Study looks at accelerating decline rates in the Permian

By Staff | July 31, 2018

A new study by Wood Mackenzie—an energy analytics firm based in Houston—titled "Everything is accelerating in the Permian, including decline rates," examines the inherent risks predicting the late-life performance of wells entering maturity.

The study compares mature Wolfcamp well results and then models the long-term supply and cash-flow implications for operators and investors. Wood Mackenzie found that after five years of production, the most active Wolfcamp sub-plays have annual decline rates roughly double the proxy value of 5 percent to 10 percent commonly used. The most common terminal decline value observed in mature horizontal Wolfcamp wells was 14 percent.

The report analysed the impact of the more plausible terminal decline rates and found that under a 14 percent terminal decline scenario, the near-term impact to total Permian supply is relatively minimal. But by 2040, nearly 800,000 barrels per day of Permian production is at risk.

While the Permian is home to thousands of vertical wells that have been producing for decades, given the relative immaturity of the Wolfcamp compared to other zones, pure field data for horizontal tight-oil wells only goes back about eight years. Consequently, operators and investors have routinely used proxy values, based on decades-old data from vertical wells and other shale plays, to model tight-oil terminal decline rates.

However, because the pace of Permian production expected to continue, the shale play will dominate U.S. oil supply growth. Output is expected to increase by nearly 800,000 barrels per day between now and the end of 2019. But if decline rate values aren't accurately and consistently employed when calculating future production, operators may need to drill more than expected—or budget for—to meet their growth plans.

Ryan Duman, principal analyst with Wood Mackenzie's Lower 48 upstream team, answered questions about the firm’s new study.  

How difficult is it to accurately model EURs in the Permian?

The challenges of modelling tight well estimated ultimate recoveries (EURs) are growing and accurately selecting a representative terminal decline rate is not always straightforward. It may have been historically, but using those assumptions for today's Wolfcamp wells in the Permian may contribute to inaccurate volume assessments and valuations.

What problems does this pose for Permian operators and potential investors?

The most significant risk associated with this error could sit with investors looking to purchase assets with a significant proportion of existing producers. To date, the bulk of Permian M&A activity has targeted undeveloped tight oil acreage, but we are starting to see more developed properties transact. In the past two years alone, 16 of the largest Permian deals, totalling almost $2 billion, have involved what we classified as mid-life or late-life assets."

Who will be affected the most by declining EURs?

Operators with the smallest projected cash flow deficit—that is, more established players—may fare the worst in regard to present value erosion because they have more mature wells in their portfolio today and could have exhausted a larger portion of ultra-low-cost drilling locations. If shale plays are classified as drilling treadmills, the Permian treadmill could actually be set on an incline.