A sharp decline in the domestic natural gas drilling rig count for even a few months might not reduce U.S. gas supplies because there are hundreds of drilled but uncompleted (DUC) wells that could be substituted for newly drilled wells, according to a survey by Barclays Capital analysts.

Information compiled by the Energy Information Administration (EIA) from Form 914 reports from producers indicates that U.S. Lower 48 gross natural gas production in June increased to 69.47 Bcf/d, up 0.1% compared with 69.39 Bcf/d in May, despite losses in the federal offshore Gulf of Mexico (GOM), Louisiana, Texas and New Mexico (see Daily GPI, Aug. 31). The EIA 914 data indicated that U.S. Lower 48 gross natural gas production in May had declined slightly from April but it was still more than 7% above year-ago levels (see Daily GPI, Aug. 3). Meanwhile, EIA days ago reported that gas drilling in August had remained “resilient” even with lower gas spot and futures prices (see Daily GPI, Sept. 8).

“Those hoping for a rebound in gas prices may be heartened by the past two EIA monthly gas reports (Form 914) showing a slowdown in the pace of U.S. supply growth,” said the Barclays analysts. “As opposed to month/month growth of 0.5 Bcf/d earlier this year, the May and June reports showed growth of only 0.1 Bcf/d. We do not feel this marks a shift in trajectory of supply, at least not yet.

“Indeed, the gas-directed rig count and improvements in rig efficiency suggest that supply should still be growing at current drilling levels. Instead, the EIA production data may simply highlight a growing inventory of DUC wells.”

Even if domestic gas drilling were to slow down, DUCs have the potential to more than make up for it, said the analysts. Based on discussions with producers, they “road tested” a DUC average estimate using 1,100 wells. They assumed that the 1,100 DUCs would be brought to market over a four-month period, which “is a reasonable estimate of the supply potential of a sudden culling of DUCs” which could average slightly more than 1.5 Bcf/d in the first year.

The risk of these uncompleted wells “suddenly coming to market is remote, we believe,” because “it is a deficit of service industry capacity that appears to be behind the growing number of DUCs,” they wrote. “While more service industry capacity is coming to market, it does not appear large enough to handle both the current oil and gas rig rate and the inventory of wells. For this reason, we have assumed in our balances that the overhang of supply represented by gas DUCs remains latent capacity that does not appear in flowing supply in 2011 or 2012. In fact, DUCs are likely to grow in the short term.”

The deficit in service industry capacity was acknowledged by Halliburton Co. CEO Dave Lesar during a recent presentation at the Barclays Capital CEO Energy-Power Conference in New York City (see Shale Daily, Sept. 9). Demand for pressure pumping services that help to release gas and oil from shale rock has outstripped Halliburton’s ability to provide services, he said. North America holds an estimated 15% of worldwide shale reserves but it has about 80% of global pressure pumping capacity. “Even then we cannot keep up with the demand,” he said.

According to the Barclays analysts, the “ability of producers to drill wells faster than they can be completed and connected points to rig capacity that outstrips service industry capacity. In some cases (reportedly, the Eagle Ford and Marcellus), gathering and processing appears to be limiting well connections. How many DUCs are there? Given the steps involved even after a well is drilled, there are always wells moving through the completion/connection queue, working their way to market. Yet, it is widely understood that there has been a surplus of wells in recent quarters.”

Getting a precise read on the current number of DUCs is difficult, they said. Producers that report well inventories “usually divulge only a total number of oil and gas DUCs. Some producers have indicated that they have concentrated scarce service industry crews on their oil or condensate wells in an effort to accelerate production of those more lucrative hydrocarbons. Where pad drilling is utilized, producers typically connect all of the pad’s wells at once, creating a natural higher percentage of wells awaiting connection. Still other producers are drilling wells to secure acreage, planning to connect them later. All of these factors create a degree of fog around both the number of DUCs, the ratio that are gas wells, and what a normal backlog rate might be.”

U.S. gas output “could stall even with the current rig count if the pace of completions/connections is too low,” the Barclays analysts acknowledged. “Yet the DUCs will eventually come to market and remain a bearish overhang for which analysts must account. Also, even a sharp decline in drilling for a few months would not cut into U.S. gas supply, in our view, as DUCs would simply be substituted for newly drilled wells.”

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