DUCs - while we're at it..25 Nov 2019 20:54
There have long been question marks over how EIA even computes DUC inventory in the US. These comments from the Dallas Q3 Fed Survey are illuminating, particularly the last point.
Exploration and Production Firms
We expect industry wide drilling-and-completion capex [capital expenditures] spending to be down by about 10 percent in 2020.
I feel like it would be worthwhile if the EIA [Energy Information Administration] would poll the major operators (the top 20–30 companies with the most rigs) under a defined definition of a drilled but uncompleted well (DUC), drilling vs. drilled for example, so the value would be reset to a more accurate estimate. My sense is the EIA DUC number implies more production capacity than actually exists and leads to downward revisions of supply estimates, which we have seen in the last six months.
Unless prices improve, I think the rig count will continue to drop.
We cannot have it both ways: There cannot be a lot of Permian production which depresses global commodity prices if capital inflows (i.e., new equity and debt issuances) are at all-time lows. Producers must reduce capital expenditures, which will have a positive effect on medium-term (two- to four-year) commodity prices.
The EIA has no clue on their estimated number of DUCs, in my opinion. Their current estimate is approximately 8,000 total DUCs in the U.S. The DUC definition needs to be defined as a well that has been drilled down to the producing formation and also drilled horizontally all the way to the end of the lease. In other words, for a Permian Basin well, that means a well which has been drilled 10,000 feet down and 10,000 feet out. What actually happens in the oil field is a smaller, “spudder” rig goes out to the lease first and drills down to approximately 1,500–2,000 feet and sets surface pipe, moves on to the next well, and does the same thing over and over. By doing this, the larger, bigger and more expensive drilling rig doesn't have to spend its higher day rate to drill and set the surface pipe. What is occurring is the EIA is counting all of these 1,500–2,000-foot spudder wells in their total DUC count! Another thought to consider is, if these wells cost $4 million to drill and then another $5 million to complete—with 8,000 DUCs, with a $4 million per [well] drilling cost, that would be $32 billion. Is this the main E&P issue now? Have they truly spent $32 billion on just the drilling of these wells and they somehow have decided to leave them shut in and therefore not complete them when they desperately need the cash low? I've spoken to several of the large shale operators in the Permian and they only have a few true DUCs on their books, not thousands. See if you can have the EIA readjust their number so the world knows the truth about how many true DUCs (all the way down and all the way out) are out there. I think the number will shock a few people.
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