A substantial inventory in the Lower 48 of drilled but uncompleted wells, aka DUCs, could sustain drilling — without adding more wells — long into the coming year, according to a new analysis.

Drilled Wells, Frac Activity, US Liquid Basins

“After DUCs run out, however, rig activity in the five key oil regions needs to be in the 280-300 range to maintain flat oil output,” according to a compilation by Rystad Energy.

As of last Friday (Sept. 4), the U.S. rig count stood at 256, putting the domestic tally on a modest uptrend over the past month, the latest data from Baker Hughes Co. showed. There were 898 domestic rigs running in the year-ago period.

The Permian Basin, which leads the onshore drilling recovery, may be able to “accommodate 13 months of activity at last month’s pace,” analysts noted. Using a “normal” DUC-to-hydraulic fracturing (fracking) ratio of around five months, Permian operators may be carrying an inventory equivalent to eight months of fracking at the current pace.

“Fracking activity for the rest of this year and early 2021 will be supported by the existing, abnormally high level of DUCs, though not all DUCs will be brought online quickly,” said Rystad’s Artem Abramov, head of Shale Research. “Large, well established operators will stay committed to capital discipline, only increasing their completion spend gradually in the current price environment.”
As the DUC inventory is depleted, “we estimate that about 190 rigs will be needed in Permian, out of the nationwide total of about 280-300, to maintain flat production next year compared with its current count of about 125 rigs.”

Even if drilling operations in the Permian were to “stop completely,” fracking could be maintained at about 200-250 wells/month through the first half of 2021 before the inventory size were to return to normal. 

Rystad estimated the nationwide DUC inventory hit a peak of about 5,800 wells before starting to decline in July. Drilling activity fell across all of the Lower 48 from March to May in the Permian and Anadarko basins, Eagle Ford and Bakken shales, and the Niobrara formation. 

Fracking operations hit bottom in May and remained static in June before beginning to recover in July. Because there were no material efficiency gains realized in the first months of the downturn because of Covid-19, the “total depth count posted a sequential decline in July with slightly more than 200 wells drilled in all of the oil basins combined,”according to Rystad.

The inventory in the Lower 48 increased by about 650 horizontal wells between February and June, but it declined by around 140 in July. 

“It is expected that the declining trend will last through the rest of this year, reaching pre-Covid numbers across all regions before the end of the year,” Rystad’s team said. However, given that fracking activity remains “far below” the levels before the pandemic began, the existing inventory “is much higher than what should be expected for the current level of activity.”

The run-rate ration for inventory-to-fracking was at around five months in 2018 and 2018. That is “widely considered a normal rate, based on the cycle time of a typical unconventional drilling and completion operation,” analysts said.

In 2Q2020, the ratio jumped to a two-three year level of fracking at the current pace in all Lower 48 oil basins. 

“Even after the recovery in activity in July, the inventory is equivalent to 13 months of fracking in the Permian Basin and 22 months across the rest of the regions,” based on Rystad’s analysis.

The oil DUC inventory structure remains upended from where it was only a year ago. 

For example, in the Permian, DUCs drilled less than six months ago declined in July year/year to 55% from 72%. Meanwhile, the share of DUCs drilled six to 11 months earlier increased to 24% from 9% in the same period. 

“Hence, there are more than 700 Permian DUCs that were drilled in the second half of last year that remain uncompleted as of today, an unprecedented number in the basin’s history,” analysts sasid.

Other onshore oil basins reveal a similar picture. The share of wells drilled less than six months ago declined from 62% to 36%, with many drilled in the second half of last year still uncompleted. 

In addition to the Permian, a material increase is seen in the share of DUCs drilled 12-23 months ago, from 3% to 13%. However, these DUCs “faced an unusual challenge” of persistent natural gas infrastructure bottlenecks in the Niobrara in 2018-2019.

With new well performance at a record high, maintenance activity is expected to follow the base decline trend. 

“In early 2020, the industry had to put on production more than 850 horizontal wells, across the five major oil regions, to keep production flat,” analysts noted. “We anticipate that the maintenance activity requirement will fall to 450-500 wells by mid-2021.”

Meanwhile, many Lower 48 exploration and production companies also are under financial duress or are voluntarily restructuring via Chapter 11. 

Many of these operators are not expected to be able to return to a “reasonable” capital spending or activity level until restructuring is completed, which takes six to 12 months.