The Fracklog Is Coming
Materials Risk | Apr 28, 2015 07:51
Could U.S. Oil production add an extra 1 million b/d by end 2015? Oil traders have perhaps understandably focused on the minutiae of weekly changes in rig activity, oil production and storage levels in their quest to understand how the imbalance in oil markets will be resolved.
However, the existence of a quasi underground storage, known as “fracklogs” creates an additional layer of uncertainty. Far from the pumping of this crude from U.S. shale wells being just an economic decision, oil production may rise (and rise sharply) due to a legal requirement too.
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The number of U.S. oil drilling rigs—a proxy for activity in the oil industry—has fallen by 56% fewer rigs since they peaked in October at 1,609 and have now declined for 20 consecutive weeks.
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Indeed, the slowdown in rig activity is starting to be felt. US crude production declined for the third time in the last two months to 9.34 million b/d but are still up by 12% over the past year.
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However, as much as 500,000 b/d of oil could be tapped in the US at short notice. According to Bloomberg at least 3,700 oil wells have been drilled and are now standing reading to be hydraulically fractured (plus around 1,000 gas wells) lying in wait for oil prices to rise.
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The Bloomberg analysis estimates that if WTI crude prices rise to $65 per barrel, oil producers will start to dip into this “fracklog”, adding as much oil as is currently produced by Libya by the end of 2016.
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However, U.S. output may be forced to rise later in 2015, even if prices don’t recover.
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Under Texas and North Dakota oil well abandonment laws , any well that remains inactive and unproductive for more than a year must be plugged. North Dakota, in addition to plugging, the well site must be reclaimed to its original landscape. The costs of reclaiming certain wells is actually higher than the NPV of the well, thus the companies may then start producing from these idled wells.
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The number of wells idled is estimated at 1,250 in Texas’s Eagle Ford formation and 632 in North Dakota’s Bakken shale. Given that the idled wells tend to be those thought to be less productive the boost to output may not be as great. However, even assuming each well produces around 500 b/d, at least initially, as much as 1 million b/d could be added over the course of 2015, even if oil prices don’t rise.
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Once oil producers in the U.S. decide to bring on one of these idled wells it can take anywhere from one to three months to hire contractors, set up their equipment and start fracturing the well. Oil service companies will have a birds eye view as to when this “fracklog” is coming.
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