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Page added on December 26, 2015

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Hoping for a Price Surge, Oil Companies Keep Wells in Reserve

Production

The price of oil keeps dropping. But that didn’t stop a work crew from drilling a well recently on what was once a cornfield, carefully guiding the last sections of 13,000 feet of pipe spiraling into the hard Niobrara shale with a diamond-tipped bit.

Their well, one of hundreds drilled by Anadarko Petroleum in eastern Colorado’s Wattenberg field this year, could someday gush as many as 800 barrels of crude oil a day. But Anadarko is not planning to produce a drop of crude from the well for at least another year because the price of oil is now so pitifully low.

The well here is just one of more than 4,000 drilled oil and natural gas wells across the country producing nothing, but ready to be tapped quickly.

Many constitute a new form of underground storage, a new well inventory strategy for an industry in distress, one that has been forced to lay off tens of thousands of workers, decommission most of its rigs and write down assets.

For individual companies like Anadarko, the deferred completions — known in the oil business as D.U.C.s (an acronym for drilled but uncomplete) — are a bet on higher oil prices than the current level of about $38 a barrel, which is about 60 percent lower than in summer 2014. They are viewed by oil executives as a way to hoard cash as service costs plummet and are a flexible lever to rapidly increase production whenever oil rises again.

“We are adapting to market conditions,” Moe Felman, the Anadarko Rockies drilling operations manager, said as he watched workers pump drilling fluids and screw pipes together within sight of the snowcapped Rocky Mountains. “We are focused on what we can do to be ready to accelerate when the market returns.”

But the incomplete wells are also another reason many analysts say a recovery in the oil price is nowhere in sight. Together the well backlog could produce as many as 500,000 barrels of oil a day, about the same amount of oil that Iran is expected to add to the glutted global market after it complies with the recent nuclear deal by the end of next year.

Some analysts say oil companies like Anadarko, EOG Resources and Continental Resources may collectively risk suffocating the very price revival they anticipate by releasing abundant new supplies once prices inch up. Others say the eventual impact would be small and short-lived, but since the industry has never used this strategy before, no one can be sure.

“If prices start to creep up in the U.S., a lot of production could come on line in a quick manner that could put pressure on the supply-demand balance in the market,” said Christopher Kopczynski, a senior oil analyst at Wood Mackenzie, a consultant firm.

The new strategy is made possible by the shale revolution in Texas, North Dakota and Colorado, which nearly doubled national oil production in six years before the price of oil plunged and production began to wane.

Before a shale well can be productive it must first be drilled, then completed with hydraulic fracturing, known as fracking, the process of blasting through shale rock with water, sand and chemicals to release oil or gas. With rigs drilling multiple shale wells from a single production pad, operators have multiplied the efficiency of their rig drilling. And since shale wells flow the most during the first year or two of production, waiting for a higher price can maximize profits, executives say.

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“It’s dry powder,” said Raoul LeBlanc, an oil expert at IHS, a consultant firm. “It’s a form of spare capacity.”

Today there are 1,300 horizontal wells — typically the most productive drilled in shale fields that will offer the biggest output their first year — that were drilled at least six months ago and remain incomplete in the nation’s major shale oil fields. That is more than three times last year’s average, according to Rystad Energy, a Norwegian consultant firm that tracks world oil fields.

Anadarko, EOG Resources and several other major producers began intentionally warehousing wells and effectively storing oil underground after the price of oil collapsed in late 2014 and early this year in the hope of a quick rebound.

“The reason we have deferred the completions is to really substantially increase the rate of return,” Bill Thomas, EOG’s chairman and chief executive, acknowledged in an investment conference call. “We want to make sure that we allow prices to firm up.”

The price did not rebound, but the economics of drilling and completing wells have changed. As the oil price dropped and drilling crews were let go, the cost of drilling wells fell as much as 30 percent. At the same time, those companies that canceled rig contracts were forced to pay high severance costs.

On the completion side, fracking crews are easier to come by and their contracts tend to be more fluid. Now those completion costs have also come down — meaning that the uncompleted wells will eventually be brought on line at a lower cost, executives say.
Photo
Drill crews work at an Anadarko shale well. The oil company, along with other major producers, began warehousing wells and effectively storing oil underground after the price of oil collapsed in late 2014. Credit Nick Cote for The New York Times

Even if oil prices do not rise substantially, some companies say they will work through much of their warehoused wells in 2016 because with the drilling costs already paid, it will be at least 40 percent cheaper to complete old wells than drill new ones. That should enable them to keep their production flat or rising even as they further cut their capital expenditures.

