Huge Backlog Could Trigger New Wave Of Shale Oil, OPEC+ Cuts Put Floor Under Oil Prices By Nick Cunningham Oil Price, Al-Jazeerah, CCUN, January 20, 2019

Huge Backlog Could Trigger New Wave Of Shale Oil

The number of drilled but uncompleted wells (DUCs) in the U.S. shale patch has skyrocketed by roughly 60 percent over the past two years. That leaves a rather large backlog that could add a wave of new supply, even if the pace of drilling begins to slow.

The backlog of DUCs has continued to swell, essentially uninterrupted, for more than two years. The total number of DUCs hit 8,723 in November 2018, up 287 from a month earlier. That figure is also up sharply from the 5,271 from the same month in 2016, a 60 percent increase. The EIA will release new monthly DUC data on January 22, which will detail figures for December.

Some level of DUCs is normal, but the ballooning number of uncompleted wells has repeatedly fueled speculation that a sudden rush of new supply might come if companies shift those wells into production. The latest crash in oil prices once again raises this prospect.

The calculus on completing wells can cut two ways. On the one hand, lower oil prices – despite the recent rebound, prices are still down sharply from a few months ago – can cause some E&Ps to want to hold off on drilling new wells. That may lead them to decide to complete wells they already drilled as a way of keeping production aloft while husbanding scarce resources. Companies that are posting losses may be desperate for revenues, so they may accelerate the rate of completions from their DUC backlog.

On the flip side, producers don’t exactly want to bring production online in a market that is subdued. “The lower oil price raises some questions about whether you go ahead with completing these wells,” Tom Petrie, head of oil and gas investment bank Petrie Partners, told S&P Global Platts. “Some companies want to get them in a producing mode; others say they won't get an adequate return right now, so they'll wait.” Related: US Oil, Gas Rig Count Plummets As Oil Prices Surge

Rob Thummel, managing director at Tortoise Capital Advisors, told S&P Global Platts that companies may have already started to work through some of their DUC inventory late last year. He suggests that the explosive production figures in 2018 seem higher than last year’s rig count justified. A higher rate of completions from already-drilled wells may explain the higher output levels.

However, the pipeline bottleneck in the Permian – which, to be sure, has eased a bit as some additional capacity has come online in recent months – could prevent a sudden rush of DUC completions. After all, the soaring number of DUCs was itself at least in part the result of the pipeline bottleneck.

A handful of new pipelines will add significant new pipeline capacity in the second half of 2019, after which more DUCs could be completed. Last summer, Pioneer Natural Resources’ CEO Timothy Dove warned in a conference call that oilfield services costs could increase when those pipelines come online because producers may rush to complete DUCs all at once.

“[T]hat could be another period of inflationary activity to the point where everyone is trying to get their DUC count reduced,” Dove said last August. “And so I would say the bigger risk inflation-wise is really past 2019. It's really 2020 and 2021.”

The prospect of higher completion rates has ramifications for U.S. production levels. DUCs may keep U.S. oil production aloft at a time when low prices are starting to curtail drilling activity. The rig count has been flat for a few months, production growth has slowed, and growing number of companies are detailing slimmer spending plans this year. Related: Oil Prices Jump As China Seeks To End Trade War

That may ultimately translate into disappointing production figures. “As a result of the slide in oil prices over the past three months, operators have already started to guide down activity for 2019 compared to their initial plans to ramp up activity,” Rystad Energy wrote in a recent commentary. “Consequentially, we have lowered our expectations for oil production growth by about 500,000 bpd for 2020 and 2021, implying less need for takeaway capacity.”

But completing DUCs is low-hanging fruit. The cost of drilling a well accounts for 30 to 40 percent of the total cost, according to S&P Global Platts. As a result, companies deciding on whether to bring a DUC online has already incurred the drilling costs. A shale company may decide to scale back on new drilling this year because of low prices, but the rush of fresh supply from DUCs may allow output to continue to grow. Of course, any decline in new drilling will eventually be felt in the production data, but that may not show up until somewhere down the line. More completions from the DUC backlog could keep near-term production figures on the rise.

