- Drillers have focused on completing DUCs during the last couple of months
- Completion of DUCs has largely helped the record cash flows of the shale patch this year
- Shale drillers will have to boost capex to sustain drilling activity in 2022
The U.S. shale patch has returned to a moderate increase in drilling activity, having largely depleted the inventory of drilled by uncompleted (DUC) wells at the fastest clip in history so far this year.
Completion of already drilled wells costs much less than drilling a new well, so U.S. operators have resorted to the backlog of DUCs since the third quarter of last year, as they largely promised that emerging from the pandemic-driven bust, they would keep spending discipline and look to reward shareholders first with the growing cash flows.
Going through the DUC inventory over the past few months—instead of spending more money on drilling—has paid off. U.S. shale producers raked in record cash flows for the third quarter amid rallying oil and gas prices. At the same time, the rate of reinvestment among shale-focused firms, excluding the majors, hit an all-time low in Q3 and is set to further decline this quarter, Rystad Energy said last month.
Completion of DUCs has largely helped the record cash flows of the shale patch this year. But the record rate at which the number of those wells has fallen has already raised the question of how long producers could continue to rely on DUCs to sustain production levels and receive cash while keeping spending flat, Loren Steffy, University of Houston Energy Scholar, writes for Forbes.
Not for too long, it seems, according to analysts.
The shale patch is also aware of that and it has already shown signs of higher drilling activity.
During the first half of 2021, shale producers have been mostly depleting their DUC inventory wells, and the number of 'live' DUCs slumped to 2,381 wells in June 2021—the lowest level since 2013, a Rystad Energy analysis showed in August. The entire DUC count also includes what Rystad Energy dubs 'dead' DUCs, or wells drilled more than 24 months earlier, which remain uncompleted and are unlikely to be completed.
Drilling activity has been rising in recent months, with the number of oil rigs increasing by 67 between early September and the middle of November.
At the start of the fourth quarter, continuous rig count additions have already stabilized the DUC inventory, and a modest build-up was visible already in September, according to Rystad Energy.
"This means that we can finally announce the end of the DUC-driven activity phase that supported the higher frac activity level seen since the third quarter of last year," Rystad Energy said in October.
Shale producers have raised—cautiously and within cash flow—drilling activity in recent months, by adding more rigs and majors planning a moderate increase in capital spending. Some large producers, including Exxon (NYSE:XOM), Chevron (NYSE:CVX), BP (NYSE:BP), and ConocoPhillips (NYSE:COP), have already signaled they could add more rigs in their Permian operations as soon as this quarter.
Yet, capital discipline is still key for the shale patch, where the pace of growth is set to be slower than pre-pandemic rates due to capital discipline, labor shortages, and surging costs.
Annual U.S. crude oil production will average 11.1 million bpd in 2021, increasing to 11.9 million bpd in 2022, largely as a result of onshore operators increasing rig counts, which will offset production decline rates, the EIA said in its November Short-Term Energy Outlook (STEO).
"Despite the rapid improvement in fundamentals, most shale operators remained quiet about their 2022 guidance, instead sticking to mantras of flat to single-digit growth in the coming year while putting the final touches on their 2022 plans, set to be released early next year," Rystad Energy said in November.
"Even with the lack of firm upward revisions for next year, record-high profits in the third quarter and expectations for moderate growth in 2022 are an impressive turnaround for the group," the research firm noted.
Dan Pickering, Chief Investment Officer of Pickering Energy Partners, commented in early November on the road ahead for U.S. shale:
"We remain convinced that US upstream management teams will stay true to their capital discipline pledges. It is simply too early for CEO's to pivot to higher production growth after more than a year of pledging reinvestment abstinence. Calls from US politicians for more supply should be politely ignored – that fox has raided the henhouse too many times."