APRIL 23, 2015
Think the U.S. is awash in crude now? Thank the fracklog
that it’s not worse.
Drillers in oil and gas fields from Texas to Pennsylvania
have yet to turn on the spigots at 4,731 wells they’ve drilled, keeping 322,000
barrels a day underground, a Bloomberg Intelligence analysis shows. That’s
almost as much as OPEC member Libya has been pumping this year.
The number of wells waiting to be hydraulically fractured,
known as the fracklog, has tripled in the past year as companies delay work in
order to avoid pumping more oil while prices are low. It’s kept crude off the
market with storage tanks the fullest since 1930. The fracklog may slow a
recovery as firms quickly finish wells at the first sign of higher prices.
“Once service costs
come down and drillers begin to work through their higher-than-normal backlog,
the market should start to price in that supply coming online,” Andrew
Cosgrove, an energy analyst for Bloomberg Intelligence in Princeton, New
Jersey, said by phone. “It may act as a cap on prices.”
Futures for U.S. benchmark West Texas Intermediate oil
tumbled by more than $50 a barrel in second half of last year amid a worldwide
glut of crude. They rose $1.99 to $58.15 a barrel at 1:11 p.m. on the New York
Mercantile Exchange.
Growing Fracklog
Oil production in the lower 48 states would rise 322,000
barrels a day to an average 7.485 million in the fourth quarter of 2016 if
drillers start shrinking their fracklogs by 125 wells a month in October,
Bloomberg Intelligence models show. The forecast assumes horizontal oil rigs
fall another 10 percent through the third quarter and prices are unchanged.
A second scenario, in which crude prices rebound to $60 to
$65 a barrel for an extended period and drillers put rigs back to work,
increases supply by 500,000 barrels a day to 7.67 million.
The U.S. fracklog has ballooned as drillers wait for prices
to recover, with oil wells making up more than 80 percent of the total.
The Permian Basin, which covers parts of Texas and New
Mexico, had the biggest collection of unfracked wells as of February, with
1,540 waiting to be completed. The count totaled 1,250 in Texas’s Eagle Ford
formation and 632 in North Dakota’s Bakken shale.
Last week, Raoul LeBlanc, an oil analyst with Englewood,
Colorado-based consultant IHS Inc., pegged the U.S. fracklog at around 3,000
wells. Halliburton Co., the world’s second-biggest provider of oilfield
services, estimated there are about 4,000 uncompleted wells, citing “third
party estimates.”
Fringe Counties
Fracklogs are growing faster in the fringe areas of play
relative to the cores where the most productive wells are, according to the
Bloomberg Intelligence analysis. In the Eagle Ford, for example, counties at
the edge of the play like Lee and Lavaca saw companies go from completing more
than 60 percent of their wells in November to less than 20 percent in February.
Large independent producers such as ConocoPhillips, Occidental
Petroleum Corp., Marathon Oil Corp., Hess Corp. and EOG Resources Inc. hold a
significant portion of the backlog of drilled but uncompleted wells.
Those companies are already seeing more incentive to start
eating into their backlog as crude prices have risen by a third since
mid-March. After-tax returns would be 5 percent to 10 percent higher than they
were just two months ago when oil was at $45, Cosgrove said.
ConocoPhillips Chief Executive Officer Ryan Lance said at
the IHS CERAWeek Energy conference in Houston on Monday that increased well
completions may exacerbate the supply glut, depending on whether oil demand
rises.
“Those who are drilling and deferring completions --
obviously if they get a price signal that the commodity price is coming back a
little bit you’ll see more supply come on,” he said.
Source: Bloomberg.com