Kids Can Be A Real Pain In the Ass

Society of Petroleum Engineers Publication 194310 titled, Permian Basin Production Performance Comparison Over Time and the Parent-Child Well Study is a great, white paper giving detailed analysis on well performance and ensuing declines in both the Delaware and Midland sub basins of the Permian in an array of different benches, right down to pounds of proppant per lateral length, and the complex relationship between infill parent and child wells.

One of its authors, Wei Zheng, a PE with Schlumberger, said when presenting the paper recently at the SPE Hydraulic Fracturing Technology Conference in Houston: “In general, normalized production from child wells is lower than parent well; older wells outperform newer ones even when adjusting for the fact that new horizontal wells extend further through the reservoir and more proppant is pumped. We are getting the same result as 5 years ago when we were spending less."

This chart above is a production profile for a number of average Midland Basin wells drilled from 2012 thru 2018. Here you can clearly see that 2018 wells (black) have a higher IP180 than previous years wells implying that well productivity has indeed improved significantly over the years. Please note, however, how steep ensuing decline rates have becomes since 2016.

This chart, above, "adjusts" the average Midland Basin well, or normalizes the wells within the study group, for lateral length and pounds of sand per perforated foot and reflects added costs necessary to get more oil out those unconventional containers (reservoirs). Longer laterals and bigger frac's cost more money. Now we can see that 2018 wells (black) look actually less productive that previous years. In other words, older wells produce more oil, for less money.

In juicy, sweet spots, where shale oil companies have been hanging out the past few years, parent wells are the oldest wells in the neighborhood and "child" wells drilled nearby often tend to interfere with each other and with the parent well(s). This interference is called "frac hits." The relationship between parent and child can often lead to higher recovery of oil in place. Often siblings will compete with each other, and their parents, for the same oil in place when drilled too close together, however. When this occurs child well economics suffer. Frac hits also cause down-hole mechanical problems, long periods of downtime for offset wells and even complete loss of production in offset wells. Frac hits across unit boundaries and leases lines imply mineral trespass and lawsuits are becoming more and more prevalent. All in all, at $8.5 million a pop, well interference is an expensive proposition; those guys are constantly tweaking frac designs, sand loading and costs. In the mean time a shit pot of OPM is getting spent sorting it all out.

How close wells are drilled together can be a simple matter of the 'rate of extraction' that an operator chooses to live with, or is forced to live with given leasehold drilling commitments and interest requirements on long term debt. It appears by this SPE study that Wolfcamp laterals in the Midland Basin drilled closer to each other than 800-1200 feet are too close. Actual real life spacing in that basin ranges down to 440 feet between laterals.

When an operator minds proper well spacing and does not over-drill its core areas, lots of good things happen for everybody.

Bottom-hole pressure is preserved, liquids recovery of OOIP increases in parent wells with pressure maintenance. Gas gathering and oil infrastructure stays ahead of production rates and there is less associated gas flared; the State of Texas is now losing 7% severance taxes on approximately 2 BCF of gas per day being wasted up flare stacks in the Permian and Eagle Ford basins. Valuable fresh water in arid West Texas is conserved when fewer wells are frac'ed. Less outside CAPEX is required to drill needless wells; parent well economics improve, company balance sheets get better and cash flow can actually be used to return dividends to shareholders and deleverage debt. A very puny shale oil industry becomes financially healthier and sustainable for the long haul.

A slower rate of American shale oil production increase will balance world oil markets and raise oil and natural gas prices. Product prices become more predictable, more stable, and long term conventional EOR and Gulf of Mexico investment increases; all of our oil eggs in America are NOT in the LTO basket. Jobs in the oil and natural gas sector become more secure and young Americans can look to our industry for long term careers. Crime, the use of illicit drugs and the cost of living goes down in shale oil basins that constantly go from boom to bust because of over production and ensuing price volatility. Higher prices cause tax revenues to go up on the State and local levels; education improves. And, get this...once shale oil companies become profitable, they pay Federal income tax...for the first time ever! How about them apples?!

Lastly, and most importantly, America's remaining hydrocarbon resources are conserved for the long term benefit of American consumers, not foreign countries currently benefiting from cheap US exports, Wall Street or greedy corporate CEO's still on reserve base compensation incentives.

We owe our real kids a secure hydrocarbon future. Thats what good parents do.

Are you listening, Austin?