Oil and gas operators in the Permian Basin—a bountiful hydrocarbon resource basin in North America—will have to drill more wells to maintain current production levels due to the high level of recent growth, according to analysis by IHS Markit.
Data from the IHS Markit automated well forecasting technology showed that the base decline rate of the more than 150,000 producing oil and gas wells in the Permian Basin has “increased dramatically” since 2010. Newer, younger wells decline much faster than older wells, thus the surge in shale drilling and output in recent years has been accelerating the production decline.
“Base decline” is calculated by identifying the actual or forecasted production of all the wells onstream at the start of the year, then tracking their cumulative decline by the end of the year. Understanding the base declines can be critical for engineers or operators to determine what level of drilling and production targets must be achieved for a company to grow production. It also factors into maintaining performance and providing returns to investors.
"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 Raoul LeBlanc, vice president of unconventional oil and gas at IHS Markit. “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. As a result, it is going to be challenging, especially for some companies with cash constraints, just to keep production flat.”
U.S. oil production growth is expected to flatten by 2021 due to a major slowdown in growth from U.S. shale, the IHS Markit production outlook shows. Total U.S. production growth is expected to be 440,000 barrels per day in 2020 before flattening out in 2021. Modest growth is expected to resume in 2022, but at volumes in stark contrast to the boom levels of recent years, LeBlanc said.
The Permian provides the comparison between traditional wells and shale wells. At the start of 2010, production for the Permian Basin was approximately 880,000 barrels per day, IHS Markit noted, with virtually all production coming from conventional operations. By the end of 2010, that group of wells produced 767,000 barrels per day—a decline of 110,000 barrels per day, or 13 percent of production.
By 2019, most Permian Basin wells were hydraulically fractured shale wells, which decline much faster. In 2019, Permian Basin production started off at 3.8 million barrels per day—a million barrels per day higher than the year before. IHS Markit predicts base production will decline by approximately 1.5 million barrels of oil per day by the end of 2019—a 40 percent base decline rate.
Because of these older wells, base declines can also decelerate if the weighted average age of the wells in the production base rises. Just as a production base with mostly young wells exhibits high decline rates, the older the production base, the more stable it is, according to IHS Markit.
Companies with the highest growth in recent years have the steepest base decline rates, and vice versa. The challenge of base declines is different for each operator, depending on multiple factors, including the decisions the firm has made concerning production growth and capital allocation, IHS Markit said.