All the DUCs in a Row: Natural Gas Production in U.S.

Abstract

Using data from seven shale gas regions in the United States, we examine natural gas production in terms of drilling rig activity and well completion rates. Our objective is to examine the determinants of well completion decisions in the U.S. natural gas production. We observe that in recent years, the explanatory power of drilling rig count has declined. On the other hand, the number of producing wells remains a significant factor for explaining the variation in gas production. We find that an increase in the number of drilled but uncompleted wells (DUCs) plays a significant role in natural gas supply. The number of DUCs depends on drilling rig activity and futures prices of oil and natural gas. Also, our results indicate that well completion decisions and the duration of DUC status depend on oil and gas prices, pipeline capacity, producing well type and well depth.

Keywords

Natural Gas Production Rigs Drilling Completion Pipelines Prices.

Get full access to this article

View all access options for this article.

References

Abrigo

M.R.

Love

(2016). “Estimation of panel vector auto regression in Stata.” The Stata Journal 16(3): 778-804. https://doi.org/10.1177/1536867X1601600314.

Addison, V. (2018). “DUC, Abnormal DUC Counts Rise in Permian.” Accessed 4/18/2019. https://www.hartenergy.com/ex-clusives/duc-abnormal-duc-counts-rise-permian-31323.

Agerton

Hartley

P.R.

, K.B. Medlock III., and T. Temzelides. (2017). “Employment impacts of upstream oil and gas investment in the United States.” Energy Economics, 62: 171-180. https://doi.org/10.1016/j.eneco.2016.12.012.

Anderson

S.T.

Kellogg

Salant

S.W.

. (2018). “Hotelling under pressure.” Journal of Political Economy 126(3): 984-1026. https://doi.org/10.1086/697203.

Andrews

D.W.

(1993). “Tests for parameter instability and structural change with unknown change point.” Econometrica,61(4): 821-856. https://doi.org/10.2307/2951764.

Andrews

D.W.

Ploberger

. (1994). “Optimal tests when a nuisance parameter is present only under the alternative”. Econometrica 62: 1383-1414. https://doi.org/10.2307/2951753.

Andrien

(2016). “A Guide to American DUCs (Drilled Uncompleted Wells).” Accessed 11/11/2018. https://www.forbes.com/sites/drillinginfo/2016/06/27/american-ducs-drilled-uncompleted-wells/#76ba200d729c.

Apergis

Ewing

B.T.

Payne

J.E.

(2016). “A time series analysis of oil production, rig count and crude oil price: Evidence from six US oil producing regions.” Energy 97: 339-349. https://doi.org/10.1016zj.energy.2015.12.028.

Arora

Lieskovsky

. (2014). “Natural gas and US economic activity.” The Energy Journal 35(3): 167-182. https://doi.org/10.5547/01956574.35.3.8.

10.

Hughes

Baker

(2019). “Rig Count FAQs.” Accessed 5/12/2019. http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=i-rol-rigcountsfaqs.

11.

Box-Steffensmeier

J.M.

Zorn

C.J.

. (2001). “Duration models and proportional hazards in political science.” American Journal of Political Science 45(4): 972-988. https://doi.org/10.2307/2669335.

12.

Boyce

J.R.

N0stbakken

. (2011). “Exploration and development of US oil and gas fields, 1955-2002.” Journal of Economic Dynamics and Control 35(6): 891-908. https://doi.org/10.1016/jjedc.2010.12.010.

13.

Chen

Linn

S.C.

. (2017). “Investment and operating choice: Oil and natural gas futures prices and drilling activity.” Energy Economics 66: 54-68. https://doi.org/10.1016/j.eneco.2017.05.012.

14.

Cox

D.R.

(1972). “Regression models and life-tables.” Journal of the Royal Statistical Society: Series B (Methodological) 34(2): 187-202. https://doi.org/10.1111/j.2517-6161.1972.tb00899.x.

15.

Davis, C. (2018). “Permian Well Completions Seen Declining, with Fewer Crews and Less Sand Demand.” Accessed 4/7/2019. https://www.naturalgasintel.com/articles/116193-permian-well-completions-seen-declining-with-fewer-crews-and-less-sand-demand.

16.

Dickey

D.A.

Fuller

W.A.

. (1981). “Likelihood ratio statistics for autoregressive time series with a unit root.” Econometrica 49: 1057-1072. https://doi.org/10.2307/1912517.

