The Energy Information Administration (NYSEMKT:EIA) is now providing monthly estimates of Drilled But Uncompleted Wells (DUCs) as part of its Drilling Productivity Report (DPR). The data is particularly useful because the number of DUCs has risen significantly, and they provide the "missing link" between wells drilled and new production.
As defined by the EIA:
DUCs are wells that have been drilled by producers but have not yet been made ready for production. The full completion process involves casing, cementing, perforating, hydraulic fracturing, and other procedures to make the well ready to begin producing oil or natural gas."
The EIA provides a nice flow chart illustration (see page 2) of the drilling process. Drilling takes place from spud to rig release. When prices were rising rapidly, drilling teams were working faster than completion teams, and the inventory of DUCs rose.
A high inventory of DUCs has implications for the size and timing of the domestic supply response to changes in oil prices, and they can alter new production without involving active drilling rigs because Baker Hughes states:
The rig count does not include rigs that are in transit from one location to another, rigging up, being used in non-drilling activities, including production testing, completion and work over, and are not expected to be significant consumers of drill bits."
The EIA assesses DUCs in four oil-rich regions (Bakken, Eagle Ford, Niobrara and Permian) and three gas-rich regions (Haynesville, Marcellus, and Utica) that together account for nearly all U.S. tight oil and shale gas production. I combined the data of all seven areas.
- DUCs in all DPR regions peaked in March 2016, following the bottoming of crude prices in February, at 5.542. The inventory of DUCs has declined in each month since then.
2. The implication is that the number of completed well has exceeded the number of new wells drilled. The EIA had been using new wells as the metric for its model, and this explains why the EIA estimates for production have overestimated the decline and why it posted a 168 million barrel revision to production, a major revision I had said was coming, even though I did not have the DUCs data.
3. I have begun to investigate the DUCs data relative to prices to see if I could find a relationship.
4. I found that the cumulative change in DUCs has a 92% inverse relationship with the cumulative change in crude prices. Therefore, I should be able to start predicting whether DUCs inventory will be increased or decreased, an important element in assessing U.S. crude production.
5. I found a strong relationship between completed wells and new production. The r-squared is 91%, so by assessing well completions I can predict new production.
6. And I developed a model to predict "legacy" production, which the EIA defines as production from wells after their first full month of production. The r-squared is 99.8%.
The new DUCs data will make it possible to have a much sharper estimate of current and near-term production than before. Using futures prices, I will be able to predict future production assuming that price path.
The DPR regions have been responsible for the lion's share of U.S. new production as well as the declines since production peaked. I can break out and model the balance after completing the DPR regions.
It appears the DUC inventory has accounted for more production than the EIA had expected from using rigs counts alone.
Declines in non-OPEC production, the U.S. in particular, have been a key prong of the bull case for balancing world supply and demand. This is why accurate assessments of U.S. production trends are so critical.
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