How this shakes out is anybody’s guess, but at a minimum, the explosion in DUCs over the past two years complicates oil production forecasts for this year.

IEA: OPEC+ Cuts Put Floor Under Oil Prices

The “journey to a balanced market will take time, and is more likely to be a marathon than a sprint.”

The International Energy Agency (IEA) said that the OPEC+ cuts that started this month likely put a floor beneath oil prices, but that it would still take time before the reductions could balance the oil market.

Oil prices fell over the course of December, even after the OPEC+ cuts were announced. That reflected pessimism over the trajectory of the global economy as well as fears that the oil market was about to head into another steep downturn not unlike the 2014-2016 bust. Those fears were exaggerated, at least as far as the oil market goes, but the production cuts will still take time to work through.

OPEC released its Oil Market Report in recent days, which showed that the cartel slashed output by 750,000 bpd in December – sharp reductions that came before the deal even went into effect. Saudi Arabia led the way with 468,000 bpd in reductions, but its efforts were aided by the involuntary losses from Iran (-159,000 bpd), Libya (-172,000 bpd) and Venezuela (-33,000) bpd.

In fact, those three countries have accounted for massive output reductions over the past two months. The OPEC+ deal is using October as a baseline, calling for 1.2 million barrels per day (mb/d) in reductions, and the group is well on their way thanks to turmoil in just a few countries. Over the course of November and December, Iran has lost 561,000 bpd, Libya has lost 190,000 bpd, and Venezuela’s output fell by 58,000 bpd. Taken together, the involuntary outages exceed 800,000 bpd.

That makes Saudi Arabia’s job a lot easier, and the de facto leader of OPEC has pledged to cut its own output by 800,000 bpd from the October baseline. That means that the OPEC+ coalition is well on its way to balancing the oil market.

Still, there is “less clarity” over Russia’s intentions, the IEA said in its report. The agency noted that Russia likely increased output in December to a new record high of 11.5 mb/d, while the cuts in January are likely going to be phased in slowly. Saudi oil minister Khalid al-Falih said in recent days that the cuts are “slower than I’d like.”

Russia’s energy minister Alexander Novak said on Thursday that his country would try to speed things up. “Of course, we will try to make the cuts faster,” Novak told reporters in Belgrade, Serbia. “We have our limitations of a technological nature, yet we will aim to reach the levels we agreed on.”

Meanwhile, U.S. shale will continue to grow this year, complicating the efforts of OPEC+. The IEA left its projection for U.S. production growth unchanged at 1.3 mb/d. Related: This Is How Much Each OPEC+ Member Needs To Cut

Demand remains one of the key questions for 2019. This is the first report from the IEA since the severe market turmoil in December and the pricing meltdown. The agency left its demand growth forecast steady at 1.3 mb/d. While the “mood music in the global economy is not very cheerful,” the IEA said, lower prices and a weaker dollar have helped stoke demand a bit. As a result, low prices somewhat offset the softer economy.

Finally, it’s a big year for the downstream sector. Refiners are gearing up for the global regulations on marine fuels from International Maritime Organization (IMO), which take effect on January 1, 2020. Knocking out dirty fuel oil from the global shipping fleet will lead to a surge in demand for middle distillates. Margins for diesel are already sharply higher than that for gasoline, and the more refiners chase diesel, the more they flood the gasoline market. At the same time, huge additions to the refining fleet are expected this year. “Processing capacity will increase by 2.6 mb/d, the biggest growth for four decades,” the IEA said. These changes could see major disruptions in various fuel markets, with a glut of gasoline occurring alongside a premium on diesel.

“By the end of the year, all industry players, upstream and downstream, may feel as if they have run a marathon,” the IEA concluded.

https://oilprice.com/Energy/Crude-Oil/Huge-Backlog-Could-Trigger-New-Wave-Of-Shale-Oil.html

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