17.

DI (DrillingInfo) . (2016). “Production.” Accessed 09/17/2018. https://app.drillinginfo.com/production/#/default.

18.

Dunning

(2016). “DUC Hunting: Demystifying Drilled and Uncompleted Wells.” Accessed 4/18/2019. https://www.forbes.com/sites/drillinginfo/2016/04/25/duc-hunting-demystifying-drilled-and-uncompleted-wells/#7fa1580433d6.

19.

EIA (2013). “Rethinking rig count as a predictor of natural gas production. Today in Energy.” Accessed 11/06/2018. https://www.eia.gov/todayinenergy/detail.php?id=13551.

20.

EIA (2016a). “Trends in U.S. Oil and Natural Gas Upstream Costs.” Accessed 3/22/2017. https://www.eia.gov/analysis/stud-ies/drilling/pdf/upstream.pdf/.

21.

EIA (2016b). “Drilling Productivity Report. EIA Estimates of Drilled but Uncompleted Wells (DUCs).” Accessed 2/5/2019. https://www.eia.gov/petroleum/drilling/pdf/duc_supplement.pdf.

22.

EIA (2017). “Drilling Productivity Report.” Accessed 2/20/2017. http://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf.

23.

EIA (2018). “The Distribution of U.S. Oil and Natural Gas Wells by Production Rate.” Accessed 1/14/2019. https://www.eia.gov/petroleum/wells/pdf/full_report.pdf.

24.

EIA (2019a). “Drilling Productivity Report.” Accessed 11/01/2019. Available online at: https://www.eia.gov/petroleum/drill-ing/.

25.

EIA (2019b). “The number of drilled but uncompleted wells in the United States continues to climb, Today in Energy.” Accessed 10/23/2019. https://www.eia.gov/todayinenergy/detail.php?id=39332.

26.

Engle

R.F.

Granger

C.W.

. (1987). “Co-integration and error correction: representation, estimation, and testing.” Econometrica 55(2): 251-276. https://doi.org/10.2307/1913236.

27.

Federal Reserve Bank of Dallas (2019). “Permian Basin Economic Indicators.” Accessed 5/07/2019. https://www.dallasfed.org/research/indicators/pb/2018/pb1807.

28.

Fleming

T.R.

Harrington

D.P.

. (2011). Counting processes and survival analysis (Vol. 169). John Wiley and Sons.

29.

Gülen

Browning

, S. Ikonnikova., and S.W. Tinker. (2013). “Well economics across ten tiers in low and high Btu (British thermal unit) areas, Barnett Shale, Texas.” Energy 60: 302-315. https://doi.org/10.1016/j.energy.2013.07.041.

30.

Hair

J.F.

Jr. Anderson

R.E.

Tatham

R.L.

Black

W.C.

. (1995). Multivariate Data Analysis, 3rd edition, Macmillan Publishing Company, New York.

31.

Hamilton

J.D.

(2013). Oil prices, exhaustible resources, and economic growth (No. w17759). Edward Elgar Publishing. https://doi.org/10.3386/w17759.

32.

Hannan

E.J.

Quinn

B.G.

. (1979). “The determination of the order of an auto regression.” Journal of the Royal Statistical Society. Series B (Methodological) 41(2): 190-195. https://doi.org/10.1111/j.2517-6161.1979.tb01072.x.

33.

Hegarty, J. (2017). “The Surge in DUC Wells Begs the Question: How Long Can a DUC Well Hold a Lease?” Accessed 4/18/2019. https://www.wsmtlaw.com/blog/the-surge-in-duc-wells-begs-the-question-how-long-can-a-duc-well-hold-a-lease.html.

34.

Hernandez

Dresdner

. (2010). “The effect of temporal closures and individual quotas on fishing trip duration: a hazard function analysis.” Applied Economics 42(29): 3767-3776. https://doi.org/10.1080/00036840802360096.

35.

IHS (2016). “Oil and Gas Operators with Significant Inventory of Drilled but Uncompleted Wells in Major U.S. Plays to Benefit from Capital Efficiency Gains in 2016.” Accessed 4/18/2019.https://news.ihsmarkit.com/press-release/ducs/oil-and-gas-operators-significant-inventory-drilled-uncompleted-wells-major-us-pl.

36.

