At long last, the Energy Information Administration (EIA) has reported an “official” estimate of the U.S. drilled-and-uncompleted well (DUC) inventory as part of its monthly Drilling Productivity Report. DUCs are a critical factor in forecasting production trends, as many of these wells are likely to be some of the first to come online as soon as prices move higher and thus have the potential to boost production quicker and easier than would otherwise be the case. However, the number of DUCs has been a difficult thing to measure, though not for lack of trying. There are, in fact, widely varying counts from many different sources circulating in the industry. Today, we begin a short series on these latest DUC counts and their potential implications.
Drilled-and-uncompleted wells, or DUCs, aren’t a new phenomenon. In fact, producers have always carried an inventory of DUCs. But in the environment of low prices and slashed capital budgets the market has been experiencing for the past 20 months or so, DUCs have taken on new relevance, not only as a tool for producers to manage their lease agreements and rig activity, but also as a control valve for production volumes, whether it is to defer supply to a future date or to quickly and economically turn on new production as prices rebound and/or as pipeline capacity is built. You can imagine, then, how without an accurate estimate of DUCs and the rate of actual completions, the current market is ripe for underestimating future production volumes that solely rely on existing and newly drilled wells.
DUCs have no doubt played some role in keeping U.S. production volumes level despite a dramatic slowdown in drilling activity over the past 20 months or so and will continue to play a role in boosting production as additional takeaway capacity comes online and prices recover. Thus, DUCs are an important piece of the equation when it comes to forecasting production trends. But they are also notoriously onerous to quantify, and thus, a thorn in the side of industry analysts and forecast modelers. There are indeed many differing DUC inventory numbers being floated in the market, but the wide range of estimates has so far only added to market uncertainty. The September 12 release of the EIA’s latest Drilling Productivity Report (DPR) provides the first “official” estimate of the DUC “inventory”. (See the DPR DUC report here.) The September report provides a baseline for the number of DUCs as of December 2013 for each of the seven DPR shale regions it covers — Bakken, Eagle Ford, Haynesville, Marcellus, Utica, Niobrara, and Permian — and then breaks out the incremental wells since then into two categories — drilled and completed — for each region on a monthly basis through August 2016. The incremental wells are then added to the baseline to then give us the absolute number of DUC wells in inventory by DPR producing region for each month since December 2013.
Before we get to EIA’s DUC data itself, let’s first take a step back to understand why DUCs accumulate and the methodology behind EIA’s estimates. Producers accumulate an inventory of DUCs for a variety of reasons — both operational and economic. Completion is the process to take a drilled well and make it a producing well. The largest completion expenditure for shale wells is the frack job, but it also includes a wide range of activities necessary to get the well’s output flowing to market. Once that investment is made and the well is flowing, producers are eager to commercialize the supply. But from an operational standpoint, for instance, there may not be sufficient takeaway capacity available to process or move the incremental supply to market. This has been especially true for natural gas producers in the Marcellus/Utica region. Producers also may delay completion to solve problems that arise during the drilling process.