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* Incomplete wells hits record in largest U.S. oilfield
* Oil still in the ground at over 1,700 Permian wells
* Firms race to drill to keep leases amid labor shortage
* Oil price rise could bring rapid surge from incomplete
By Devika Krishna Kumar
NEW YORK, March 24 U.S. shale producers are
drilling at the highest rate in 18 months but have left a record
number of wells unfinished in the largest oilfield in the
country – a sign that output may not rise as swiftly as drilling
activity would indicate.
Rising U.S. shale output has rattled OPEC's most influential
exporter Saudi Arabia and pushed oil prices to a near four-month
low on Wednesday. U.S. production gains are frustrating
Saudi-led attempts by the world's top oil exporters to cut
supply, drain record-high inventories and lift prices.
Investors watch data on the number of rigs deployed in North
American oil and gas fields as a leading indicator for output.
But the rising rig count and frenetic drilling activity in the
Permian Basin in West Texas is not all about pumping oil.
During the 2014-2016 downturn in global oil prices, the
number of wells left incomplete grew as companies shut down
rigs, laid off workers and retreated from the fields. When
prices picked up, operators were expected to pump the oil from
those incomplete wells before spending money on drilling new
Instead, the number of incomplete wells has risen. A record
1,764 wells were left unfinished in the Permian in February,
according to U.S. government data going back to December 2013.
In February alone, 395 wells were drilled and only 300
completed. That was the highest drilling rate in the Permian in
The surprise surge in unfinished wells indicates that
investors, traders and oil market players may need to
reinterpret rig count data.
"You would now be looking at the number of wells drilled and
the uncompleted wells and not necessarily the rig count," said
Bruce Bullock, director of the Maguire Energy Institute at
Southern Methodist University in Dallas.
Reuters interviews with more than a dozen well completion
service providers, oil and gas lawyers and industry experts show
that some operators are drilling because their leases require
them to do so within a specified time limit to keep their
leases. But they may not be required to actually pump the oil
immediately after they have drilled the hole.
See a graphic on the number of incomplete wells here: tmsnrt.rs/2mYJlgN
To complete a well, shale producers stuff the hole with
sand, water and chemicals at high pressure until the rock
fractures and releases the oil contained in its pores.
There is typically a lag of a few months between drilling
and completion in government data, so some of the increase in
unfinished wells can be explained by rising activity.
Some leases do require firms to produce a minimum volume of
oil. On those leases, many firms will frack one well and leave
others incomplete. That allows them to meet their contracts with
land holders but gives them flexibility to come back and pump
the oil later.
LEASE VALUES JUMP
The value of land in the Permian has rocketed as oil prices
recovered to around $50 a barrel, so oil firms are now
scrambling to do the required drilling to keep leases they had
"During the period where we had the downturn in price, there
were a lot of leases that were in danger of being lost ... they
had to drill a well to maintain it," said Michael Stoltz, an
attorney who represents energy firms in Texas for Stubbeman,
McRae, Sealy, Laughlin & Browder Inc.
A new lease could cost the operator as much as five times
more than a few years ago, said Joe Dancy, an oil and gas
lawyer, who helps negotiations on such deals. Drilling costs are
also on the rise, adding to the rush by producers trying to stay
ahead of price inflation.
Fracking is more expensive than drilling and is time
consuming. As much as 70 percent of well completion costs are
tied to fracking, while 30 percent is for drilling, experts say.
Fracking crews are in short supply, which is another reason
that oil firms have delayed completion.
As activity has picked up in the Permian, the labor market
has tightened. Many oil workers found jobs elsewhere during the
downturn, so rebuilding the workforce is taking time.
"There were a number of completions that were originally
scheduled in first quarter and you've seen those slide to Q2 and
that's really being driven by ... access to service crews and
things like that," said Tom Stoelk, the CFO and interim CEO of
Northern Oil & Gas Inc, a producer focused on the
Williston Basin in North Dakota and Montana.
The number of incomplete wells could complicate OPEC's
attempt to balance markets, as they could be completed
relatively quickly if the oil price rises.
Saudi Arabia is targeting a $60 per barrel price, and that
could trigger those well completions and bring a new wave of
supply to the market.
If all the incomplete wells in the Permian pump
instantaneously, output from the field could jump as much as
300,000 barrels per day (bpd), according to consultancy Wood
In February, the field accounted for about 2.1 million bpd,
or about 23 percent of total U.S. crude output of about 9
million bpd, according to U.S. government data.
LOCKING IN LEASES AND COSTS
Landowners lease their land to energy companies for an
upfront lump sum or signing bonus and subsequent royalty
A standard lease lasts three years, with an option to extend
for another two years, said sources who work with companies on
Leases vary greatly. Some require drilling but no
production, others require production, and some require a well
every six months. None of them require firms to complete all the
wells they drill.
Continental Resources Inc, which has about 185 such
drilled but uncompleted wells (DUCs) in the Bakken in North
Dakota, says that innovation during the downturn meant it could
now complete those wells more cost efficiently.
"We're glad we saved all those wells," CEO Harold Hamm said
at an industry conference this month.
(Additional reporting by Ernest Scheyder in Houston and Swetha
Gopinath in Bengaluru; Editing by Simon Webb and Paul Thomasch)