E&Ps with significant DUC inventory to benefit from capital efficiency gains: IHS

HOUSTON -- U.S. oil and gas operators with significant inventories of drilled but uncompleted wells (DUCs) in the major U.S. plays will benefit from capital efficiency gains in 2016, but conversion of these wells to production will have a limited impact on overall U.S. production compared to U.S. production growth derived from new drilling activities, according to new analysis from IHS. 

IHS analysis indicates that production to be derived from approximately 2,750 net remaining DUCs is estimated to be more than 380,000 bpd by September 2017, which is just 16% of the estimated U.S. oil wedge production volume of 2.45 MMbpd. For natural gas, IHS estimates that production will peak at 3.5 Bcfd in October 2017, accounting for only 19% of wedge volumes of 18.58 Bcfpd. 

“While the overall production implications for U.S. supply are relatively small, on a company performance level, these DUC wells are critical to the operators that have them in their 2016 inventory because they will deliver production and significant capital efficiencies,” said Stephen Beck, senior director of energy research for the North America Onshore Service at IHS Energy, and a lead author of the DUCs analysis, entitled Drilled but Uncompleted (DUC) Wells-FIFO Practices Provide Order in Uncertain Times. “At IHS, we estimate that total spending to convert all existing DUCS to production is approximately $11.5 billion, which represents an estimated 40% savings of the capital it would require to drill and complete a new well. In this low-price environment, that is a significant savings for operators who have DUCs in their inventories.”

Some of the operators with the largest remaining inventories of DUC wells include EOG Resources, Anadarko and Chesapeake Energy, IHS said. Operators such as Anadarko and EOG are two of the few known operators who employed a ‘drill and hold’ strategy and intentionally accumulated DUCS to shape growth when oil and gas prices increase, IHS said. The companies continued to drill wells with rigs that were under contract rather than terminate the contracts and defer the completions of these wells.

Pad Drilling

IHS defines a drilled but uncompleted well as a location in which the well has reached target depth, but has not finished the completion process (perforation, hydraulic fracturing, etc.)  IHS said delays in bringing these wells into production vary significantly by play, impacting supply forecasts. However, due to the DUC analysis, IHS has been able to identify consistent patterns for conversion, based on well and play analysis.

“When assessing the conversion strategies and production impacts from these DUCs, we at IHS found that in all major U.S. plays, with the exception of those in Appalachia, there is a clear and consistent pattern of first-in, first-out (FIFO) development for these plays,” Beck said. “Our IHS research found that this pattern of development is due to ordinary field-operating procedures inherent to pad drilling. Standard practices in pad drilling generate lags between when these wells are drilled and when they are completed. Typically, this conversion lag-time averages about 120 days, but can extend to as long as nine months. This variability in the lag times is why DUC conversion estimates can impact production and supply forecasts materially.”

To optimize their pad drilling efficiencies and minimize risk, operators typically drill all the wells on one pad then move to the second and third pads, if present, and do the same until all wells are drilled, Beck said. The operators will then proceed with the completion process.

“Drilling all the wells at once enables operators to negotiate better rates with service companies, who in turn, get the benefit of larger projects, but this leads to a batch-processing nature. This batch processing results in the formation of these DUC wells, but it also drives a natural delay as it relates to the completions of these DUCs, which also follow in batches,” Beck said. 

Batch Processing

In conducting its DUC analysis, IHS researchers spoke with numerous U.S. operators who have confirmed this ‘batch processing’ scenario is consistent with their own field operations procedures, and the driver for formation of their DUCs inventories.

Some plays, such as the Eagle Ford in South Texas, have a minimum lag time, IHS said, due to its priority as a key and prolific producer, but it does still have a lag time. The IHS analysis said the speed of conversion of these DUCs in any particular play is largely driven by the geology of the play and the operators in the play, some of whom have tremendous history, experience and understanding of the geology, which allows greater efficiencies.

The plays with a natural inventory of DUCs include the Eagle Ford, Bakken, Permian horizontal plays (Bone Spring, Midland Wolfcamp and Delaware Wolfcamp), Niobrara horizontals (Wattenburg and Niobrara fracture), Marcellus, Utica, Arkoma Woodford, Fayetteville and Mississippian. Of these, IHS said, 70% of current DUCs exist in predominantly oil plays, while 30% are found in gas plays.

“What our IHS Energy analysis illustrates is that it is imperative to have a strong understanding of field operations in order to assess the impact of these DUCs and achieve a truly accurate assessment of the supply forecast for a specific play or for North America as a whole,” Beck said. “This is important because, in this price environment, technology continues to forge ahead to drive greater efficiencies, so we are seeing drilling times diminish further and they will continue to do so moving forward. On a positive note, in terms of operators, the survivors of this downturn are likely to be better off than before because they will be eliminating unnecessary costs and inefficiencies, creating stronger organizations.”

“Most importantly,” Beck said, the delayed conversion of DUCs to producing wells in the last few years explains the “resiliency in U.S. production, and in part, accounts for its recent recognition as the world’s new ‘swing producer.’ “The U.S. energy system doesn’t turn on a dime,” Beck said, “but it does turn faster than an oil tanker. It can respond to changes in price in less than a year, which is not the case for other resources elsewhere.”