But Anadarko remains cautious for 2016.

“Should the commodity price change, we can ramp up,” Darrell E. Hollek, Anadarko’s executive vice president for onshore exploration and production, said in an interview. “We may find that we complete a lot of these intentionally drilled and uncompleted wells but we may find we only want to do half of them. But from a capital standpoint, it truly is a lever for us.”

Anadarko lost $2.2 billion last quarter and the company’s stock price has been cut in half. Its executives have devised a strategy to slow investment into new production in its onshore shale wells, in order to devote more cash to developing high-stakes projects in the deep water Gulf of Mexico and abroad. The strategy should lift its revenue in several years when most experts think the oil price will be higher.

Anadarko already has 6,800 wells producing oil and natural gas in the Wattenberg field and has identified 4,000 additional drilling locations. It is drilling 380 wells here this year, 11 more than in 2014, with fewer rigs drilling more efficiently designed wells. But while all the 2014 wells were completed, it plans to defer 130 completions of this year’s new wells for as much as a year or more.

The company is following a similar strategy in its Texas fields, making it the oil company with the most uncompleted wells after EOG Resources. Wall Street analysts have generally agreed with the strategy.

“Relative to others Anadarko is managing through the cycle effectively,” said Mark Hanson, a Morningstar analyst. “These guys are looking down the road a bit further.”

New York Times  


20 Comments on "Hoping for a Price Surge, Oil Companies Keep Wells in Reserve"

  1. penury on Sat, 26th Dec 2015 9:35 am 

    Perhaps it is not a cycle but the end of a cycle.

  2. buddavis on Sat, 26th Dec 2015 10:09 am 

    This is just stupid. You drill a well when the economics make sense and you complete it after you drill it (if worth completing). To run casing and then wait till prices go up is a waste of money. But I guess that is what these independents are left to doing. This article screams desperation more than anything else, in my opinion. Things are worse than I thought.

    If I was an investor in Anadarko, I would be nervous that an analyst who wouldn’t know the difference between a drilling rig and pumping unit agreed with this strategy.

  3. twocats on Sat, 26th Dec 2015 10:36 am 

    companies like this have overhead and ongoing expenditures, salaried employees and insurance costs (which do eventually change as gross revenues change, but still), they have to have some activity to keep the lights on. Any major company has a minimum revenue requirement to survive. As their current assets deplete below that minimum level they’ll need to bring on more wells.

  4. shortonoil on Sat, 26th Dec 2015 11:00 am 

    Ridiculous; most of these outfits are drilling to hold leases that they already paid for before the price fell. If they don’t do some drilling they have to write those investments off next quarter. Storing oil in the ground is some kind of a new new excuse for going broke slowly, rather than rapidly. These companies know that the price of oil is not going back up enough to save them, but if investors desert them they are sunk immediately.

    http://www.thehillsgroup.org/depletion2_022.htm

    It is all about buying a little bit of time. Shale is now like a terminally ill patient taking a drug that will eventually kill them anyway.

  5. buddavis on Sat, 26th Dec 2015 11:07 am 

    Short. After the primary term, the leases are held by production or continuous operations. Continuous operations will hold them for a very limited time at best. 90-120 days. This strategy maintains leases in a very limited way. Assuming these are standard leases, this has nothing to do with holding leases.

  6. coffeeguyzz on Sat, 26th Dec 2015 12:30 pm 

    For folks interested in a more granular analysis of this topic, the December 23, 2015 piece from oilandgas360dotcom titled “Why Keep Drilling”? explores 7 main Appalachian based outfits and why they still drill.

    Pretty good overview/intro to the Marcellus, to boot.

  7. rockman on Sat, 26th Dec 2015 12:48 pm 

    And one other reason to keep drilling not not often mentioned: to make a profit. lol. The Rockman will drill 4 17,000′ Smackover wells in Mississippi in 2016. Granted not as many viable conventional prospects today as when we had high oil prices but there is some inventory left to drill.

  8. Truth Has A Liberal Bias on Sat, 26th Dec 2015 2:01 pm 

    Lol the oil has been in the ground for eons so they drill a well but don’t produce from it and call it “a new kind of underground storage”. Lmfao. Anything to pump shitty bonds lol

  9. shortonoil on Sat, 26th Dec 2015 2:18 pm 

    “Short. After the primary term, the leases are held by production or continuous operations. Continuous operations will hold them for a very limited time at best. 90-120 days.”

