Price Effects on Developmental Well Completions, Reserve Additions, and Oil Production in West Texas

Abstract

ABSTRACT Ninety-seven percent of the oil reserve additions in West Texas during the 1980's are attributable to development and redevelopment of existing reservoirs. This reserve growth occurred during a large fluctuation in deregulated oil prices. Therefore, the 1980's provide a time period in which models can be developed to determine the effects of deregulated oil prices on reserve growth and thus the oil supply from West Texas. In 1981, price deregulation within the United States resulted in an oil market in which the West Texas oil supply became sensitive to world oil price. The economic factors controlling West Texas oil supply varied widely during the subsequent decade. Average annual oil price ranged from $10.40 to $33.80 (1982 $). Average well-drilling costs ranged from $29.12 to $74.40 (1982 $) per foot. At the same time, inflation ranged from 5 to 12 percent, while the annual average real prime interest rate ranged from 4.6 to 10.6 percent. These economic factors were the basis for investment decisions that resulted in 35,600 development well completions, 4,452 million stock-tankbarrels(MMSTB) of developmental reserve additions, and 4,689 MMSTB of oil production during the 1980's in West Texas. During the 1980's, oil price controlled the number of development well completions, the amount of developmental reserve additions, and oil production in West Texas. The oil price increases of the early 1980's resulted in increased reserve additions after an initial time lag; that is, annual reserve additions declined for the first two years of the decade, and increased in 1983. The number of development wells completed and the amount of oil production also display a time lag. In contrast, drilling costs and drilling rig utilization rose immediately after this price increase. In the second half of the 1980's with the sharply decreasing price in 1986, an immediate and concomitant decline in rig utilization, development well completions, and reserve additions occurred. Between 1985 and 1986, annual reserve additions declined from 744 to 174 MMSTB (nearly 75 percent) before recovering to approximately 540 MMSTB in the latter part of the decade. Thus, there was a time lag in the response of oil supply parameters to price increases but not to sharp price decreases. This time lag is related to supply and demand mechanisms controlling a deregulated oil price. It also provides insight into the assessment of how future oil price variations will affect the West Texas oil supply.