Production Decline Projected for Permian Basin

Over the past 10 years, tight oil boosted the United States back to world prominence in crude oil production. Today’s projections tie future U.S. production levels to continued strength in tight oil output, especially from the Permian Basin.

Considering the importance of unconventional oil plays in the overall U.S. production picture, it’s useful to examine the outlook for tight oil.

And in the Permian Basin, that outlook isn’t as bright as previously thought.

Ryan Duman is principal analyst, Lower 48 upstream, for research and consulting company Wood Mackenzie. Duman found that decline rates for Wolfcamp wells in the Permian were steeper than anticipated.

“The challenges of modeling tight-well estimated ultimate recoveries (EUR) are growing, and accurately selecting a representative terminal decline rate is not always straightforward,” he said.

“Using those (past) assumptions for today’s Wolfcamp wells in the Permian may contribute to inaccurate volume assessments and valuations,” he noted.

Wood Mackenzie’s analysis found that decline rates for the Permian’s conventional vertical wells has been between 5 percent and 10 percent annually, but “the most common terminal decline value observed in mature horizontal Wolfcamp wells is 14 percent,” the company reported.

Paucity of Precedent

Unconventional wells are known to decline more rapidly than conventional wells. Trying to project an accurate long-term decline rate for tight oil wells is tricky, especially with limited production history, Duman explained.

“We don’t have 10- or 15-, let alone 30-year histories of tight oil production to work off of,” he said.

Also, operator-reported output numbers are no substitute for longer-term, real-world production statistics, he added.

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Over the past 10 years, tight oil boosted the United States back to world prominence in crude oil production. Today’s projections tie future U.S. production levels to continued strength in tight oil output, especially from the Permian Basin.

Considering the importance of unconventional oil plays in the overall U.S. production picture, it’s useful to examine the outlook for tight oil.

And in the Permian Basin, that outlook isn’t as bright as previously thought.

Ryan Duman is principal analyst, Lower 48 upstream, for research and consulting company Wood Mackenzie. Duman found that decline rates for Wolfcamp wells in the Permian were steeper than anticipated.

“The challenges of modeling tight-well estimated ultimate recoveries (EUR) are growing, and accurately selecting a representative terminal decline rate is not always straightforward,” he said.

“Using those (past) assumptions for today’s Wolfcamp wells in the Permian may contribute to inaccurate volume assessments and valuations,” he noted.

Wood Mackenzie’s analysis found that decline rates for the Permian’s conventional vertical wells has been between 5 percent and 10 percent annually, but “the most common terminal decline value observed in mature horizontal Wolfcamp wells is 14 percent,” the company reported.

Paucity of Precedent

Unconventional wells are known to decline more rapidly than conventional wells. Trying to project an accurate long-term decline rate for tight oil wells is tricky, especially with limited production history, Duman explained.

“We don’t have 10- or 15-, let alone 30-year histories of tight oil production to work off of,” he said.

Also, operator-reported output numbers are no substitute for longer-term, real-world production statistics, he added.

“Operators are quick to highlight 30-day averages, Cum(ulative)-90s, Cum-180s. Few come back five or six years down the line to say those wells are meeting, exceeding, or falling behind expectations,” Duman said.

Adjusting decline rates to the 14-percent Wolfcamp scenario indicates that terminal declines will be a long-term risk to production, Wood Mackenzie projected. By 2040, nearly 800,000 barrels per day of Permian production could be lost, it reported.

With his colleague Robert Clarke, research director, Lower 48 upstream for Wood Mackenzie, Duman will present the technical session “Faster Tight Oil Decline Rates Could Mean Growing Project Spend and More Deals” at the Unconventional Resources Technology Conference (URTeC) in Denver.

The session is scheduled for Monday morning, July 22. Duman also will present a session on Permian produced water and its potential effect on Wolfcamp growth at URTeC on July 24.

