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Resilient Shale
Here Comes the Fracklog

Brent crude has recovered from its sub-$30 per barrel low in early January, and is today trading at $41.60 (with WTI trading less than $2 below that). But even this modest recovery could be swatted down by a boost to American supplies if more shale producers start unleashing the so-called “fracklog” of drilled-but-not-yet-completed wells. Reuters reports:

Some U.S. shale oil producers, including Oasis Petroleum and Pioneer Natural Resources Co, are activating drilled but uncompleted wells (DUCs) in a reversal in strategy that threatens to bring more crude to a saturated market and dampen any sustained rebound in prices. […]

[W]ith crude futures hovering near multi-year lows and many doubting recent modest gains that brought oil prices near $40 a barrel can hold, the backlog of DUCs is already shrinking in some areas. In key shale areas such as Eagle Ford or Wolfcamp and Bone Spring in Texas such backlog has fallen by as much as a third over the past six months, according to data compiled by Alex Beeker, a researcher at Wood Mackenzie.

Oil prices have fallen a long way from their $115 per barrel high back in June of 2014, and along the way they’ve threatened the profitability of many operations, including those in America’s shale formations. But many of those producers have not been sitting by idly, and have invested into refining techniques to turn profits even in today’s bearish markets. Now, with prices edging up, financially pinched firms are keen to cash out.

The world’s petrostates have seen their national budgets imperiled by the rise of non-OPEC production, and American shale companies have been some of the biggest contributors to today’s supply glut that’s led to the collapse in prices. The sheer resilience of the plucky U.S. oil industry has been a painful lesson for the oil giants, and the unleashing of the frackog is only likely to twist the knife.

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  • Andrew Allison

    This suggests that the current price at which fracking is profitable is $40, which puts a lid on price. Unfortunately for other producers, the fracking break-even is headed downwards.

    • http://radical-moderation.blogspot.com/ TheRadicalModerate

      Not necessarily. DUC’s have (ahem) sunk costs, so the marginal cost to bring a well online is less than that for a brand new well.

      • Andrew Allison

        Good point. But there are a lot of DUCs, and if production is profitable at $40, financing will likely become available for new wells, the cost of which is declining.

        • Jacksonian_Libertarian

          It’s more than just DUCs, old paid for wells can be refracked with new and improved technology and produce as much as 300% more oil.

  • CaliforniaStark

    The price of oil was kept artificially high because OPEC, a malodorous oil cartel, was able to limit its supply to manipulate its price. The cartel has now been broken because of fracking. The price of oil will now be determined by supply and demand, and will be kept low by advances in technology.

    Countries that based their economies on the price of oil being kept artificially high by OPEC will now begin to implode, and their politics descend into chaos. Does anyone predict a good future for the House of Saud in the next decade? Anyone predict a good future for Venezuela, or Nigeria, now? I hope certain academicians with blogs don’t assume that when each of these countries go down, it is an American problem and we need to gallop to the rescue. They are paying the price for their own greed.

  • david russell

    The problem with DUCs is that no one knows how many there are. The state agencies know but only a very few report. Genscape suggests the number is between 2600 and 2700. So what does that mean? I’ve read estimates that up to 1/3 of them will never get completed (but who knows, really). I’ve also read that it could take up to 2 years to bring them all into production (but that was back when more rigs were operating).
    If you had a DUC would you bring it on line at today’s prices?… or wait for even higher prices…..or wait because you didn’t believe $40 would hold (athough presumably you could hedge this risk — maybe… if you had good credit).
    I don’t know why anyone would drill and not complete a well. I don’t know why lenders would allow it — you don’t prove up any reserves with DUCs.
    So there’s a lot of unknowns here.

  • White Knight Leo

    There was a report a few days ago about an American fracking firm saying they expected to be able to make a 30% profit on the new $41 barrel prices. Which puts their break-even price at about $28. Which is quite a change from even 5 years ago, but it’s also very good news, because few other oil producers can operate at that price.

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