Hard To Forecast Tight Oil EURs -- Bloomberg

Updates

Later, 7:04 p.m. central time: I've really enjoyed the blog. Thinking again about the Arps equation -- if you go the linked fekete page below you will see a page full of integral calculus (at least I think it's all integral). I try to read a book on math at least once every year. I took calculus in college, got an "A" both semesters, and never understood what it was good for. It was only years later, after reading several books, that I finally understood it. It obviously makes sense why one would need calculus to calculate depletion of an oil well that was non-linear. Newton and Leibniz would have been proud. 

Later, 3:39 p.m. central time: a reader sent me a nice note regarding Arps equation. That note spurred me to look at the equation at fekete. The math was more than I had seen since my days in Calculus 101 -- first year college.  Wow, a new appreciation for those who calculate EURs.

I have an idea there are least five EUR's to be cognizant of:

a) the EUR of a specific well
b) the EURs of wells in the same drilling unit
c) the EURs of wells in the same oil field (to include same formation)
d) the average EURS of wells in the same basin (Williston vs Permian vs...)
e) the average EURs of wells operated by the same operator across the globe

.. and there would be different (and multiple) reasons for calculating the various EURs at all levels.

I have learned so much from the blog. The take-away in this discussion: there is no "average" EUR of a Bakken well. The best we can perhaps do is determine the average EURs of wells in the same drilling unit. In the Bakken, the EURs can vary widely even in the same oil field (I'm thinking of two fields, as examples, the Parshall [east-west], and the Cottonwood [north-south]). Within the same drilling units, the EURs will evolve over time as technology and processes improve.

Original Post

A reader sent me this link. I wasn't going to post it at first; the headline, as usual had more "tease" than the article had "meat." But I can never resist the opportunity to comment on the banality of some of these articles. Bloomberg is reporting on old math:

In 1945, Arps, then a 33-year-old petroleum engineer for British-American Oil Producing Co., published a formula to predict how much crude a well will produce and when it will run dry. The Arps method has become one of the most widely used measures in the industry. Companies rely on it to predict the profitability of drilling, secure loans and report reserves to regulators. When Representative Ed Royce, a California Republican, said at a March 26 hearing in Washington that the U.S. should start exporting its oil to undermine Russian influence, his forecast of “increasing U.S. energy production” can be traced back to Arps.

The problem is the Arps equation has been twisted to apply to shale technology, which didn’t exist when Arps died in 1976. John Lee, a University of Houston engineering professor and an authority on estimating reserves, said billions of barrels of untapped shale oil in the U.S. are counted by companies relying on limited drilling history and tweaks to Arps’s formula that exaggerate future production. That casts doubt on how close the U.S. will get to energy independence, a goal that’s nearer than at any time since 1985, according to data from the U.S. Energy Information Administration.

I would like to see the "proof" that the Arps equation has been twisted to apply to shale technology. Perhaps, but my hunch it's become a lot more sophisticated than "tweaks" to Arps' formula. My hunch is that estimating EURs in the Bakken will be a lot like weather forecasting. Despite the jokes, weather forecasting is pretty darn good. Operators now have seven solid years of production from 6,000 wells in the Bakken.

Estimates are just educated guesses.  The fact that SM Energy revised its EURs four times in a year (or whatever it was) suggests that SM Energy was simply issuing too many press releases, too much information. Smile.

SM Energy needs to keep its focus on improving its wells; the EURs will take care of themselves. The article didn't mention EOG which has seen incredibly good EURs. The article didn't mention the significant increase in EURs in the Bakken from 2007 to 2013.

I would think it will be impossible to sort out EURs in tight oil. In the Bakken, the sweet spots are very different from other areas, and these areas are sometimes separated by less than a mile. Mostly it has to do with natural fracturing, but also with porosity and permeability. Thickness of the seam is less variable and TOC is probably fairly consistent, within a range, and those are the five parameters (natural fractures, porosity, permeability, thickness, and TOC) before we even get to "competence" of the drillers and the frackers.

Idle chatter.

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A Note to the Granddaughters

Joseph Schumpeter, A Contemporary of Albert Einstein's

From Sylvia Nasar's  Grand Pursuit, pp 186 - 190

In 1908, Schumpeter posed two questions that have relevance today:

• could one prove the existence of economic development in the sense that growth could be traced to economic rather than demographic, political, or other external causes? and, 
• was it possible to devise a plausible narrative of economic evolution under the assumption that existing social arrangements -- capitalism and democracy would persist?

His provisional answer: a strong affirmative.

Nasar:

A nation's ability to provide its citizens with a high standard of living depended first and foremost on its productive power, which enabled the economy to produce more and more with the same resources, like the porridge pot in the Grimm brothers' fairy tale. Output per worker had doubled or tripled in his own lifetime after more or less stagnating for nearly two thousand years between the births of Christ and [Queen] Victoria. ... Schumpeter treated economic development as a fact rather than a theoretical possibility. By contrast, Malthus was convinced that technological improvement wold fail to counteract the fateful law of decreasing returns and that a stationary state was near at hand.

And, then,

If development were being driven mainly by globalization, as Marx had hypothesized, and local conditions mattered little, average living standards should become more, not less, similar. But anyone who had recently lived in Cairo as well as London, Cernowitz, and Vienne had to be struck by the stunning differences in the level and rate of economic development of different countries. In 1820, the average standard of living in the world's richest country -- still Holland -- was roughly three and a half times that of the poorest nations of Africa and Asia. By 1910, however, the lead of the richest over the poorest had grown to more than eight-fold. These differences in living standards primarily reflected differences in productive power rather than in territory, natural resources, or populations [compare Russia with North Dakota]. For any given amount of capital and labor, the most efficient economies could produce many times as much as the least efficient ones.