In their session notes, Duman and Clarke wrote that continued downspacing, more intensive completions, higher stimulated rock volumes and aggressive lift strategies have had a positive effect on early-life productivity for Permian wells, but one that might be coming at the expense of late life volumes.

“There’s a trade-off that looks like it’s happening. You might have a little better (initial production) rate at the expense of longer-term EUR expectations,” Duman said.

They observed that accelerating production declines could force Permian operators to drill more wells and consequently commit more capital expenditures to meet output targets.

“It’s easy to think of it as the treadmill effect. You have to drill more and more wells, or bigger and bigger wells, in the same place,” Duman said.

Permian Primacy

How important is the Permian Basin to tight oil potential? The U.S. Energy Information Agency reports that tight oil production reached 6.5 million barrels a day in the U.S. last year, accounting for 61 percent of total domestic production.

“U.S. tight oil production, which became the more common form of oil production in 2015, will continue to increase through 2030, ultimately reaching more than 10 million barrels per day in the early 2030s,” it projected.

Much of the recent tight oil production growth in the United States has resulted from drilling in the Permian Basin – in fact, in just three main plays.

“Three major tight oil plays in the Permian Basin – the Spraberry, Bone Spring, and Wolfcamp – accounted for 41 percent of U.S. tight oil production in 2018,” the EIA reported.

Do the math and it turns out that a quarter of all U.S. crude production last year came out of those Permian Basin formations, which are projected to be even more important in the future.

In the EIA’s current reference-case outlook, “approximately half of cumulative tight oil production through 2050 is expected to come from these three plays,” it noted.

Production Challenges

For the near term in the Permian, “there’s certainly no end of headwinds or obstacles that operators are facing,” Duman said. They include transportation bottlenecks – already a known challenge for the basin’s oil output, and a tight local labor market.

Given time, those near-term obstacles will be overcome, he predicted.

“The medium term is where we see the greatest risk in things like water,” Duman said. “There’s a growing cost component in the basin in water pipelines and disposal, and sourcing, as well.”

At some point, he sees Permian operators “playing catch-up” on water issues, drilling more disposal wells, putting in more water-treatment facilities and addressing other problems.

“If every barrel (of produced water in the Permian) was going to be targeted for treating, you’d still have an overhang,” he observed.

Medium-term spending demands “could erode some of the ultra-low breakevens” companies have achieved in the basin, Duman said.

He forecast a coming round of consolidation for the Permian with the number of operators falling off over the next five years, and said, “I expect to see more refracs and (enhanced oil recovery) technologies applied to tight oil wells.”

Duman cited three factors likely to have an impact on future Permian production:

  • Artificial lift technologies
  • Late-life/enhanced recovery technologies
  • Big Data and machine learning

Operators could look for additional plays in their Permian holdings, or elsewhere, but “the reality is that not all drilling inventory is created equally,” he said.

“You may have operators looking at other assets within their portfolios to see if there’s a way to benefit,” Duman noted.

He called that a “silver lining” if some of the industry’s focus shifts away from Permian tight oil. Companies could increase spending to develop additional production in other plays, including the Eagle Ford and Bakken.

Overall, operators have done an admirable job of increasing efficiency in the Permian through improvements in landing laterals, better completion design and other efforts, Duman noted.

“That being said, some of the low-hanging fruit has already been taken advantage of,” he observed. “There is still room for improvement. But I think it will be small, incremental gains.”

With increased spending demands and higher break-evens, plus consolidation and more operator joint efforts, the industry could be headed toward trying to sustain tight oil production from the Permian, not grow it.

“Just offsetting declines and keeping production steady will be the theme as we move into 2025 and beyond,” Duman predicted.

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Comments (1)

Optional title for the recent AAPG Permian article.
Taking a verbatim line from your Permian article and utilizing it as the articles 'Title' might be a good idea? Now this is just my humble opinion. Regardless, this is a very pertinent, and interesting AAPG article. Regards. "trying to sustain tight oil production from the Permian, not grow it."
7/11/2019 6:49:12 PM

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