Untapped Energy Wells Stand Ready -- WSJ

By Erin Ailworth 

U.S. oil and gas companies have drilled thousands of wells they have yet to tap, creating a ready reserve of fuel that could surge onto the market when energy prices recover.

As producers report quarterly earnings during the next few weeks, a question looms: When will they start exploiting these "drilled but uncompleted" wells?

While the industry often has an inventory of drilled wells awaiting completion, the backlog has grown significantly during the past two years as companies such as Continental Resources Inc. and EOG Resources Inc. deliberately delayed tapping wells to wait for higher energy prices.

Federal estimates show the number of such wells in the nation's seven most prolific drilling regions stood at 5,069 in September, up from 3,768 in January 2014, before oil prices began falling.

Because companies have already spent the money to drill the wells, known in the industry as DUCs, bringing on the supply they hold is cheaper than drilling and fracking a new well. That means DUCs are an economic proposition for many companies, especially with U.S. crude now trading at around $50 a barrel.

Ryan Duman, a senior analyst at energy-consulting firm Wood Mackenzie, said he expects to see companies completing many of the delayed wells in the next 18 months. "You're at a point where pretty much every DUC that's sitting out there is in the money," Mr. Duman said.

Wood Mackenzie estimates that the industry has about 2,000 more wells awaiting completion than it normally would. Those extra DUCs are capable of producing more than 250,000 barrels a day of crude and 4 billion cubic feet of natural gas a day, the firm estimates. That is equal to roughly half of California's daily oil output in July and West Virginia's daily gas production the same month.

Mr. Duman called the untapped resources contained in the DUCs a "meaningful amount of supply" that would have "some implications on commodity prices." Many of the DUCs, he added, are located in the Marcellus drilling region of Pennsylvania and the Bakken in North Dakota.

Companies reporting in the coming week include ConocoPhillips, Antero Resources Corp. and Cabot Oil & Gas Corp. Continental Resources is set to report on Nov. 2, and EOG thereafter.

While many companies still expect their DUC backlogs to remain larger than normal at the end of this year, some have begun tapping the wells in recent months, or are planning to do so soon. Federal estimates show that the number of DUCs in the nation's seven most prolific drilling regions has fallen by about 500 wells since peaking in January at 5,576 wells.

Executives at Continental Resources, one of the most active producers in the Bakken, have said they view DUCs as "oil in the bank" at a cost-effective price. The company expects to have 185 drilled but uncompleted wells in the Bakken at year end, up from 135 at the end of 2015.

"We would likely start working down the DUC inventory when we see a stable WTI price around $50," said Warren Henry, a Continental vice president, referring to West Texas Intermediate, the benchmark price for U.S. crude.

EOG has said it expects to have 200 drilled but uncompleted wells at the end of 2016 -- down from 300 a year prior -- as it looks to enter 2017 in growth mode. Analysts said they expect to hear about companies drawing down their DUC inventories as producers lay out preliminary drilling plans for 2017 during third-quarter earnings calls.

"A lot of companies will at least put up some guardrails around '17 -- 'Well, at this price, we could spend this much; at that price, we could spend this much,' " said Pearce Hammond, an analyst at Simmons & Co. International.

David Tameron, an analyst at Wells Fargo Securities, said most companies will use DUCs to boost their output without spending as much as they would drilling new wells. That will limit the impact of new production from those wells on the broader energy market.

Tim Rezvan, managing director of Americas research at Mizuho Securities USA Inc., said that while the untapped wells represent a large resource, it will take time to begin pumping them. "You can't get those turned on overnight," he said.

Write to Erin Ailworth at [e-mail]

(END) Dow Jones Newswires

October 24, 2016 02:48 ET (06:48 GMT)

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