Increased DUCs in recent years indicated an extended period of depressed crude oil prices or anticipation of trouble on the horizon. As fracked wells typically have larger initial production rates which drop off rather dramatically in subsequent months, producers bound by drilling contracts set months ahead of a drop in oil prices are essentially forced to drill in order to hold a lease.
Similarly, if there’s a strain on the capacity to transport that oil to market, companies must drill, but they can let those wells sit uncompleted, or un-fraced until there’s room in the pipeline to move it. That’s the problem the Permian is dealing with.
The Crash DUCS
Prior to the beginning of the crash of 2014-15 which began in July of 2014, the ratio of completed wells to DUC’s in the Permian play by month averaged just 20%, meaning, for every well completed, there were 1.2 wells that where waiting to be completed, a 1.2 to 1 ratio. During the crash, and in the restart lag of the aftermath, by July 2016, that ratio exploded by 500% peaking at 6 to 1 for that month with 189 wells completed and 1,136 DUC’s.
As production in the Permian and other plays ramped up at the beginning of 2017, DUC’s continued to pile up, but the industry at least maintained the ratio of DUC’s to completions at around a 5:1 rate. Since January 2018, that ratio has remained relatively stable in every major play, except the Permian.
In recent months, the DUC to completions rate in the Permian has been flirting with a 10:1 ratio, meaning, that with 404 completed wells in January of 2019, there were nearly 4,000 drilled but uncompleted. The most recent data from February showed a brief dip, but indicators suggest that this trend may continue well into the summer despite an increase in pipeline builds coming online in 2019.
Why is this a problem?
DUC’s can essentially serve as virtual storage, and can provide a relatively quick source of increased production in the event of a future price spike in the markets. But uncompleted wells that sit for too long face potential devaluation issues. With the increased concern over frac hits, where one active well begins to essentially draw down the pay zone of another well, and concerns with overall reservoir pressure drops, sitting DUC’s that were once assumed to be good potential producers might become middle performers.
Though new pipeline additions are coming on line in 2019, the DUC backlog could take some time to draw down.