DUC, DUC, Goose Chase
Executive Summary: the DUC count is an important indicator of the capability of US oil and gas companies to add production in the near term. In short, we can’t, and the ability to do so diminishes by the day.
Currently, most wells are developed on pads- as little as 2 per pad, mostly 4-6 and sometimes as many as 12+. Drilling, building facilities, tying the wells into pipelines and preparing to bring the wells on production takes ~4-6 months assuming 20 days to drill a well and a well isn’t productive until it is “completed.”
The primary event in the completion process is the much maligned and little understood (by outsiders) fracture stimulation. A 10,000’ well can have upwards of 50 stages and each stage takes 1.5 hours to pump. With 6 wells on a pad, that’s 300 total frac stages, 450 hours of pump time excluding maintenance with ~3,000,000 bbls of water, ~120,000,000 lbs of sand and ~60,000’ of steel tubing. In the Permian, each month this activity is occurring concurrently on “6 wells pass” 70 times. As you can imagine, the logistics are hard in a world that is short of labor, trucks, steel and capital.
A DUC, the topic of this post, is a drilled but yet to be completed well and is the “shortest cycle” production to bring online. This is the “savings account.” Drilling is the “salary” and production is the “mortgage payment.” The US has been hanging on to production levels by depleting the savings account of DUCs and the end is nigh. So when the Biden administration goes looking for production, they should heed Vicki Hollub’s words last week at CERA.
We’re in a really dire situation. We’ve never faced a scenario where we need to grow production, when actually supply chains not only in our industry but every industry in the world [are] being impacted by the pandemic. Now, with supply chain challenges, it makes any kind of attempt to grow now — and at a rapid pace — very, very difficult.
DUCs were the low hanging fruit and they are almost out.
The western world is in an energy crisis of our own making. From arguably rational things (like sanctions on Iran that never have been taken off) and cutting off Venezuela, to irrational things like not calling the UAE or Saudi Arabia in 2021 when Biden officially became President, canceling Keystone XL and vilifying and “divesting” domestic producers, we are reaching a tipping point. For a full brief, I highly recommend the following two posts from “Viscosity Redux” and “Doomberg”, both writers I hope you subscribe to on Substack. I love that I get your eyeballs for a few minutes a day, but my primary goal is sharing knowledge, and there is so much to go around, I’m happy to share the things that I read.
For the #hottakeoftheday’s part, I wanted to revisit US oil production and DUCs (drilled, uncompleted wells). As we sit, world oil demand is somewhere between 100 and 102 mmbo/d. World oil supply is at the low end 95 mmbo/d (if you exclude the 7 mmbo/d of Russian exports entirely) and 102 mmbo/d if you assume that there are enough buyers of Russian crude at some discounted price that the barrels can move. That kind of uncertainty has riled the markets and oil and had absolutely insane swings in price, as you can see in the chart below (and if you have been living under a rock).
Even the most ardent anti oil folks such as the IEA, Elon Musk and President Biden have got in the act.
Since Putin began his military buildup on Ukrainian borders, just since then, the price of the gas at the pump in America went up 75 cents. And with this action, it’s going to go up further.
I’m going to do everything I can to minimize Putin’s price hike here at home. In coordination with our partners, we’ve already announced that we’re releasing 60 million barrels of oil from our joint oil reserves. Half of that — 30 billion — million — excuse me — is coming from the United States.
And we’re taking steps to ensure the reliable supply of global energy.
And we’re also going to keep working with every tool at our disposal to protect American families and businesses.
Now, let me — let me say this. To the oil and gas companies and to the finance firms that back them: We understand Putin’s war against the people of Ukraine is causing prices to rise. We get that. That’s self-evident. But — but, but, but — it’s no excuse to exercise excessive price increases or padding profits or any kind of effort to exploit this situation or Ameri- — or American consumers — exploit them.
Russia’s aggression is costing us all, and it’s no time for profiteering or price gouging.
But increasing production is much easier said, than done. Casing is 6 months back-ordered. There is limited labor for drilling and frac crews, trucks and trucking, access to sand, and most notably, 2 years of calls to reduce capital and pay back investors. If you look at U.S. oil production over the past 5 years, the EIA 914 report is the best:
At present, we are 1.2 mmbo/d behind where we were in November 2019 and if you recall from the “Peak Oil USA” series the HTOTD did in September of 2019, I called 12.8 mmbo/d as the top, forever. Tier 1 locations were depleting, declines were accelerating and capital was being starved from an industry high in debt. You can see in the chart about that from November 2019 to March 2020 (pre COVID impact) oil did, in fact, decline 200 mbo/d.
Since 2014, the driver for US oil growth has been the Permian. It is the engine, and has the most remaining inventory and biggest US companies- both public and private- drilling there.
It has already exceeded it’s 2019 high and the rate of increase matches mid 2018 through mid 2019. Drilling was exceeding completions by more than 100/month and the DUC inventory built to almost 3400.
As 2020 hit, completions and drilling ground to a halt, and even with the recent ramp in activity, we are ~90 completions a month behind the previous pace (driven in large part by frac crew labor and sand availability and remarkably, the DUC count has fallen nearly 2000 in the last 24 months). That is to say 2000 MORE wells have been completed than drilled, and currently completions outrun drilling by ~80 a month. And that’s in the busiest basin.
The rest of the country matches the trend.
Which is to say without a substantial change in the rate of drilling, a lot of the increase in production over the past year has been driven by 1) the best of the best inventory 2) short cycle times because the wells were already drilled and 3) we were completing at a much faster clip than we are drilling.
For those hoping that the US can fill the void in production globally, they are barking up the wrong tree. Which is why the industry is best to say “supply chains are limiting us” and let the next 12 months play out with flat activity, robust cash flow, huge dividends and massive debt repayment, while using equity to merge.
The industry at the end of 2022 will be smaller, stronger, and the world will understand just how important domestic and foreign oil actually is to the economy. And as Larry Fink and Elon Musk take more productive positions for society, perhaps the conversation will be as it should have been: “All energy is good energy.” But in the meantime, assuming we can “just grow production” is like hoping that “money grows on trees.” It doesn’t.
