As oil trades at about $50 a barrel, everyone in the US industry is looking at DUCs.
Wells that are are holes in rock waiting for the steel casing, connecting pipes and hydraulic fracturing needed to bring them into production.
From early in oil’s two-year downturn they have been seen as a readily available source of supply that will start producing as the market tightens.
In recent weeks there have been signs that is happening. Several shale producers — including , and — have started to complete some of their DUCs. Others, including , have said they can follow suit if oil stays near $50.
Some believe this “fracklog” of uncompleted wells could put a ceiling on , which have already rallied almost 80 per cent from their January lows. On Tuesday, West Texas Intermediate, the US oil benchmark, was down 0.9 per cent at $50.18.
Citigroup reckons DUCs could add up to 1m barrels per day to the market in the second half of the year, “putting the brakes on oil’s march higher” and delaying the rebalancing of the market.
“DUCs represent the low hanging fruit for US oil producers,” says Citi.
As crude prices fell, many companies drilled wells that they either could not afford to or did not want to complete. Often they had contracts with rig operators that meant they had to pay up whether or not the wells were drilled, and made a virtue out of necessity by arguing they were deliberately building up an inventory of DUCs to tap when prices rose.
Rystad Energy, the consultancy, estimates that about 90 per cent of all the oil DUCs in the US can be profitable with oil at $50. There have been signs in derivatives markets of increased hedging by producers, suggesting they are moving to lock in these prices and take the risk out of completing their wells.
But while wells are coming on stream and swelling US production, it is worth keeping the size of the DUCs in proportion.
No one knows exactly how many there are. Analysts make educated guesses based on state records and company statements, and estimates vary widely. Rystad thinks there are now about 3,900 in the US, down from 4,000 at the end of last year.
It expects about 6,000 drilled in the US this year, so those 3,900 DUCs would give a noticeable boost to production if they came on line quickly.
Wood Mackenzie, however, argues that just because a well looks like a DUC and fracks like a DUC, that is no reason to jump to conclusions.
Some delay between drilling and completing a well is inevitable, it points out: the fracking crews and other workers and equipment need to be brought to the site to do their jobs, and the logistics are never frictionless.
So Wood Mac counts only the wells that are left uncompleted for longer than three months as excess or “abnormal” DUCs, and it thinks there are about 1,300 of those.
Rystad agrees that there will always be some uncompleted wells, but reckons the number that have been deliberately delayed is quite a lot higher, at 2,000 to 2,400.
Both firms are pretty confident, though, that the number of excess DUCs is falling. Rystad expects the fracklog to drop by 100-150 per month through the end of the year, while Wood Mac expects a fall of about 120 per month.
And although their views on the numbers of DUCs are very different, their estimates of the impact on production are quite close: Wood Mac expects about 250,000 barrels per day from completed DUCs in December, while Rystad expects about 300,000 b/d. To put that into context, that would represent about 4-5 per cent of total onshore crude production from the “lower 48” states of the US.
While DUCs can slow the decline in US oil output that has been under way since April 2015, they cannot prevent it. For that to happen, the US oil industry will have to start drilling again and putting rigs back to work. The Baker Hughes count of rigs drilling onshore oil wells in the US has now risen for three weeks in succession, but is still only back to its level in April.
Uncompleted wells can delay the rebalancing of the global oil market, pushing it further back into 2017. The belief that they can carry a recovery in US oil production, however, looks like a dead duck.