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Permian Decline Curves Altering Supply Outlook?

Two basic but important factors that are taken into account when BTU Analytics refines our monthly oil and gas production forecasts are well decline curves and initial production (IP) rates. As more complete data comes in for the first half of 2016, we can examine the newest trends and see how this year is lining up compared to previous results. Upon first glance, both decline rates and IP rates have shown significant changes in the past couple of years, impacting production forecasts.

Taking a closer look at the gas decline curves for three sub-locations in Texas, the recent data shows a significantly steeper 3 month decline year over year.  Central Midland jumps from an 8% decline rate in 2015 to 23% in 2016. The 2016 BTU estimated 1st year declines follow a similar trend, with the Central Midland increasing from 55% to 64% this year and the other regions also showing large increases in the decline rate. All else equal, a steeper decline rate would indicate that the well’s total EUR would be lower, reducing the production per well for that sub-location.


On the oil side, we see much more stable decline rates when comparing 2016 to previous years. In fact, the Central Midland and Delaware Texas even show a slightly reduced 3 month decline rate. While there are smaller changes in the oil decline rates than on the gas side, the oil rates are already very steep at ~70% for the Central Midland and Delaware Texas sub-locations.

Decline Curves - Permian and Eagleford Monthly and Annual Declines

To relate the decline curves to production numbers, it is necessary to look at the average maximum IP rates as well. The chart below shows that both oil and gas IP rates have been steadily increasing since 2013.  Longer laterals and new completion techniques have resulted in strong IP gains, and a producer focus on their best acreage has also helped to drive these well improvements.

Decline Curves - Permian and Eagleford Initial Production Rates

While there are many variables which could cause the decline rates and IP rates to continue to change going forward, one possible scenario BTU is keeping an eye on what could lead to decline curves flattening and IP rates stagnating is that producers are discussing choking back wells in their first few months of production to ‘right-size’ for field level infrastructure. For example, Pioneer Resources (NYSE:PXD) reported in their quarterly earnings that in order to keep capital spending on their water disposal infrastructure to a minimum, they have implemented a choke management program on their new wells in the Wolfcamp.  If more producers follow this strategy, we could soon see smaller growth in IP rates, and a flattening of type curves as the initial declines decrease.

It is important to know what type of impact these variables have on the overall production dynamics as they have an opposite effect on production volumes. To examine how a shift in type curves can affect our production forecast, BTU created an excel-based tool for clients which can take user inputs to alter our base case forecast. The following chart shows the effect of a 10% increase or decrease in first year decline rates on BTU’s overall gas forecast for a single sub-location, the Delaware Texas basin. As you can see, a 10% change in only the first year decline rate can lead to a year-end 2018 production change of ~90 Mcf/d in the Delaware Texas. The Central Midland and Western Eagle Ford showed similar responses with production deviations of +/- 75 to 125 Mcf/d. As type curves and IP rates change, the overall affect on US supply has the potential to be substantial.

Decline Curves - Delaware Basin Forecast Sensitivity

BTU forecasts over 90 different sub-locations, and our client tool can be used to run scenario analysis on any region of the US. For more information, or to demo the Excel-based version of the tool, see our Production Forecasting Tool page.

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