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OPEC Beware
The American Fracklog Is Huge—And Growing

With oil fetching barely half the price today that it was this past June, some U.S. shale operators are choosing to sit on their supplies, waiting for a price rebound before they start crude flowing again. They’re doing that by drilling wells into shale formations but not yet fracking them, sticking a tap in the ground but choosing not to turn it on. As Bloomberg reports, these operators are creating a large fracking backlog—a “fracklog”:

Drillers in oil and gas fields from Texas to Pennsylvania have yet to turn on the spigots at 4,731 wells they’ve drilled, keeping 322,000 barrels a day underground, a Bloomberg Intelligence analysis shows. That’s almost as much as OPEC member Libya has been pumping this year.

The number of wells waiting to be hydraulically fractured, known as the fracklog, has tripled in the past year as companies delay work in order to avoid pumping more oil while prices are low. It’s kept crude off the market with storage tanks the fullest since 1930.

Companies are also putting drilled crude into storage, following the same logic as the frackloggers. They hope to fetch a better price for their product in the coming months. These efforts can temporarily help curtail America’s booming supplies and could cut down on the global glut that’s led to the price crash in recent months, but OPEC’s petrostates shouldn’t be cheering. As soon as prices start to tick upwards, these wells will be fracked and crude put in storage will be sold, and the market will be once again flooded with oil. When that happens, expect prices to tick right back down again.

The larger the fracklog grows, the less likely it seems oil prices will return to $100+ per barrel prices anytime soon. Meanwhile, the American shale industry is innovating its way to lower breakeven prices. These producers may find they’re able to profitably sell off some of this fracklogged oil at current prices, and that could send crude even lower. Petrostates, beware.

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  • Kevin

    Low prices have two effects for well owners who are delaying fracking their wells.

    First the current lower prices for crude means they have no or limited revenue coming in if they choose to drill but not frack. This means they need to have patient capital to invest to do this or (much more likely) they have to go into the credit market and borrow money to drill, paying interest until the price of oil goes back up and they can sell their crude and repay their creditor. Being in hoc to the bank with insffucient cash coming in is no fun and will lead to continuous cash flow issues.

    On the other hand the second effect is that this falling demand makes it much cheaper to hire drillers as demand for their services are down. This means that cash rich (or cash flow positive) owners can take advantage of this to lock in lower drilling prices.

    • Andrew Allison

      Kevin, http://www.zerohedge.com/news/2015-04-28/debt-pile-fuel-further-oil-price-pressure suggests that the smaller shale companies are up to their ears in debt and must keep producing at any price in order to service it. Meanwhile, as the post points out, those who can afford to keep on paying drillers, probably as you suggest, at significantly lower prices.

      • Kevin

        Yes, that seems to support my intuition. This bifurcation of outcomes among firms happens in most industries that suffer a downturn. Well capitalized forms with solid cash flow tend to weather the storm well and come out with stronger market shares; meanwhile highly leveraged firms are often brought down by the same events.

  • MarkE

    One thing bothers me about failure of attempts at hydraulic fracturing in foreign countries. Why is it that we have been able to successfully apply fracking to 3 or 4 different geologic formations in the US, but not a single geologic formation in the rest of the world?

    • Kevin

      Your observation tends to support the idea that it is not (just) geology that determines success.

  • Jacksonian_Libertarian

    This is nothing but good news, with no one getting hurt except the Dictatorships in control of the mostly Muslim Petro-states.

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