact on US supply, as shale producers fight a natural decline from older wells. About 80% of new wells drilled will be solely to offset the decline in production, he said.
About 2500 uncompleted wells were added this year, according to IHS figures. In June, there were less than 200 wells being brought online, although now that figure is closer to 600 wells.
According to Rystad, fracking in the prolific Permian basin can be maintained at about 200 to 250 wells per month through the first half of 2021 before the basin’s inventory size returns to normal.
The Permian will need about 190 rigs to maintain flat production next year, while nationwide rig activity will need to be in the 280 to 300 range.
“In early 2020, the industry had to put on production more than 850 horizontal wells, across the five major oil regions, to keep production flat. We anticipate that the maintenance activity requirement will fall to 450 to 500 wells by mid-2021,” Rystad said.
A recent report from the US Energy Information administration showed an expected decline in uncompleted wells in almost every major shale basin except for the gassy Haynesville, which added four in August to total 317. The overall count dropped by 77 from July to August for a total of 7665.
The Permian held the most uncompleted wells with 3532 in total, declining by 22 from July to August.
Additionally, the agency predicts that shale production across seven shale basins will decline by 68,000 barrels per day to 7.6 million bpd next month, although the Permian is expected to add 23,000 bpd from September to October to total 4.2 million bpd.
“From a fiscal perspective, the shale industry and shale players will be in a very strong position to grow next year, and previously they would’ve taken advantage of that and would’ve gone all out for growth,” LeBlanc said. “We think that despite their ability to grow next year, they will choose not to”.
The slow ramp-up is due to free cash flow being returned to shareholders, who for years have seen their returns reinvested into companies that were seeking to grow output quickly.
Those investors want their money back now, however, especially those with an eye on the energy transition, LeBlanc said.