?For a recent study, E&P research firm Ross Smith Energy Group Ltd., based in Calgary, performed a huge task—analyzing data from almost 700,000 wells drilled in the U.S.—to build type curves and show average well performance. The firm sought to answer these questions: How has well performance changed in recent years, and how has the change affected the overall gas-production profile?


“Our analysis is based on actual data available through January 2008. Contrary to industry consensus, the U.S. natural gas base decline rate is not sharply steepening. It has been stable since about 2003…fluctuating in a narrow band of 26% to 28%.


“How is this possible? For more than a decade prior to 2000, the decline of new gas wells got steeper and steeper, causing the aggregate U.S. decline to increase. But starting around 2000, the average first-year decline of gas wells drilled in the U.S stabilized and has since been essentially constant.”


The firm reports that the popular conventional wisdom, which holds that base declines are steadily worsening in gas wells, can only occur when total gas production increases continually year over year. When total production is not changing, the production-weighted average vintage does not change—meaning the decline does not change.

Per-well productivity
Total U.S. production had remained relatively flat year-over-year prior to a recent increase in gas drilling activity in 2007 that continued through most of 2008. According to the analysis, the average annual first-year decline rate for new gas wells was relatively unchanged, between 40% and 50%, since 2000.


The base decline rate of U.S. production had remained fairly steady at 26% to 28% since 2003. “The decline, which needed to be fought, during 2007 (declines from 2006 and prior drilling) was around 27%.”
Yet, a steady decrease in the important metric of productivity per well over time reversed in 2006, according to the findings. “Per-well productivity increased in 2007 and the same is expected in 2008, meaning that industry will need fewer wells to replace the same amount of production.”


The annual average initial production per well experienced a dramatic increase in 2007, to about 900,000 cubic feet a day from 680,000 in 2006 (which was the lowest point in history), reversing a downward trend that began in the 1990s, the firm reports.


Not surprisingly, these productivity gains are attributed to innovations, such as horizontal drilling in tight reservoirs, mechanically isolated and multistage fracture stimulation, and cracking the code to commercialize shale gas.


The researchers found that, since 2000, the average first-year decline has remained relatively constant (with the exception of a drop in 2002). Additionally, the second- to fifth-year decline rates have shown no steepening trend for 15 years.


The U.S. base decline was approximately 16% in the early 1990s, requiring new drilling to add approximately 8 billion cubic feet of daily production per year to replace falling output from existing wells. The base decline rate increased to the mid-20% range by 1999 and held fairly steady through 2007, meaning approximately 12- to 13 billion cubic feet of new daily production was required every year through this period to replace natural declines.


“Thanks to improving productivity per well since 2006, the number of wells needed to keep production flat fell in 2007. Instead of the roughly 24,500 wells we estimate that were needed to keep production flat at 2006 levels, about 31,000 were drilled.


“As a result of 2007 drilling and high activity levels in 2008, we expect the base decline rate to increase as a result of the corresponding growth in U.S. production through 2007 and 2008. However, unless production growth is maintained year over year, the U.S. base decline rate will quickly revert back to its long-term average as the weighted average production vintage is restored.”


The firm cautions that a $7 Nymex gas price may make it difficult for producers to maintain gas production-growth rates similar to those seen in 2007 and 2008.

Methodology
Ross Smith says production data available from state sources have inconsistencies that required a significant amount of digging to understand and amend accordingly. Ross Smith’s data cannot be compared directly with Energy Information Administration (EIA) information, the analysts caution, because of differences in convention and methodology.


For example, EIA production data is compiled through industry surveys where producers must file data on EIA Form 914, but Ross Smith used a vendor that provides state-level data aggregation (HPDI LLC).


“We have only looked at production from gas wells and have not accounted for associated gas from oil wells. We believe the base decline would be lower if we incorporated associated gas,” the report says.