Deferred Oil Well Completions Keeping Supply Out of U.S. Market

Companies delaying the completion of wells that have been drilled are keeping 373,000 barrels a day of oil out of the market, energy intelligence firm Genscape Inc. said.

Six companies announced plans to defer completing a total of 845 drilled wells this year, Genscape said in a report Wednesday.

Some oil producers have responded to the 50 percent drop in crude prices since June by delaying the hydraulic fracturing of wells. This backlog of unfracked wells, known as a fracklog, can then be completed and brought online when prices have rebounded.

“The crude oil contango market in the U.S. has created a massive incentive to store oil, and while traditional storage hubs reach record high levels, operators look to their own wells as an avenue to store until commodity market conditions improve,” Randall Collum, managing director of supply side analytics at Louisville, Kentucky-based Genscape, said in the report. “Deferring the completion of wells makes economic sense by allowing capital conservation while banking on the forward curve.”

West Texas Intermediate crude for May delivery settled at $50.42 a barrel Wednesday on the New York Mercantile Exchange. The May 2016 contract was more than $7 higher, at $57.74.

Genscape analyzed the fracklogs of Cabot Oil & Gas Corp., Chesapeake Energy Corp., EOG Resources Inc., SM Energy Co., Apache Corp., and Anadarko Petroleum Corp. In addition to the oil supply, the delays are keeping 528 MMcfd of natural gas off the market.

Apache said in an e-mailed statement April 1 that it was no longer deferring completions and, with service costs falling, “all wells we are drilling today, we are completing.”

There are about 3,000 drilled but uncompleted wells across the U.S., James West, senior managing director at Evercore ISI in New York, said in a March 30 report.

Hess Corp., the biggest spender in North Dakota’s Bakken region, is doing the exact opposite of some of its rivals. The company is working this year to shrink its fracklog to 30 wells, down from the 60 that it had going into 2015, Chief Operating Officer Gregory Hill said at a Hart Energy oil conference in Denver April 1.

“I hear the guys that are saying they’re drilling these wells and not completing them, and that makes no sense,” Hill said. “The one thing I know in this industry is we can’t even predict long-term pricing. How are we going to predict short-term pricing? While you wait to complete that well, the return is steadily declining. You’re getting no revenue and you got all this sunk capital in the drilling part.”

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