Depletion Rate

A topic I don't see addressed very often is the striking production decline rates of shale wells. A year ago, companies were finding Marcellus horizontal wells deplete about 75% the first year and 90% within 5 years. Link:

 

http://www.thefriendsvillegroup.org/declinecurve_range.pdf

 

Although the industry business model is to keep moving on and drilling (thus the beauty of the huge Marcellus), the impact of this decline is huge on individual landowners and their finite wells. A couple royalty calculators have recently been pulled off of the internet due to their failure to accurately project this decline. We are all focusing on the initial rate of production reports (average of 5 mmcfe, high wells of 13-14 mmcfe), and not the reality that ongoing royalties will be 10% of these initial calculations... Don't buy your yacht on credit.

 

Has anyone heard or read any current reports or experience on decline rates?

 

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Replies to This Discussion

Permalink Reply by Raymond Calhoun on March 28, 2010 at 3:06pm
Daniel,
I really don't have the experience or knowledge to comment on this, however, this is the biggest informational nut of all that needs to be cracked relative to Marcellus and value. Early on a lot of the experts on these shales felt they would keep on giving for 40-50 years. In light of current apparent depletion rates, after 5-10 years the trickle of gas would probably not be economic. Hope your question generates a lot of interest. Furthermore, hope it doesn't cause respondents to argue for the value of other layers of shale that will be tapped whenever the Marcellus slows to a trickle. They might be there, but that would be highly speculative. Also wonder whether the data on Marcellus, which is solely Range and probably in Southwestern PA, might reflect the relative shallowness of Marcellus in that area. Perhaps it gives it up fast and that might not be true elsewhere, e.g. northeastern PA. Just a thought.
Permalink Reply by Mmmarkkk on March 31, 2010 at 2:11am
The Marcellus decline rates, as well as all of the other shale plays, are very high in the early years. 70% is probably a good number. But most people in industry are looking at correlations between initial production rates and ultimate recoveries. There appears to be a good correlation and that's why you see so much attention paid to IP's. Plus, when looking at cashflow, its always better to get your cash sooner rather than later.

As to the economics of producing the low rates in the out years, these wells will have very very low economic limits. So I'd expect to see them producing for a long time, even if production drops below 100 MCF/day.

The original poster's warning is very valid though: royalty owners should NOT get all comfortable with those big checks in the first year. They will drop and drop quickly! But at some point they will reach a level where they are fairly flat (5% decline per year). Just at a much lower level. But hey, never look a gift horse in the mouth!!
Permalink Reply by Brian Day on March 31, 2010 at 4:22am
So... what happened to all those arguments that land owners should not be that concerned about the bonus money in the beginning? All the money is in the royalties. Yeah, I want a great royalty rate - especialy in the first year or two - but I want as big of a chunk of bonus money also, so that I can reinvest some of it to carry the payments on the yacht after the well declines. this business is just one joyful surprise after another as far as pertanent information is concerned. Another point, if a drilling company is allowed to hold your land in limbo for years by drilling a shallow well and capping it, you better get a big wad of cash up front because you might be dead or at least senile before you see any royalties. (My spelling is proof of my own advancing senility.)
Permalink Reply by Raymond Calhoun on March 31, 2010 at 10:39am
Well put Mark. I understand what your saying about the economics still being good at lower levels of production. I guess the greater concern, which has been hinted at with respect to Barnett is whether the production actually stops after a much shorter period of time than was estimated for original EURs. If the orginal EURS hold up, that would mean a rather extended period of time for relatively low, but constant production, e.g. still might be that 30-40 years I've heard reported. Definitely want the gusher production up front for the benefit of all parties. Would like the post 3-4 year production to be steady for a very long time. Your, or anyone else's thoughts please.
Permalink Reply by Jean Michel LeTennier on March 31, 2010 at 11:10am
HOw does this reapid Decline rate apply to acreage with Stacked Plays..?
Permalink Reply by Nancy Famiola on March 31, 2010 at 2:12pm
since the other zones besides the marcellus wont be fully developed until the marcellus is drilled, its a non issue. to answer your question though, every shale well drilled will have a pretty similar decline. having two wells drilled in two different zones would be the same as having two marcellus wells. Same decline.

since companies are so overloaded with marcellus acreage and marcellus wells to drill, the other shales are only considerable when the marcellus isnt the dominating shale under your acreage.

Jean how many times do you need to hear this to believe it? The decline pertains to everybody getting wells. Your question should be how many wells can I get, not does the decline pertain to my stacked play. Either way, you will get a marcellus well unless you can convince these companies you are smarter than them and they should do otherwise. Judging by your tone in these posts you do believe you are outsmarting these guys and they are doing it all wrong.
Permalink Reply by Raymond Calhoun on March 31, 2010 at 2:21pm
Nancy,
I'm still looking to see if the EUR estimates for the life of a Marcellus well will hold up, irregardless of IP and rapid decline rates in the first few years. Don't know if Barnett data proves that up in any way or not. Public companies projected EURs seem to imply a long, slow, tail to production. If anyone on this site has info to prove that up, I would appreciate hearing or seeing it. I also agree with your assessment regarding stacking, IF the costs of generating gas for each layer are approximately the same. There should be some savings by being in the same hole, but not likely significant.
Permalink Reply by Nancy Famiola on March 31, 2010 at 3:07pm
Hi Raymond,

Just quickly on the stacked play issue. You actually wont be saving any money because there will be 2 separate holes.. You will have 2 wellheads... etc. Companies dont just drill one well down and branch out. Its a 4 million dollar well cost whether its a marcellus or a different shale well.

So, basically these zones can be developed if the potential of that other zone is greater than the Marcellus. The Marcellus is so dominant in most places that this stacked play issue really isn't an issue at all.

The recent reports by arthur berman are being refuted by industry analysts. He isn't the first one that looks at these results (barnett shale results that is). Hundreds of investment bank companies have already done what he's done, and they all independently came out with similar results to one another. Berman is the lone one who got his kind of results.

Like every other comment which goes against the grain (like the anti-drilling protests), it gets more publicity than the actual facts.

Marcellus is too early in the game to disprove the EUR's.
Permalink Reply by Raymond Calhoun on March 31, 2010 at 4:19pm
Nancy,
As you can readily tell, I'm relatively new to this, but eager to learn as much as I can as fast as I can. Thank you. Your comment was objective, rational, clear and concise. ray
Permalink Reply by Tom Copley on April 25, 2010 at 10:05am
Nancy-- We will only begin to suspect Berman was right when one of the top E & P companies adopts a sock puppet as spokespersonality. --Tom
Permalink Reply by hunter777 on October 19, 2010 at 5:27am
I'd like to see that in depth report, and the data from which it came!

I am very familiar with the decline of the Marcellus wells in the Dimock area, and it is about 70% in the first year! What that means in practical numbers is that if the first month's production averaged 10 MMCF, the thirteenth months production would average about 3 MMCF. This is not a theory.

BTW- the data from DEP only lists total production over those twelve months, not initial production or decline.
Permalink Reply by David Pache on March 31, 2010 at 6:45pm
I thought that when the well begins to decline it can be re-stimulated several times to extend the life of the well.

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