Ikonnikova

Gülen

. (2015). “Impact of Low Prices on Shale Gas Production Strategies.” The Energy Journal 36. Adelman Special Issue. https://doi.org/10.5547/01956574.36.SI1.siko.

37.

Iledare

O.O.

(1995). “Simulating the effect of economic and policy incentives on natural gas drilling and gross reserve additions.” Resource and Energy Economics 17(3): 261-279. https://doi.org/10.1016/0928-7655(95)00003-G.

38.

Johansen

(1988). “Statistical analysis of cointegration vectors.” Journal of Economic Dynamics and Control 12(2-3): 231-254. https://doi.org/10.1016/0165-1889(88)90041-3.

39.

Johansen

(1995a). “A statistical analysis of cointegration for I (2) variables.” Econometric Theory 11(1): 25-59. https://doi.org/10.1017/S0266466600009026.

40.

Johansen

(1995b). Likelihood-based inference in cointegrated vector autoregressive models. Oxford University Press on Demand. https://doi.org/10.1093/0198774508.001.0001.

41.

Joskow

PL.

(2013). “Natural gas: from shortages to abundance in the United States.” American Economic Review 103(3): 338-43. https://doi.org/10.1257/aer.103.3.338.

42.

Jiang

Liu

. (2014). “A panel vector error correction approach to forecasting demand in regional construction markets.” Construction Management and Economics 32(12): 1205-1221. https://doi.org/10.1080/01446193.2014.977800.

43.

Kerr

R.A.

(2010). “Natural gas from shale bursts onto the scene.” Science 328(5986): 1624-1626. https://doi.org/10.1126/science.328.5986.1624.

44.

Khalifa

Caporin

, and S. Hammoudeh. (2017). “The relationship between oil prices and rig counts: The importance of lags.” Energy Economics 63: 213-226. https://doi.org/10.1016/j.eneco.2017.01.015.

45.

Kleinberg

R.L.

Paltsev

Ebinger

C.K.E.

Hobbs

D.A.

, and T. Boersma. (2018). “Tight oil market dynamics: Benchmarks, breakeven points, and in-elasticities.” Energy Economics 70: 70-83. https://doi.org/10.1016/j.eneco.2017.11.018.

46.

Levin

Lin

C.F.

, and C. Chu. (2002). “Unit root tests in panel data: Asymptotic and finite sample properties.” Journal of Econometrics 108(1): 1-24. https://doi.org/10.1016/S0304-4076(01)00098-7.

47.

Liew

(2004). “What lag selection criteria should we employ?” Economics Bulletin 33(3): 1-9.

48.

Logan

Lopez

Mai

Davidson

Bazilian

, and D. Arent. (2013). “Natural gas scenarios in the US power sector.” Energy Economics, 40: 183-195. https://doi.org/10.1016/j.eneco.2013.06.008.

49.

Mason

C.F.

Roberts

. (2018). “Price Elasticity of Supply and Productivity: An Analysis of Natural Gas Wells in Wyoming.” The Energy Journal 39(S1): 79-101. https://doi.org/10.5547/01956574.39.SI1.cmas.

50.

Melick

(2014). “The energy boom and manufacturing in the United States.” Federal Reserve Board (FRB) International Finance Discussion Paper 1108. Accessed 12/17/2018. https://www.federalreserve.gov/PUBS/ifdp/2014/1108/ifdp1108.pdf. https://doi.org/10.17016/IFDP.2014.1108.

51.

Melek

N.C.

(2015). “What could lower prices mean for US oil production?” Federal Reserve Bank of Kansas City. Economic Review 100(1): 51-69.

52.

Moeller

P.D.

(2012). “Request for Comments of Commissioner Moeller on Coordination between the Natural Gas and Electricity Markets, Federal Energy Regulatory Commission.” Accessed 10/19/2019. https://www.ferc.gov/industries/electric/indus-act/electric-coord/moellergaselectricletter.pdf.

53.

Mugabe

Elbakidze

Zaynutdinova

(2020). “Elasticity of substitution and technical efficiency: evidence from the US electricity generation.” Applied Economics 52(16): 1789-1805. https://doi.org/10.1080/00036846.2019.1678733.

54.

Neal

(2014). “Panel cointegration analysis with xtpedroni.” The Stata Journal 14(3): 684-692. https://doi.org/10.1177/1536867X1401400312.

55.

Oliver

M.E.

Mason

C.F.

