Background on Well Depletion in Early Years of Production – The Decline Rate

The shale wells using horizontal production have a very high drop off rate in production over the first few years. The initial production (IP) is very high which falls fast (depletion rate). The wells then sustain production at a low level (terminal decline) for a very long time.

That is a very simple summary of what I’ve learned in the last year.

Here is a more detailed explanation from Michael Filloon at Seeking Alpha – Bakken Update: EOG Wells Model EURs Over 2 Million Barrels Of Oil

Here is his first comment that is quite helpful to me:

Horizontal wells share like characteristics. High initial production or IP rates are followed by high depletion rates. IP rates are used to calculate estimated ultimate recoveries or EURs. The method of calculation is important as this can cause a wide range of results.

Notice how the assumptions and methodology can change results. Keep this in mind as you see some in the blogosphere come up with results that show conclusive proof the Bakken production levels are cratering even at this moment:

More importantly, models can be used to produce incorrect results by changing data. This can be from ignorance, but some will manipulate data to produce findings to back their assertions. This causes contradictions difficult to disprove. Different areas see different types of production further complicating well results. Producers also have better or worse results depending on well design.

Then a discussion of depletion rates:

Well depletion changes from year to year. Models calculate for this, but these are just estimates.

He then lists several of the variables, which are still over my head.  Then the gold, which describes the shape of the depletion curve and the flat portion after that sharp drop off. Check this out:

Initially, wells experience a hyperbolic initial decline. This decline occurs after a large amount of resource is produced from the stimulated source rock. Depletion continues to decrease until terminal decline begins. This is a change as the shale’s matrix replaces production from the stimulated rock. In the Bakken, terminal decline is 8% and continues for decades.

The decline for the first few years is in the shape of a hyperbolic curve.  Think back to a hyperbola from your algebra class. There is a very fast decline but the rate of decline slows.  At some point, around 8% of the IP, it stops being a hyperbola and levels off to a very slow decline rate.

The well will produce on that slow declining curve for several decades.

See that link in the last paragraph I quoted? It leads you to a presentation by QEP to their stockholders. Check it out.

I looked at slides 33 through 38 for a while. Won’t mention specific numbers because I think that might require disclosures that I don’t make investment comments and all that stuff about forward looking statements, etc  What I will mention is that I’m guessing what I’m seeing is comparable to all the other shale wells.

What I learned is that all the wells listed (2 in Bakken/Three Forks plus 4 outside Bakken) look like a hyperbolic curve at the front and then flatten out for a very long run. Most of the wells will have a 35 to 40 year production run.

The Bakken wells have a noticably faster depletion rate, but not radically faster. They also have a higher terminal decline, at 8% instead of 6%. So the production curves for Bakken wells drop faster in the first couple of years but stabilize at a higher level for several decades.

Good stuff. I’m learning a lot as I go along. More reading results in more learning, showing there’s much larger parts of the story for which I don’t yet have a clue

(Hat tip: Bruce Oksol at Million Dollar Way.)

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