WoodMac: Permian basin production growth could slow early next decade

Operators implemented technology to rapidly increase Permian basin production and they are poised to continue increasing Permian production. But Wood Mackenzie Ltd. suggests geological constraints could lead to long-term production growth declines, perhaps early next decade.

WoodMac forecasts that Permian production will increase to more than 5 million b/d in 2025 in a reference case outlined in a report entitled, "Geology vs technology: How sustainable is Permian tight oil growth?"

Although breakthrough technologies still offer Permian upside potential, WoodMac also noted downside risks from tighter well spacing and well-on-well interference, which could accelerate peak Permian production by 4 years compared with the upside case.

That scenario could put more than 1.5 million b/d of future production in question.

Robert Clarke, WoodMac research director for Lower 48 upstream, said, "Industry is set up to develop the Permian region's shale zones at an unparalleled level, testing the geological limits of the play. It is very likely that the upcoming level of activity will introduce a new set of issues, particularly reservoir deliverability."

Other shale plays have demonstrated that the first years of production growth typically are the easiest. Beyond that, producers require more breakthroughs to keep production at the bottom of the cost curve.

"The Marcellus hit regulatory and midstream bottlenecks, the Bakken contended with huge differentials, the Haynesville dealt with a massive cyclical downturn, and the Eagle Ford sweet spots ended up being much smaller than originally modelled," WoodMac's report said.

"In the Permian, the growth challenge could relate to the industry ultimately finding hard subsurface limits for tight oil recovery," WoodMac said.

It quantified the unintended consequences of high-intensity, long-lateral, close-proximity drilling and hydraulic fracturing on reservoir deliverability. Researchers suggest well interference during fracturing could reduce future estimated ultimate recovery (EUR) value by 30% compared with today.

"These reservoir issues could begin to manifest as sweet spots become exhausted," Clark said. "If future wells tap more difficult rocks, and are not offset by continued technology evolution, the Permian may peak in 2021."

The report outlined a prevalent reservoir risk as parent-child wells. Industry uses the term "child wells" to describe infill wells next to older producing wells, which are the "parent" producers. Only a small percentage of Permian wells being drilled now are child wells but this will change in the coming years.

Alex Beeker, WoodMac senior research analyst and co-author of the report, said, "When child wells are drilled, they are exposed to different reservoir conditions than the parent. Leaning on history again, we believe future child wells, because they're effectively drilled into pressure sinks, could have EURs 20-40% smaller than their parent producers. This would massively impact production growth and also limit the amount of cash flow available for reinvestment."

The report outlines conditions in which the maximum range between the upside technology and downside reservoir risk cases is more than 1.5 million b/d in 2025.

"The ultimate outcome will be some combination of all the factors we modelled," Beekeer said. "Other risk factors will also come into play such as evolving gas-to-oil ratios and water-injection issues in adjacent zones that will impact pressure regimes and completion designs."

The analysis shows Permian production will grow aggressively for the next few years, technology advancements will quickly spread across all operators, and EURs for many parent wells should keep rising.

But reservoir risks might become a reality longer term unless technologies evolve, WoodMac said.

Clark said less Permian supply starting in 2021 could exacerbate effectively meaning the US cannot deliver as much oil as analysts suggest.

"Other sources of higher-cost, conventional production would be needed," Clarke said.