Much has been written and said recently about a hot new trend in the oil and gas industry known as Fracklogging. “Fracklog” is the catchy new expression for the backlog of US shale wells that have been drilled but not yet completed or fracked. More commonly referred to as “drilled but uncompleted” or “waiting on completions,” these wells will need to be fracked and fitted with production equipment for the production to flow. Sometimes because the oil and gas companies are waiting for a higher price environment, other times because their budgets don’t yet allow for all the wells they’ve drilled to be completed, these frackloggers are essentially storing oil in the ground awaiting the frack.
The number of wells waiting to be hydraulically fractured has tripled in the past year. Many shale operators are electing to delay output in the hopes of more favorable price conditions returning to the market. Ideally, these wells can be made operational very quickly, and with minimal effort, because most of the work has already been done. Bloomberg Intelligence reports that “Drillers in oil and gas fields from Texas to Pennsylvania have yet to turn on the spigots at 4,731 wells they’ve drilled, keeping 322,000 barrels a day underground.” Hoping to get a better price for their product in the future, some companies are also putting drilled crude into storage, following the same logic as the frackloggers. The American Interest warns, however, that Petrostates must beware that as soon as prices start to tick upwards, these wells will be fracked and crude that had previously been put in storage will be sold, leading the market to once again be flooded with oil driving prices right back down again. So, under this view, the larger the fracklog grows, the less likely it seems that oil prices will return to $100+ per barrel anytime soon. Still others believe that the potential threat will have minimal impact on the market. Oil companies have had to slash budgets for drilling and well development, laying off large numbers of employees, retiring rigs and putting off the acquisition of new rigs and other critical equipment, while oilfield service companies scramble to cut costs to survive. This suggests that once oil prices finally rebound, oil companies clambering to boost production will be faced with a shortage of rigs and other essential infrastructure as well as drilling and completion expertise thereby limiting the rate at which production can grow and, in turn, ultimately increasing the costs associated with drilling and fracking.
Additionally, regardless of the effect these fracklog wells will have on the market, it is also important to keep in mind the effect these wells may have on leasehold. At least in Louisiana, the many “standard form” mineral lease shut-in provisions that could potentially hold a mineral lease for a time outside of the original primary term have typically been associated with gas producing wells. But most of these fracklog wells are oil wells. Moreover, it is unlikely given the status of these wells as having not yet been completed that any would qualify as a “shut-in” well under even the most liberal definition. Therefore, operators primarily concerned with cutting costs associated with drilling and well completion should also heed their mineral lease provisions and be careful not to lose sight of other mitigating factors, like maintaining leasehold acreage, the loss of which could very well lead to costly consequences.