DUC, DUC, Production Boost?

Analysts weigh the number of wells incomplete wells and their impact on production in North America.

Hundreds, if not thousands of drilled but uncompleted (DUC) wells are idling in the United States, but how much they could produce – or even when production may commence – vexes industry insiders.

As analysts at Raymond James (RayJa) explained in a November report, DUCs have long been part of the oil and gas business. A natural, “normal” imbalance exists for two primary reasons: the difference between the number of rigs and completion crews, and the lag between drilling time and completion time. And while an absolute method for calculating the number of DUCs is up for debate, there’s little disagreement that currently there is an overabundance of DUCs.

States calculate DUCs on often incomplete data that is “massively oversimplified,” RayJa said. For example, Texas data would indicate there are more than 2,000 DUCs in the Permian basin.

But more typical estimates vary from 500 or so to more than 3,000 DUCs. And those numbers are expected to swell in 2016 if oil prices don’t incent operators to put the DUCs to work.

The key issue is what bringing these DUCs online will do to U.S. production. RayJa’s best guess, “with a very low confidence level” is that DUCs could account for 100,000 to 300,000 barrels per day (bpd) for 2016 production growth.

“Again, the actual DUC impact upon our U.S. oil supply model could be as low as zero and as high as 400,000 bpd next year,” RayJa said.

R.T. Dukes, research director at Wood Mackenzie in Houston told Rigzone that figuring DUCs in the thousands may be distortion of the true count because that total would include those that happen as part of the process of developing a single pad where several wells can get underway. So they’re a natural inventory for various plays, he said. Looking at the hard number of wells intentionally placed in the DUC stage is between 700 and 800.

R.T. Dukes

Research Director, Wood Mackenzie

Completing those wells will probably spill over into next year. However, WoodMac said that even when they’re at peak production – estimated between 250,000 to 350,000 per day – it won’t be enough to move the market.

To get started, it would take between three and four months for the inventory to come online, Dukes said. Plus the significant investment to bring DUCs online would be a considerable blow to capital expenditures (CAPEX) when most companies are cutting back.

On the side of those who believe there is an abnormally large backlog of these wells say it’s based on  the emergence of deflating industry economics and inflexible rig contracts on contracts for completion crew services.

No one would argue for drilling a well without the intention of completing it. But it’s also true that economics come into play. Completing these wells for production is roughly three-quarters of the cost of the entire well, which is a multi-million dollar proposition.

“Investing upfront with no resulting cash generation simply leads to degradation in the net present value (NPV) of the well,” RayJa said.

DUCs exist in the same vacuum of the energy industry’s cyclical nature. When oil prices drop, the pace at which operators want to drill slows. And conversely, when commodities prices meet or exceed economic thresholds, producers have incentive to drill and complete and produce. 

“When oil prices meet or exceed economic thresholds, producers are incentivized to drill complete and put wells on production as quickly as possible. In such an environment, drilling and completion (D&C) costs naturally rise and equipment [and] people shortages typically drive an involuntary surge in DUCs,” RayJa said.