These are grim days for oil producers. Europe’s oil benchmark is below $38 per barrel, a far cry from the $115 high water mark it set in June of last year. America’s benchmark is similarly depressed. For petrostates, the plunge that prices have taken over the past 18 months has pinched national budgets; in the private sector, oil companies are scrambling to find ways to stay profitable in the bearish market. Trimming capital expenditures is the most obvious way to try and get out of the red, but a number of U.S. shale firms are employing a more forward-looking tactic: drilling wells but not yet starting production, choosing instead to wait for prices to rebound before they get the crude flowing. The New York Times reports:
[Deferred completions]—known in the oil business as D.U.C.s (an acronym for drilled but uncomplete)—are a bet on higher oil prices than the current level of about $38 a barrel, which is about 60 percent lower than in summer 2014. They are viewed by oil executives as a way to hoard cash as service costs plummet and are a flexible lever to rapidly increase production whenever oil rises again. […]
But the incomplete wells are also another reason many analysts say a recovery in the oil price is nowhere in sight. Together the well backlog could produce as many as 500,000 barrels of oil a day, about the same amount of oil that Iran is expected to add to the glutted global market after it complies with the recent nuclear deal by the end of next year.
This “fracklog” has been growing all year long, and is in some way a product of one of the key features of shale drilling: the ability to rapidly increase or decrease production at wellheads. In contrast to more conventional oil projects which require larger capital outlays and investments, shale production requires relatively little infrastructure and time to get the crude flowing. Fracked wells also see output decline quite quickly, so the industry as a whole has been forced to become quick on its feet, capable of drilling and fracking the next well as soon as the current one is tapped.
Producers have found that, by drilling but not yet fracking shale formations, they can do all the heavy lifting on the front end and wait for prices to tick upwards before actually bringing the oil out of the ground. Thanks to sustained low crude prices, the American fracklog is quickly growing.
Looking ahead to next year, this array of unfracked wells, combined with the prospect of an oil output renaissance in sanctions-free Iran, promises to keep the global supply of crude well above demand. The world is swimming in oil, and as soon as prices inch back up, a new wave of American shale production will quickly come online and send prices back down again.