Growing pains – diminishing returns from tight oil wells
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'You cannae change the laws of physics' – or can you?
US tight oil’s second phase of growth is well underway. We expect tight oil production to double from 4.7 million b/d today to around 9.5 million b/d in the mid-2020s – and our view is by no means the most bullish. Most of the growth we foresee is from the Wolfcamp play in the Permian Basin, the focus of much of the increase in Lower 48 drilling over the last eighteen months.
The Permian’s huge in-place resource has been known about for decades, identified by thousands of vertical wells. What’s been harder to figure out is how much can be extracted commercially at lower oil prices.
But in the handful of years since hydraulic fracturing has been applied to Wolfcamp rocks, the EUR (estimated ultimate recovery) numbers have kept going up.
A modern horizontal Wolfcamp well today has an IP rate of 900 b/d, ten times that of a vertical one. EOG, a leading Permian operator, has delivered 3,500 b/d of oil from some wells. Exponential increases in well productivity have been achieved by the engineering equivalent of throwing in the kitchen sink – longer laterals, more proppant, more water, higher pump rates, etc.
Despite all this technical progress, operators are taking their foot off the gas.
The Wolfcamp rig count is now flattening with labour and equipment hard to find. The focus is turning to execution and delivering value rather than growth for growth’s sake.
There are also signs that inexorably ramping up the intensity of the extraction process is leading to diminishing returns. Around 90% of horizontal Wolfcamp wells have been drilled with laterals less than 10,000 foot. Normalised productivity on longer laterals – those above 10,000 foot – has been 20% lower. Drilling costs rise exponentially with depth, and there’s a suspicion that longer wells are hitting a cost efficiency ceiling.
Proppant metrics fall off even more precipitously.
The top 10% of high volume proppant wells saw production per ton of sand drop by over 50% compared to average Wolfcamp completions. The additional proppant was used to help buoy early production metrics and shorten payback periods, but have not always increased NPV. Typical Permian wells use about 1,400 pounds of sand per foot, but wells where twice as much sand is pumped don’t deliver commensurate volumes of oil.
Might the Permian be reaching the limits of well size and design? Maybe – as Star Trek’s Scotty might observe of an underwhelming high intensity completion ‘you cannae change the laws of physics, Jim’.
But in its young life to-date, tight oil has consistently confounded expectations. Rob Clarke, Director of L48 Research, argues that there are sound reasons why the fading metrics might just be growing pains.
First, proppant placement is far more advanced and effective as we move into 2018.
In the past only 30% of completion stages actually contributed to production according to some reservoir models. Now, pin-point frac technology can place the proppant exactly where it’s wanted. Science is also being applied to identify the most effective proppant grain size and shape as well as drill bit design and fluid chemistry all with the aim of boosting EUR.
Second, the Majors have moved in and will change things.
ExxonMobil has global expertise in extra-long laterals – including a 39,000 footer in Russia – and has arrived into the Permian in a big way with the BOPCO acquisition earlier this year. BOPCO’s average lateral was impressive by Permian standards at over 10,000 feet; but ExxonMobil has already drilled a 12,500 foot well on the lease and will no doubt ramp up longer still to test the diminishing returns theory. Executing an effective completion on a well that long will be the next challenge.
All this shows how developing tight oil plays is like a real-time lab experiment albeit with direct commercial implications. The US Majors gave upbeat messages on the Permian in last week's earnings calls and clearly want to play a big part in the next stage of the experiment. The application of the Majors’ capital and industrial approach will test whether the thousands of wells to be drilled in the future enable the Permian to deliver on the bold growth targets.