An old oil myth is getting a new lease on life by traders and "analysts" set to convince you that the sky is about to fall.
These "Chicken Littles" are once again talking about drilled but uncompleted wells (or DUCs) and how they (any day now!) will bring oil and gas prices crashing down.
DUCs Used to Cast a Shadow on the Market
Now, a while back I took on several misconceptions surrounding the number of DUCs in the U.S. oil and natural gas sector.
But this most recent version of the DUC myth requires another takedown.
DUCs are wells where the bore hole has been drilled to the base of project specifications, but other elements are missing, such as: production pipe casing, equipment string, cementing of the annulus (the area between the pipe and the bore hole wall), and surge protectors.
These DUCs certainly carry the promise of additional extraction. However, until the wells are actually completed and volume begins to flow, they have no impact on the market – apart from analysts and traders trying to "handicap" their completion.
Put simply, the assumption by many was that DUCs would simply aggravate the supply glut in the American market by being a ready source of unwelcome new (oil or gas) volume. That volume, in turn, would constitute a rising tide of excess surplus supply, thereby depressing prices.
When the concern over DUCs was initially advanced, the market was in the throes of a deep price decline, brought about in oil by the OPEC decision to defend market share rather than price, and in natural gas by a seemingly inexhaustible supply of "unconventional" shale and tight gas.
DUCs then became regarded as a depressing shadow cast on any view of market balance between supply and demand.
Yet their existence has always been a component of the distinction between "full cycle" and "half cycle" field operations…
DUCs Are Just a Strategy to Save Costs
Full cycle operations require that full work be done to develop a field, while half cycle refers to wells put on producing acreage with infrastructure already in place and in use.
DUCs are part of a move to reduce overall field expenses by having new production locations able to replace older ones on short notice. The savings can be appreciable. The figure below is an illustration of that from one of my industry briefings.
The U.S. Energy Information Administration (EIA) began tracking DUCs in September of last year (the initial report outlining how the figures are compiled and analyzed can be found here).
Given that most DUCs are found in horizontal wells tapping shale or tight oil/gas, the EIA defines a DUC as a new well after the end of the drilling process, but for which its first completion process has not been concluded.
EIA estimates the end of the drilling process is 20 days after drilling has begun, while the end of the first c…
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.