Guest Editorial: Aging US Shale Wells: Years of Remaining Opportunities or Growing Asset Retirement Obligations?

Abstract

A year ago, I wrote a JPT Guest Editorial on stripper wells in the US. It was the result of data analysis that I personally found shocking and the result of frustration I was having with clients looking for acquisitions at that time. The piece was written right before oil prices started an incredible climb and when natural gas prices had been under $3.00/Mcf for an extended period. On the acquisition and divestiture front, although corporate consolidation was ongoing, deal counts were at a decade low, and it was extremely hard to transact. With oil prices at $45/bbl and the so-called “shale bust” of the past few years, many investors would not even consider an unconventional asset. Given this backdrop, I had clients on the hunt for conventional assets with stable base cash flow and limited risk. One client was a very serious buyer; however, some decision makers were adamant about certain asset characteristics, namely conventional, onshore US, certain states, operated working interest, proved producing (PDP), and no stripper wells. Despite this seeming like a reasonable set of criteria, asset after asset kept getting screened out. Finally, I had a call with the CFO and in frustration told him, “They’re all stripper wells.” Something about saying that out loud stuck in my head and got me thinking. I started wondering “how many stripper wells are there?” I began to think about the well count across the US, well IPs (initial production or starting flow rates), and the approximate rates at which I generally saw most wells go uneconomic in financial modeling. Given about 1 million active wells in the US, it seemed like there ought to be a decent percentage of active, producing, conventional wells over the 20–30 BOPD mark. I started pulling well data and found that for many US regions, 95% or more of the active vertical wells were producing 15 BOPD or less. The article generated a lot of interest as it brought to light something many people think is a problem in the back of their mind but had not seen quantified in a simple way. The follow-up question I got over and over was “What about horizontal wells?” The US Energy Information Administration (EIA) estimates that about 80% of US oil and gas wells are producing less than 15 BOEPD. For horizontal wells, EIA estimates about half are 50 BOEPD or less (the use of 6:1 BOE tends to improve the overall daily rate in an amount that is disproportionate to the value and economic impact of adding the gas stream). This rate includes both conventional and unconventional wells. It is natural to assume that the older conventional wells bring down the average and that more recent production from the hottest US shale plays is much higher.