DUCs Can’t Sustain US Shale

ESAI Energy’s recent North America Watch reports that while some rigs are starting to return to the shale patch, there will not be enough new drilling to offset decline in the coming months. US shale production will exit 2020 down by over 1.5 million b/d from December of 2019. ESAI Energy says a draw on the recent build-up of drilled-but-uncompleted wells (DUCs) has begun and will likely accelerate going into the new year.  But the analysis shows that a draw on DUCs can only provide a limited and short-term cushion, preventing a larger drop in production until the pace of drilling picks up speed. In its outlook for the coming year, ESAI projects drilling activity to accelerate by mid-2021 as crude demand recovers, and total US shale will exit 2021 about 300,000 b/d higher than where it starts.

After shedding almost 500 oil rigs between April and June, rigs are starting to return, increasing by around 14 percent since July. But with just over 200 oil rigs currently active nationwide, the number remains far below where it started the year. ESAI expects the pace of rig additions will remain subdued through the end of 2020 as producers remain focused on keeping spending levels in check, especially as oil prices have continued to hover near $40 per barrel.  In its report, ESAI points out that in 2019, well completions for the four major shale basins combined averaged about 950 per month. The company estimates that roughly 475 - 500 wells per month need to be completed to offset decline and keep production at the current level of 7.2 million b/d in these four basins. Under this scenario, available DUCs would be exhausted by mid-2021, and decline would quickly accelerate without new drilling.

Elisabeth Murphy, ESAI’s upstream analyst for North America, explains that “oil prices stuck near $40 makes only the best wells profitable. In the end, both drilling and completions would need to rise rather significantly to regain the loss in production we have seen over the past 7 months.”

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