Fracklog In The Biggest U.S. Oilfield May All But Disappear

Source: Bloomberg

The number of dormant crude and natural gas wells in the U.S. stopped growing in the first quarter -- and may all but disappear in the nation’s biggest oil field should prices hold steady.

As of April 1, there were 4,230 wells left idle after being drilled, a figure little changed from January, according to an analysis by Bloomberg Intelligence. While some explorers have continued to grow their fracklog of drilled but not yet hydraulically fractured wells, others began tapping them in February as oil prices rose, the report showed.

Crude in the $40- to $50-a-barrel range may wipe out most of the fracklog in Texas’s Permian Basin and as much as 70 percent of the inventory in its Eagle Ford play by the end of 2017, according to Bloomberg Intelligence analyst Andrew Cosgrove. While bringing them online is the cheapest way of taking advantage of higher prices, the wave of new supply also threatens to kill the fragile recovery that oil and gas markets have seen so far this year.

“We think that by the end of the third quarter, beginning of the fourth quarter, the bullish catalyst of falling U.S. production will be all but gone,” Cosgrove said in an interview Thursday. “You’ll start to see U.S. production flat lining.”

Drillers that expanded operations in U.S. shale fields found that sidelining wells was the easiest way to cut costs when oil and gas prices plunged. Since then, these wells have been “just sitting around, basically waiting for a better price to come along,” said Het Shah, an analyst at Bloomberg New Energy Finance.

U.S. oil producers extended the biggest shale drilling revival since last summer as rigs targeting oil and gas in the U.S. rose by 7 to 447 last week, according to Baker Hughes Inc. Dave Lesar, chief executive officer of Halliburton Co., the world’s largest provider of hydraulic-fracturing work, said Wednesday that the market in North America has turned and that he expects a “modest uptick” in drilling in the second half of the year.

U.S. oil futures have rallied 21 percent this year, settling at $44.75 a barrel on Thursday. Gas is up 15 percent, closing at $2.692 per million British thermal units.

“With oil hovering below $50, decisions on whether to tap the idled supply are increasingly driven by local well economics and company-specific factors,” Bloomberg Intelligence analysts Cosgrove and William Foiles wrote in the report.

EOG Resources Inc. began reducing its fracklog in early February. The company is focusing on completing dormant wells and has said it plans to trim the backlog to 230 from 300 this year.

Bakken Basin

Meanwhile, Continental Resources Inc. added 78 dormant wells in the Bakken formation, where it’s the biggest leaseholder, from Sept. 1 to April 1 -- more than all the drillers in the play combined. The company had more long-term rig contracts and likely has the capital to complete wells as prices rise, Foiles said.

"It shows management is pretty confident in their situation," he said.

Among the three major U.S. oil plays -- the Permian, the Eagle Ford and the Bakken -- the number of untapped wells increased the most in the Permian, which saw a 12 percent jump in the first quarter. That topped the 4.4 percent increase in the Bakken. Dormant wells across the three plays may fall 25 this year, with the Permian leading the way.

"The Permian drawdowns will continue to trump those you see in other basins," Cosgrove said.

New output from the wells will equal the decline from older ones in four shale oil basins, according to Everscore ISI. That means tapping them will only temporarily stem production declines.

And while dormant wells "coming online may cause prices to remain flat" until the end of the year, sometime in 2017 prices will gradually improve, said Brian Youngberg, an energy analyst at Edward Jones.