Permian Basin oil and natural gas operators will have to drill substantially more wells not only to maintain current production levels but to build reserves as rates for newer wells have a faster decline rate, according to an analysis by IHS Markit.
Data showed that the base decline rate for the 150,000-plus producing oil and gas wells in the Permian has dramatically increased since 2010. The increase in unconventional drilling and output by exploration and production (E&P) companies has been accelerating the inherent production decline because newer wells decline more quickly than older, conventionally drilled wells.
"Base decline is the volume that oil and gas producers need to add from new wells just to stay where they are; it is the speed of the treadmill,” said IHS Markit’s Raoul LeBlanc, vice president of Unconventional Oil and Gas.
“Because of the large increases of recent years, the base decline production rate for the Permian Basin has increased dramatically, and we expect those declines to continue to accelerate,” he said. “As a result, it is going to be challenging, especially for some companies with cash constraints, just to keep production flat.”
The base decline is calculated by identifying the actual/forecasted well production onstream at the start of the year and then tracking the cumulative decline by the end of the year.
Total U.S. oil production growth is forecast to flatten by 2021 because of a major slowdown in output from the Lower 48, according to IHS.
Total domestic oil growth is forecast to hit 440,000 b/d in 2020 before essentially flattening out in 2021. Modest growth is expected to resume in 2022, but those volumes would decline sharply from the boom levels of recent years, LeBlanc said.
With its myriad, stacked formations, the Permian offers an apt comparison to review “traditional” wells, in which E&Ps use vertical, or conventional drilling, and via unconventional techniques, where horizontal drilling and fracturing have allowed operators to extract tighter resources.
In early 2010, Permian production stood at about 880,000 b/d, with “virtually all” the output from conventional development, according to IHS. By the end of 2010, the group of wells produced 767,000 b/d, down 110,000 b/d, or 13%.
This year, as most of the Permian wells have been horizontally drilled and fractured, there’s been a much faster decline, and “the situation became even more dramatic,” said researchers.
Permian oil production began 2019 at 3.8 million b/d, around 1 million b/d higher than the start of 2018. However, base production by the end of 2019 is forecast to decline by around 1.5 million b/d, or a staggering 40% base decline rate.
“Unless intentionally choked back, new individual unconventional wells decline very rapidly, often 65-85% in the first year, so companies with many young wells in their inventory see significant declines in production compared to companies with a balance of younger and older wells,” LeBlanc said.
“However, these high initial decline rates of individual shale wells become shallower over time, with older wells showing annual declines of 20% or less. So, the key here is that older wells in an operator’s inventory help offset the rapid declines of newer wells.”
Because of the older wells, base declines could decelerate if the weighted average age of the wells in the production base increases. Similar to how a production base with newer wells usually exhibits high decline rates, the older the production base, the more stable it is, according to IHS.
“Companies with the highest growth in recent years have the steepest base decline rates, and vice versa,” researchers noted. “The challenge of base declines is, therefore, different for each operator, depending on multiple factors, but especially on the decisions the firm has made concerning production growth and capital allocation.”
Said LeBlanc, “Now that capital markets have closed for many companies and investors are requiring returns, a critical objective for these companies is to slow production growth, significantly moderating their base declines.”
Raymond James & Associates Inc. analysts in September said there was “clear evidence” that Lower 48 oil production wrested from wells using unconventional drilling techniques may have reached its maximum level and could decline as producers deal with well interference and “rock quality deterioration.”
Through August, total domestic oil supply growth was tracking below the same period of 2018, up by less than 100,000 b/d from nearly 600,000 b/d over the same period of 2018, according to Raymond James. Through the first six months, domestic well productivity gains “only amounted to about 2% (versus our 10% growth estimate),” analyst J. Marshall Adkins said. “We believe that this represents clear evidence that U.S. well productivity gains are beginning to reach maximum limits and may even roll over in the coming years as the industry struggles to offset well interference issues and rock quality deterioration.”
The Raymond James team also provided a caveat about last year’s 15% year/year well productivity increases from 11% in 2017. There was a slight uptick in 2018, but it was “largely a one-off gain,” as ExxonMobil and Chevron Corp. each accelerated Permian Basin activity and adopted more efficient drilling techniques.
The outlook for 2020 domestic oil production has been dimming on bearish commodity price forecasts and reduced global demand. Lower 48 operators also are reducing their spending plans.
Tudor, Pickering, Holt & Co. (TPH) analysts recently reduced their U.S. crude supply forecast and expect output to hit 13.1 million b/d by the end of 2020, versus a previous estimate of 13.5 million b/d. The downward revision follows TPH’s adjusted upstream price deck for 2020 to $50/bbl West Texas Intermediate from $53.