Few drilled but uncompleted wells and limited natural gas takeaway capacity may limit crude oil production growth
According to our Drilling Productivity Report (DPR), the number of wells completed on a monthly basis has outpaced the number of wells drilled since July 2020, resulting in fewer drilled but uncompleted (DUC) wells in the United States. Although the number of active oil-directed rigs, which drill new oil wells, was increasing earlier this year, the rig count has remained relatively flat since July. The declining number of DUCs has coincided with high oil prices and increasing U.S. oil production (Figure 1). Because of the lag between well drilling and completion, the reduction in DUCs may limit increases in future crude oil production growth without more drilling. Furthermore, in the Permian region, associated natural gas is produced along with oil, and limited natural gas pipeline takeaway capacity may also limit crude oil production growth.
The two main stages in bringing a horizontally drilled, hydraulically fractured well online are drilling and completion. The drilling phase involves dispatching a drilling rig and crew, who then drill one or more wells on a pad site. The completion phase is typically performed by a separate crew, who then begin casing, cementing, perforating, and hydraulically fracturing the well for production. In general, the time between the drilling and completion stages is several months, contributing to DUC inventories in each production region.
Since mid-2020, the number of new wells drilled in the United States and the number of wells completed have both increased. However, from July 2020 through September 2022 (the latest month for which data are available), more wells have been completed than new wells drilled, and the number of DUCs has fallen. The total number of DUCs in the United States fell to 4,333 as of September 2022, the fewest since at least December 2013, when we started estimating the number of DUCs.
Historically, high or rising crude oil prices have encouraged well completions and crude oil production as well as increased drilling. In mid-2020, however, U.S. crude oil production began to grow and the number of DUCs fell, indicating that producers were completing DUCs at a faster rate than they were drilling new wells. The significant decrease in the number of DUCs is a break from previous trends and may reflects producers’ caution about increasing capital expenditures needed to drill new wells after the disruption to the petroleum industry by the COVID-19 pandemic.
As of October 14, 2022, Baker Hughes reported 610 active oil rigs, which reflects a significant increase from 172 rigs on August 14, 2020. However, the rig count since July has been relatively flat and has been historically low compared with other periods when front-month crude oil futures prices were near similar levels or even lower (Figure 2). Increased drilling typically lags four to six months behind a price increase. If drilling activity doesn’t increase, well completions and production may be limited as the number of DUCs fall.
Of the seven major oil and natural gas producing regions in the United States covered in our DPR, the Permian region accounts for around 60% of crude oil production. From January through September 2022, 3,904 wells were completed in the Permian region. During the same period, we estimate that 3,533 new wells were drilled in the Permian region. Because completions outpaced new wells drilled, the number of DUCs in the Permian region decreased (Figure 3). From July 2020 to September 2022, the number of DUCs in the Permian region fell from 3,590 to 1,103. The limited number of DUCs and constrained natural gas takeaway capacity could slow activity in the Permian region.
Because most natural gas production in the Permian region is associated natural gas production—that is, produced along with and as a result of crude oil production—the constraints developing in natural gas takeaway capacity could also begin to limit growth in Permian crude oil production. Natural gas prices in the Permian region have declined compared with benchmark Henry Hub prices in Louisiana (Figure 4). The widening price spread between natural gas priced at the Waha Hub in West Texas and Henry Hub indicates increased constraints on pipeline takeaway capacity in the Permian region, as producers have to sell their natural gas at a wider discount amid limited takeaway options, particularly during periods of pipeline maintenance. This widening price spread occurred in the Permian region for both crude oil and natural gas in 2018 before more takeaway capacity was added. Unlike 2018, crude oil pipeline takeaway capacity in the region is currently sufficient to support the growth in Permian crude oil production; however, natural gas capacity faces limits, which may limit crude oil production growth.
Recent pipeline maintenance is likely causing further price differentials between Waha Hub and Henry Hub. Beginning on October 3, El Paso Natural Gas (EPNG) cut westbound flows of natural gas by more than 300 million cubic feet per day (MMcf/d) on the southern part of its system due to maintenance that it expects to continue until October 21. On October 4, EPNG also announced a 300 MMcf/d cut in westbound flows along the northern part of its system due to a force majeure event. Maintenance will likely last until October 24.
Although crude oil producers could flare excess natural gas, the Texas Railroad Commission regulates the amount of flaring allowed in the portion of the Permian region in Texas. As natural gas takeaway capacity approaches its limits in the Permian region, the Commission may grant flaring permits, which could alleviate oil production constraints. The number of flaring exceptions the Commission grants can vary year-to-year.
Our latest Natural Gas Pipeline Project Tracker indicates several new projects coming online over the next two years that will add natural gas takeaway capacity to the Permian region. Nonetheless, the emerging wide price spread between Waha Hub and Henry Hub indicates that the region is currently facing capacity constraints. As a result, the amount of crude oil and natural gas produced from the Permian region faces may be limited in the fourth quarter of 2022 and into 2023.