There’s yet another concern growing as oil prices continue to erode: A record U.S. fracklog.
There were 5,946 drilled-but-uncompleted wells in the nation’s oilfields at the end of May, the most in at least three years, according to estimates by the U.S. Energy Information Administration. In the last month alone, explorers drilled 125 more wells in the Permian Basin than they would open. That represents about 96,000 barrels a day of output hovering over the market.
If OPEC thought shale was a thorn in its side before, just wait until U.S. explorers turn their spigots on full blast. Wells waiting to be fracked and flowing are an overhang that could mean a burst of new supply in the second half of the year and into 2018, according to Luke Lemoine an analyst at Capital One Securities Inc. in New Orleans.
“Even though rig counts have gone through the roof in the Permian, we really haven’t even felt the full production implications,” said William Foiles, an analyst at Bloomberg Intelligence in New York. “We’ve only felt 70 percent of the rise in drilling.”
Explorers generally start the drilling process with contractors such as Helmerich & Payne Inc. and Nabors Industries Ltd., using rigs to dig a vertical shaft that can drop 5,000 feet or more. They then build in a bend to extend the shaft sideways into a promising shale layer, a process that overall can take weeks.
Other service companies such as Schlumberger Ltd. and Halliburton Co. complete the process, using high-pressure machines that push in sand, water and chemicals to free up oil and natural gas that’s pumped to the surface. Until that final step occurs, the well is known as a DUC, a drilled-but-uncompleted asset, part of the so-called fracklog.
Rising global oil stockpiles plunged the industry into its worst downturn in a generation three years ago, with prices falling as low as $26.05 on Feb. 11, 2016. Service companies were among the hardest hit, cutting more than 333,000 jobs globally and sidelining much of their machinery. Now, they’ve been caught short by the explosiveness of the U.S. shale rebirth.
“The pace at which operators can exploit this resource will depend on how quickly the services sector can bring back completion capacity and crews,” said Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions in Houston, in a telephone interview.
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Right now, that’s not expected until the second half of the year, when as much as another 2 million horsepower in equipment is made available, according to Capital One’s Lemoine. In addition to fixing up gear that that had been parked on the sidelines, fracking companies are methodically hiring and training workers.
As long as crude sticks above $40, shale drillers will continue boring new wells, adding to the overhang, according to Charles Cherington, co-founder of Argus Energy Managers, an alliance of private equity firms that invest in the oil explorers and suppliers.
Deal Extended
On May 25, the Organization of Petroleum Exporting Countries and partners including Russia agreed to extend the supply deal they forged last year to limit output as a way to bleed crude stockpiles and rebalance the market. The rising U.S. fracklog could threaten that push, Cherington said. Without deeper cuts, prices could fall low enough to crash the industry again, he said.
“This is still a very fragile industry,” Cherington said. “There will be casualties.”
The glut isn’t expected to balance out this year as earlier forecast, partly because the shale boom continues to crank out more crude. And if the price of oil continues to fall, dropping to $40 or below, explorers can now shift their spending to fracking crews from drilling rigs to make their money off that large untapped supply, Capital One’s Lemoine said.
It would likely take oil prices collapsing below $35 a barrel to keep shale companies from chewing into their unfracked inventory of wells and adding production to the global market, according to Foiles, the Bloomberg Intelligence analyst. “You can’t just look at the rig count anymore,” he said.