Large Inventory of Drilled but Uncompleted Wells Pose Opportunities for Handful of U.S. E&P Operators with Quality Assets; Challenges for Those Without, IHS Says
BHP Billiton, Chesapeake, Anadarko, EOG Resources, ConocoPhillips and Pioneer Resources Own Nearly 40 Percent of Optimal DUC Wells in Eagle Ford
Faced with continued market uncertainty due to falling oil prices in late 2014, U.S. oil producers operating in shale plays such as the Eagle Ford in south Texas have built a large inventory of nearly 1,400 drilled, but uncompleted wells (DUC) that are now driving the investment focus for many operators. The most promising of these wells belong to just a handful of operators in the play, giving them a likely advantage, according to new analysis from IHS (NYSE: IHS), the leading global source of critical information and insight.
The IHS Energy Analysis of Drilled, but Uncompleted Wells in the Eagle Ford Shale indicates DUCs can be converted to producing assets for approximately 65 percent of the cost of a new drill, significantly lowering the economics when evaluated against remaining costs. When considering the productivity of the Eagle Ford DUC inventory, nearly 40 percent of the 1,400 DUCs are considered to have attractive economics (break-even costs below $30 per barrel) and belong to a handful of operators, IHS said. Those operators include BHP Billiton, Chesapeake, Anadarko Petroleum, EOG Resources, ConocoPhillips and Pioneer Resources. Thirty-three other operators account for the remainder.
“In this low oil-price environment, operators in the Eagle Ford and other U.S. shale plays are focused on optimizing the value of their assets and managing their costs, and these drilled, but uncompleted wells enable them to do that more effectively for several reasons,” said Raoul LeBlanc, senior director of research at IHS Energy, and the lead author of the DUC analysis. “First, the drilling costs of these wells were already incurred by operators prior to 2015, and the completion costs--which comprise the majority of well costs–can be negotiated at a cheaper rate since completion crews are now both available and available at cheaper rates. Second, if completion costs are fairly consistent in the play, then it stands to reason that wells with higher production will yield better returns on capital.”
The DUC inventory is driven by the drilling sector outpacing the completion industry, the IHS analysis noted. As the rate of new wells drilled in the play falls, completion crews will be able to convert more wells to alleviate the DUC backlog.
Due to the shortened lead time of converting these drilled but uncompleted wells, and the lower incremental costs of generating production from a DUC well, operators are likely to be incentivized to work through DUC well inventories, IHS said. *(The DUC inventory is comprised of wells with varying production expectations. Due to the differences amongst the operator portfolios, the nature of DUC conversions will vary by operator).
Said LeBlanc, “Using a proprietary IHS “neighbor” algorithm, which takes into account certain performance metrics of nearby wells, IHS found that the DUC inventory quality closely aligns with historical operator performance, so these companies have performed well in the past. However, in terms of future performance in the Eagle Ford, IHS estimates that BHP, ConocoPhillips and Pioneer Resources have higher-quality DUC wells than their current producing well portfolios, providing them the greatest available options going forward of any operators in the play.”
To estimate the implication of these wells on 2015 production rates, IHS ran different conversion scenarios to assess the outcomes of bringing onstream 50, 100 and 150 DUC wells every month. Considering the need for a steady-state inventory of approximately 300 DUC’s at all times, the study found that roughly 1,100 DUC wells studied should be available for conversion. If the low-case conversion rate of 50 wells per month is achieved, IHS estimates that the DUC wedge (incremental) production would be 123,000 barrels of oil per day at the end of a year, while a high-case conversion rate of 150 would result in a DUC wedge production of 269,000 barrels of oil per day after 12 months.
“The more desirable DUC wells are located in the Northeast core sub-region of the Eagle Ford shale play, so operators such as EOG Resources, BHP Billiton and ConocoPhillips have significant financial flexibility and greater options,” said Robert Fryklund, chief upstream strategist at IHS Energy and a co-author of the DUC analysis. “On the other hand,” Fryklund said, “operators who complete lower-productivity DUCs in the Eagle Ford west area may be challenged during the low-price environment and a few may delay completions until oil prices rebound. The operators in the play with these DUCs will follow different strategies depending on their financial strengths, asset portfolios, degrees of hedging and their stakeholder demands in this low oil-price environment.”
How DUC inventories are reduced (if they are), will make operator strategies more transparent, IHS said, and most operators, particularly those with deep reductions in capital budgets and ambitious growth targets, will seek to liquidate DUCs in 2015 to deliver on production volumes. A minority, the report noted, will make the decision to manage DUC conversion to shape growth in response to prices and costs
“The volumes of these DUCs that are converted are meaningful because our IHS analysis indicates that the Eagle Ford DUC wedge production alone could generate an additional 180,000 barrels of oil per day in the second half of 2015,” Fryklund said. “That additional potential production represents approximately 14 percent of the play’s annual production of 1.25 million barrels of oil per day. This further supports our IHS view that oil price fundamentals will face headwinds despite the collapsing rig count, and that a material price increase could lead to a supply response in late 2015 and 2016.”
To speak with Raoul LeBlanc or Bob Fryklund regarding the IHS Energy Analysis of Drilled, but Uncompleted Wells in the Eagle Ford Shale, please contact Melissa Manning at email@example.com. For more information on the IHS Energy analyses of DUCs in other U.S. shale plays, please contact Sheana.firstname.lastname@example.org.
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