http://nyti.ms/1ZsWQma
ENERGY & ENVIRONMENT
By CLIFFORD KRAUSS DEC. 25, 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.
Their 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 another year because the price of oil is now so pitifully 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 D.U.C.s (an acronym for drilled but uncomplete) — are a bet on
higher oil prices than the current level of about $38 a barrel, which is about 60
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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 snowcapped 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.
Some analysts say oil companies like Anadarko, EOG Resources and
Continental Resources may collectively risk suffocating the very 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 has never
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 on line in a
quick manner that could put pressure on the supply-demand balance in the market,”
said Christopher Kopczynski, a senior oil analyst at Wood Mackenzie, a consultant
firm.
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.
Before a shale well can be productive it must first be drilled, then completed
with hydraulic fracturing, known as fracking, the process of blasting through shale
rock with water, sand and chemicals to release oil or gas. With rigs drilling multiple
shale wells from a single production pad, operators have multiplied the efficiency of
their rig drilling. And since shale wells flow the most during the first year or two of
production, waiting for a higher price can maximize profits, executives say.
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“It’s dry powder,” said Raoul LeBlanc, an oil expert at IHS, a consultant firm.
“It’s a form of spare capacity.”
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 and 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 reason we have deferred the completions is to really substantially increase
the rate of return,” Bill Thomas, EOG’s chairman and chief executive, acknowledged
in an investment conference call. “We want to make sure that we allow prices to firm
up.”
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.
On the completion side, fracking crews are easier to come by and their contracts
tend to be more fluid. Now those completion costs have also come down — meaning
that the uncompleted wells will eventually be brought on line at a lower cost,
executives say.
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.
But Anadarko remains cautious for 2016.
“Should the commodity price change, we can ramp up,” Darrell E. Hollek,
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Anadarko’s executive vice president for onshore exploration and production, said in
an interview. “We may find that we complete a lot of these intentionally drilled and
uncompleted wells but we may find we only want to do half of them. But from a
capital standpoint, it truly is a lever for us.”
Anadarko lost $2.2 billion last quarter and the company’s stock price has been
cut in half. Its executives have devised a strategy to slow investment into new
production in its onshore shale wells, in order to devote more cash to developing
high-stakes projects in the deep water Gulf of Mexico and abroad. The strategy
should lift its revenue in several years when most experts think the oil price will be
higher.
Anadarko already has 6,800 wells producing oil and natural gas in the
Wattenberg field and has identified 4,000 additional drilling locations. It is drilling
380 wells here this year, 11 more than in 2014, with fewer rigs drilling more
efficiently designed wells. But while all the 2014 wells were completed, it plans to
defer 130 completions of this year’s new wells for as much as a year or more.
The company is following a similar strategy in its Texas fields, making it the oil
company with the most uncompleted wells after EOG Resources. Wall Street
analysts have generally agreed with the strategy.
“Relative to others Anadarko is managing through the cycle effectively,” said
Mark Hanson, a Morningstar analyst. “These guys are looking down the road a bit
further.”
A version of this article appears in print on December 26, 2015, on page B1 of the New York edition with the headline: Waiting to Flip the Switch.
© 2015 The New York Times Company
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Read the attached article and then, in three paragraphs, discuss the following:
Discuss how the characteristics of oil make Anadarko's capacity planning strategy possible. Why would a company like Apple not be able to plan its capacity in the same way? Is there only up-side for Anadarko with respect to their capacity planning strategy or are there also significant risks?

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