    Who does the depletion allowance go to; the owner of the mineral rights, or the leaser? I think you are confusing public leases, with private.

  10. MaxData21000 on Sat, 26th Dec 2015 2:33 pm 

    Get Yourself an BMW i3 – Special Lease Offer – And you’ll never give a damn about the price of gas again.
    -Cut your personal pollution
    -Give American Energy Independence with American Jobs.
    -Stop Funding the Most Polluting Fuel on Earth; Canadian Tar Sand garbage.
    -Stop Funding the Saudi’s who Funded the 9/11 Terrorists.

    http://www.bmwusa.com/bmw/special-offers

  11. buddavis on Sat, 26th Dec 2015 2:36 pm 

    No confusion short. Depletion allowance is tied to cash generated off sales of production. It has nothing to do with uncompleted wells. Although they can write off the IDC associated with those uncompleted wells.

    Without reading the specific language of the leases, generally speaking, uncompleted wells do not maintain a lease beyond the primary term. Drilling a well for the sole purpose of maintaining a lease and not completing that well is crazy. A complete waste of money.

  12. nony on Sat, 26th Dec 2015 4:36 pm 

    I think these ducs are because of rigs under contract. Expect less of this as rig count drops. There is no good financial reason to drill and not complete a well if the rig can be cancelled sans penalty.

  13. peakyeast on Sat, 26th Dec 2015 4:52 pm 

    MinData21000: I can drive the next 460 years at current diesel consumption for the price difference btw my car and the cheapest i3 – and thats excluding the more expensive insurance for an expensive car.

    So that sounds like a real stooopid thing to do to me.

  14. shortonoil on Sat, 26th Dec 2015 6:38 pm 

    “Drilling a well for the sole purpose of maintaining a lease and not completing that well is crazy. A complete waste of money.”

    It certainly is! These guys are hoping that the price goes up enough before their leases expire to make completion of these wells economical. At $37 it sure isn’t at present. They are probably also locked into drilling contracts that are going to cost them heavily to get out of, if they don’t drill. If it takes $50 to have a positive cash flow on these wells, they are taking one long shot. The way things are looking at present it is possible that we will never see $50 again:

    http://www.thehillsgroup.org/depletion2_022.htm

    Personally, I hope they make it, but I’m sure glad its not my money on the table!

  15. coffeeguyzz on Sat, 26th Dec 2015 6:45 pm 

    Mr. Short, Mr. Buddavis

    I was just reading up a bit on Anadarko due to this article.
    Apparently, almost all Anadarko’s acreage in the Wattenberg field is subject to the terms of the Land Grant given by the US government to the Union Pacific railroad 150 years ago.
    When Anadarko bought Union Pacific Resources in 2000, the rights transferred over.
    I do not know how that affects royalties/leasing particulars, but some operators in the Appalachian Basin have similar arrangements and describe them in highly favorable terms.

    Rockman, good luck with the new wells.

  16. buddavis on Sat, 26th Dec 2015 7:50 pm 

    I would be curious to see what percentage of the drilled but uncompleted wells are unit wells or alternate unit wells. That will give some insight as to why they are drilling what they are drilling.

  17. Jeff on Sat, 26th Dec 2015 7:57 pm 

    Rockman; Are you a MS Operator? I too have some 2016 projects in MS…

  18. Jeff on Sat, 26th Dec 2015 8:01 pm 

    Note: Leases in Resource Plays like the Niobara, or Haynesville, etc. often include clauses that enable the lease to be held once Production Casing is set anywhere within the drilling unit… I would wager that Anadarko is in fact holding leases via the strategy detailed in the report above…

  19. Jeff on Sat, 26th Dec 2015 8:25 pm 

    This statement is highly misleading:

    “The well here is just one of more than 4,000 drilled oil and natural gas wells across the country producing nothing, but ready to be tapped quickly.”

  20. Kenz300 on Sun, 27th Dec 2015 9:20 am 

    Boom….bust……..

    Oil Bankruptcies Reach Highest Quarterly Level Since Recession – Bloomberg Business

    http://www.bloomberg.com/news/articles/2015-12-24/oil-bankruptcies-reach-highest-quarterly-level-since-recession

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