A NEW THREAT EMERGES AS OIL PRICES KEEP ERODING
Oil prices have fallen 4 straight weeks as U.S. drillers add more rigs.
There’s yet another concern growing as oil prices continue to erode: a record U.S. “fracklog.”
There were 5,946 drilled-but-uncompleted wells in the nation’s oilfields at the end of May, the most in at least three years, according to estimates by the U.S. Energy Information Administration. In the last month alone, explorers drilled 125 more wells in the Permian Basin than they would open. That represents about 96,000 barrels a day of output hovering over the market.
If OPEC thought shale was a thorn in its side before, just wait until U.S. explorers turn their spigots on full blast. Wells waiting to be fracked and flowing are an overhang that could mean a burst of new supply in the second half of the year and into 2018, according to Luke Lemoine an analyst at Capital One Securities Inc. in New Orleans.
“Even though rig counts have gone through the roof in the Permian, we really haven’t even felt the full production implications,” said William Foiles, an analyst at Bloomberg Intelligence in New York. “We’ve only felt 70 percent of the rise in drilling.”
Explorers generally start the drilling process with contractors such as Helmerich & Payne Inc. and Nabors Industries Ltd., using rigs to dig a vertical shaft that can drop 5,000 feet or more. They then build in a bend to extend the shaft sideways into a promising shale layer, a process that overall can take weeks.
Other service companies such as Schlumberger Ltd. and Halliburton Co. complete the process, using high-pressure machines that push in sand, water and chemicals to free up oil and natural gas that’s pumped to the surface. Until that final step occurs, the well is known as a DUC, a drilled-but-un-
completed asset, part of the so-called fracklog.
Oil prices have declined for four straight weeks as U.S. drillers continue to add rigs, blunting OPECled efforts to rebalance an oversupplied market. Last week was the 22nd in a row in which U.S. explorers boosted their rig count, the longest stretch of uninterrupted growth in more than three decades.
Explorers can afford to keep drilling with oil under $50, once considered a key price point for expansion, partly because of hedging, price insurance bought by companies when oil neared $55 at the end of last year.
Explorers have also cut the cost of drilling using new systems that make the process more efficient. In some shale plays, like the Permian, that’s dropped the break-even price to about $35. That new efficiency, though, has overwhelmed fracking firms.
Rising global oil stockpiles plunged the industry into its worst downturn in a generation three years ago, with prices falling as low as $26.05 on Feb. 11, 2016. Service companies were among the hardest hit, cutting more than 333,000 jobs globally and sidelining much of their machinery. Now, they’ve been caught short by the explosiveness of the U.S. shale rebirth.
“The pace at which operators can exploit this resource will depend on how quickly the services sector can bring back completion capacity and crews,” said Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions in Houston, in a telephone interview.
Right now, that’s not expected until the second half of the year, when as much as another 2 million horsepower in equipment is made available, according to Capital One’s Lemoine.
In addition to fixing up gear that had been parked on the sidelines, fracking companies are methodically hiring and training workers.
As long as crude sticks above $40, shale drillers will continue boring new wells, adding to the overhang, according to Charles Cherington, co-founder of Argus Energy Managers, an alliance of private equity firms that invest in the oil explorers and suppliers.
On May 25, the Organization of Petroleum Exporting Countries and partners including Russia agreed to extend the supply deal they forged last year to limit output as a way to bleed crude stockpiles and rebalance the market.
The rising U.S. fracklog could threaten that push, Cherington said. Without deeper cuts, prices could fall low enough to crash the industry again, he said.
“This is still a very fragile industry,” Cherington said. “There will be casualties.”
The glut isn’t expected to balance out this year as earlier forecast, partly because the shale boom continues to crank out more crude.
And if the price of oil continues to fall, dropping to $40 or below, explorers can now shift their spending to fracking crews from drilling rigs to make their money off that large untapped supply, Capital One’s Lemoine said.