Investors and operators like to draw attention to the lengthy history of oil production from the Permian. Benefits include well-known reservoirs and lower cost brownfield options for services and infrastructure. Today's boom mirrors prior periods of intense Permian activity, but using prior comparisons of tight oil reservoir behavior can result in dangerous conclusions.
The Permian houses thousands of vertical wells that have been online for decades. The actual terminal decline rates of those wells can be modeled with empirical data, and our analysis shows that they sit between 5% and 10% annually. However, pure field data for horizontal tight oil wells does not go back as far, so terminal decline values from vertical wells or general ‘shale’ declines are often applied to Wolfcamp type curves as a proxy. This is a risky practice.
Building evidence suggests that the most active Wolfcamp sub-plays may eventually still have annual decline rates greater than 10% five or more years into their lifespan. Not recognizing this and modeling with the lower proxy value from older, analogue tight oil plays could result in overstating production potential and overvaluing projects. Wolfcamp players without exposure to other basins may need to resort to M&A to fill production gaps. We are already seeing signs of this in 2018 deals with Concho and Diamondback using M&A to acquire larger undrilled acreage footprints.
In many cases, Permian tight oil wells realize more than 40% of the estimated ultimate recovery (EUR) within only 36 months of being online. Nearly 50% net present value (NPV) is realized by year five. Rightfully so, we have observed the analytical focus being placed on each well's first few years. This emphasis has also been driven by the limited number of tight oil wells with more than five years’ worth of production history. Less than 20% in the Permian tight oil wells have been producing more than 60 months.
As the Wolfcamp play matures, the later-life performance of wells starts to matter more. Even with record rig counts, the number of new wells drilled each year becomes a smaller proportion of the total wells contributing to supply.