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Hoping for a price surge, oil companies keep wells in reserve

 
Drill crews work at a shale oil well owned by Anadarko Petroleum in Berthoud, Colo. Though the wells are ready to go, Anadarko doesn’t plan to produce any crude from the area for at least another year because the price of oil is now so low.
Drill crews work at a shale oil well owned by Anadarko Petroleum in Berthoud, Colo. Though the wells are ready to go, Anadarko doesn’t plan to produce any crude from the area for at least another year because the price of oil is now so low.
Published Dec. 29, 2015

BERTHOUD, Colo. — 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.

The 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 a year because the price of oil is now so 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 DUCs, meaning "drilled but uncompleted" — 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 snow-capped 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.

Flawed strategy?

Some analysts say oil companies like Anadarko, EOG Resources and Continental Resources may collectively risk suffocating the 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 hasn't 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 online in a quick manner that could put pressure on the supply-demand balance in the market," said Christopher Kopczynski, a senior oil analyst at consultant firm Wood Mackenzie.

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.

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 that 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 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.

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.