In the Permian Basin, will geology or technology prevail?

By Staff | September 21, 2017

Based on Mackenzie Wood’s recent update of breakeven benchmarks for the lower 48 states, the Permian Basin is big and getting bigger. By 2025, the basin could produce up to 5 million barrels per day, according to the Houston-based energy analytics firm.

The Wood Mackenzie report—“Geology vs. technology: how sustainable is Permian tight oil growth?”—notes that geological constraints could arise as the play is aggressively developed, leading to production shortfalls. This could lead to higher prices early next decade.

Robert Clarke, research director for Lower 48 upstream at Wood Mackenzie, questions whether the oil and gas industry’s plans to test the geological limits of the shale play could hurt production over the long term.

“It is very likely that the upcoming level of activity will introduce a new set of issues, particularly reservoir deliverability,” he said.

At the same time, Clarke believes the potential for improvements in completion technologies could result in even greater Permian production. This is one of three scenarios studied in the Wood Mackenzie report.

Clark was recently interviewed on Wood Mackenzie’s “Crude for Thought” podcast where he answered questions about what the future might hold for the most prolific shale play in the U.S.

What does the study say about future production from the Permian?

Every time we update type curves, we update drilling plans. We see more and more volumes coming. As it stands now, the base view is that in 2025, 2026, the Permian gets a little bit above 5 million barrels a day of tight oil production and that’s huge. That’s coming from a little less than 2 million barrels a day now. That’s 150 percent growth over the next eight years.

Don’t U.S. shale plays typically go through an exuberant stage in which production is overstated?

In retrospect, it seems like the first three years of a shale play are easy. After that, it gets a bit harder. Regulatory delays hurt the Marcellus. Sweet spots in the Eagle Ford were a lot smaller than thought. Haynesville was doing well until the economy crashed. It seems like a few years in, something unexpected happens.

What factors could hurt production from the Permian?

When we look at the Permian, we start to benchmark against other plays. In the next three years, basically industry’s going to push on the rock in the Permian harder than they’ve ever pushed on a shale play before—even harder than they pushed on the Eagle Ford during its three biggest boom years. The number of wells drilled in the Permian over the next three years will be about the same as the Eagle Ford during its heyday. But remember, these wells are physically much larger, longer laterals, more water, more sand. We all know that. But from a reservoir perspective, industry is going to push on the Permian. It poses the question: are we going to find the hard limit for tight oil recovery?

What was the takeaway from the analysis at how anchor or parent wells compare to the future, younger child wells?

All the technical papers were suggesting that child wells drilled on 500-foot spacing or less could have EURs 20 to 30 percent lower than the parent. We did some detailed querying and it was a tough query to run because essentially we wanted to find wells in a shale play where we had a lot of production data that were drilled by the same company two years later that had a like-for-like completion. We found about 20 of them in the Eagle Ford. When we did the type curve analysis, those EURs looked to be between 20 and 30 percent lower than the parents. We were happy with those numbers. We extended that idea forward in the Permian. We looked at all the wells that are likely to be drilled in all the sub-plays. We looked at drilling schedules. We looked at an assumed ratio of parent-to-children, i.e. what percentage of all the wells could be classified as parent. We built out this switching schedule. What year do we start to see the majority of new wells be child producers?

If they are child producers, what the model indicates is the Permian could peak in 2021. It’s simple in the sense that you’re drilling wells that are of EUR X now and we’re going to drill really, really hard for the next three or four years. We’re going to exhaust a lot of those parent locations. We’re going to keep drilling, but we’re going to be drilling into pressure-depleted areas. If all those EURs for future child wells are .7 X, then it’s very hard for the Permian to keep growing.

Will it take higher activity level to sustain growth rates or will the growth be much less and even shrink to some extent?

When I say the Permian peaks in 2021, that’s the model of output. It doesn’t fall off a cliff. You’re still drilling lots of wells. They’re just 30 percent smaller. Taking that downside scenario case forward—even out to 2030—the Permian’s still producing just shy of 3 million barrels a day. So this isn’t a story of it peaks and it’s finished. It falls down to where it was a couple of years ago. We still see a lot of drilling. They’re just smaller wells. Is the Permian going to keep growing up and to the right forever? That’s something to think about as folks make their own forecast. The base view is that in 2025, 2026, the Permian gets a little bit above 5 million barrels a day of tight oil production. And that’s huge. That’s coming from a little less than 2 million barrels a day now. That’s 150 percent growth over the next eight years.

Why is the view of technology important in how it drives the future? What do you think we should watch for the future?

The paper has three scenarios in it. It has the base case. It has what we call the reservoir downside. And then technology upside is the third scenario. Let’s look at Wolfcamp EURs for new wells drilled by vintage. In 2016, the average Wolfcamp EUR is double what it was in 2013. What’s driven that? It’s been a host of things. It’s been better reservoir modeling. It’s been understanding the right chemicals in slurry. It’s been understanding the right proppant size and the right pump schedules. It’s been better geo-steering. It’s been downhole diverters. You name it, we are just smarter in the Wolfcamp then we’ve ever been before. So it’s tough to say that ends. The rate of change will adjust, and there are some step changes in technology. But to say that it’s capped might not be the smartest thing to say.