In each edition of our weekly newsletter, we include a graphic showing the U.S. Energy Information Administration’s (EIA) estimate of the number of “drilled but uncompleted wells” in the U.S. The so-called “DUCs” are often pointed to as a ready supply of new production that may come online as soon as oil and gas prices start to rise and would quickly throw cold water on any price rally.
In a recent note to clients, Raymond James showed that many of the DUCs are several years old, and they postulated that DUCs older than two years would never be completed. By removing that set of wells from the DUC count, the remaining inventory is reduced, and of course, the impact they would have on prices (if they were completed) would be smaller.
Historical DUCs By US Region
Source: U.S. Energy Information Administration (EIA)
There are several other reasons DUC counts likely overstate the number of wells that can be placed on production, however, particularly in Texas.
- Poor Economics — Generally speaking, completing an already drilled well is one of the most profitable investments an operator can make. Many wells that aren’t completed are likely to have encountered poor reservoir conditions or have mechanical problems that make completion a poor economic decision.
- Lost Leases — Many DUCs are the only wellbores on their lease and the presence of a non-producing wellbore is typically insufficient to hold a lease past its primary term. At the very least, there’s significant uncertainty about whether an operator retains the right to produce in such circumstances, and it may be necessary to re-lease the acreage. The additional leasing cost would reduce the economics of the completion investment.
- “Unhatched” DUCs — DUCs are defined as wells that were spud, but never completed, according to state regulatory records. In some cases, operators drill the top sections of wells with the intention of returning to the location and drilling the rest of the vertical and horizontal sections. These wells are a long way from being fully drilled and shouldn’t count as DUCs
- Already Completed — This can be a particular problem with oil wells in Texas. Because oil production is reported on a lease basis, it’s not immediately clear when a new well has been placed on production by reviewing volume information. Completion reports are frequently filed months after a well is placed on production and they’re occasionally overlooked in public reporting systems.
It would be a great benefit if the EIA would publish a list of wells (by API number) that make up their DUC counts. This would allow users of the data to place them on a map to consider the quality of the acreage and other issues to help them decide if they’re likely to be completed. It would also allow for corrections to the inventory. Until then, however, use the DUC counts with caution.