Fracklog Threatens to Put a Lid on Oil Prices

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Fracklog Threatens to Put a Lid on Oil Prices

By Tim Maverick, Commodities Correspondent

The price of oil continues hovering near six-year lows.

Oil companies waiting for prices to rebound have turned to various storage methods for keeping oil “on ice” unless prices recover.

These methods included tactics such as storing oil in vast storage tanks onshore and in huge oil tankers offshore.

But, clever companies have found another place to keep the oil in storage . . .  underground in the rocks where the oil comes from.

Ever Heard of Fracklog?

You see, fracking, the method used to extract shale oil, is a two-step process.

The first step is to drill a horizontal tunnel through the layers of shale rock. The second step is the actual fracking – blasting the rocks with water, sand, and chemicals. After that, the oil is ready to flow and become a producing well.

But these days, many companies are stopping after the first stage. This unique method is called fracking backlog or fracklog. That is, wells have been drilled, but not brought into production.

Harold Hamm, the CEO of Continental Resources (CLR), told Bloomberg that, under current conditions, about 85% of shale oil wells in the United States aren’t being completed and are fracklogged.

Energy consultancy Wood Mackenzie estimates that there are now about 3,000 such wells in the United States.

In addition to storing the oil, it is a real cost-saver for the industry, as completing a shale oil well accounts for anywhere from half to three-quarters of the well’s overall cost. This is a quick and easy way to cut back on capital expenditures.

There is also a possibility down the road that oil service companies may lower their fees since they’re receiving less work from the shale companies thanks to fracklogging.

Many of the big shale producers are jumping on board the fracklog bandwagon.

The largest U.S. shale producer to fracklog is EOG Resources (EOG). It started 2015 with 200 uncompleted wells and announced it would “intentionally delay” about 85 more wells this year. Anadarko Petroleum (APC) said it expects to have about 440 uncompleted wells by the year’s end.

Other major producers joining in on fracklog are Continental Resources, Apache (APA), and Chesapeake Energy (CHK).

On the surface, fracklog seems like a logical move for oil producers, but the strategy may backfire.

Opening up the Floodgates

Let’s say oil prices rebound to the point where the companies decide to complete the wells.

Estimates are that it’ll take only one to three months to get the oil flowing from these now-uncompleted wells. Bloomberg Intelligence pegs the output from these wells to be as high as three million barrels per day!

This veritable flood of new oil will serve to cap any rally in the oil prices, and will likely send prices south, once again.

Saudi Arabia’s OPEC governor, Mohammed al-Madi, summed it up nicely when he said that oil will not see $100 per barrel any time soon, because higher prices would spur more output and prolong the ongoing oil glut.

And the chase continues,

Tim Maverick

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By Tim Maverick