Finnoff

(2014). “Pipeline congestion and basis differentials.” Journal of Regulatory Economics, 46(3): 261-291. https://doi.org/10.1007/s11149-014-9256-9.

56.

Oglend

Lindbäck

M.E.

, and P. Osmundsen. (2016). “Shale gas boom affecting the relationship between LPG and oil prices.” The Energy Journal 37(1): 211-233. https://doi.org/10.5547/01956574.37.Laogl.

57.

Osmundsen

Rosendahl

K.E.

, and T. Skjerpen. (2015). “Understanding rig rate formation in the Gulf of Mexico.” Energy Economics 49: 430-439. https://doi.org/10.1016/j.eneco.2015.03.001.

58.

Pedroni

(1999). “Critical values for cointegration tests in heterogeneous panels with multiple regressors.” Oxford Bulletin of Economics and Statistics 61(S1): 653-670. https://doi.org/10.1111/1468-0084.61.s1.14.

59.

Pedroni

(2004). “Panel cointegration: asymptotic and finite sample properties of pooled time series test with an application to the PPP hypothesis.” Econometric Theory 20(3): 597-625. https://doi.org/10.1017/S0266466604203073.

60.

Peters

J.C.

Hertel

T.W.

. (2017). “Achieving the Clean Power Plan 2030 CO 2 Target with the New Normal in Natural Gas Prices.” Energy Journal 38(5): 39-66. https://doi.org/10.5547/01956574.38.5jpet.

61.

Phillips

PC.

Perron

(1988). “Testing for a unit root in time series regression.” Biometrika 75(2): 335-346. https://doi.org/10.1093/biomet/75.2.335.

62.

Piotrowski

(2016). “The DUCs Are Fracking: The Uncertainty Surrounding Drilled but Uncompleted Wells.” Accessed 4/18/2019. http://energyfuse.org/ducs-fracking-uncertainty-surrounding-drilled-uncompleted-wells/.

63.

Ringlund

G.B.

Rosendahl

K.E.

, and T. Skjerpen. (2008). “Does oilrig activity react to oil price changes? An empirical investigation.” Energy Economics 30(2): 371-396. https://doi.org/10.1016/j.eneco.2007.06.002.

64.

Rogers

(2011). “Shale gas—the unfolding story.” Oxford Review of Economic Policy 27(1): 117-143. https://doi.org/10.1093/oxrep/grr004.

65.

Stogiannis

Caroni

, C.E. Anagnostopoulos., and I.K. Toumpoulis. (2011). “Comparing first hitting time and proportional hazards regression models.” Journal of Applied Statistics 38(7): 1483-1492. https://doi.org/10.1080/02664763.201 0.505954.

66.

Srinivasan

Krishnamurthy

, and P. Kaufman. (2019). “Concerns and Clarifications for Drilled Uncompleted (DUC) Wells in the Williston Basin.” Society of Petroleum Engineers Reservoir Evaluation and Engineering 22(1): 190-202. https://doi.org/10.2118/185753-PA.

67.

Surran

(2019). “Permian Basin natural gas prices at negative all-time lows, Seeking Alpha.” Accessed 5/08/2019. https://seekingalpha.com/news/3448082-permian-basin-natural-gas-prices-negative-time-lows

68.

J.P

Taylor

J.M.

. (2000). “Estimation in a Cox proportional hazards cure model.” Biometrics 56(1): 227-236. https://doi.org/10.1111/j.0006-341X.2000.00227.x.

69.

Teachman

J.D.

Hayward

M.D.

. (1993). “Interpreting hazard rate models.” Sociological Methods and Research 21(3): 340-371. https://doi.org/10.1177/0049124193021003003.

70.

U.S. Department of Energy (2015). “Natural Gas Infrastructure Implications of Increased Demand from the Electric Power Sector.” Accessed 10/19/2019. https://www.energy.gov/sites/prod/files/2015/02/f19/DOE%20Report%20Natural%20Gas%20Infrastructure%20V_02-02.pdf.

71.

Vogelsang

TJ.

(1997). “Wald-type tests for detecting breaks in the trend function of a dynamic time series.” Econometric Theory 13(6): 818-848. https://doi.org/10.1017/S0266466600006289.

72.

Weber

J.G.

(2012). “The effects of a natural gas boom on employment and income in Colorado, Texas, and Wyoming.” Energy Economics 34(5): 1580-1588. https://doi.org/10.1016/j.eneco.2011.11.013.