Conventional Discovery Shortfall Demands Well Diversity

Over the past decade, the U.S. oil and gas sector has emphasized developing short-cycle-time unconventional projects rather than wildcat drilling that targets potentially more bountiful conventional plays.

In a recent report, IHS Markit concludes the trend toward unconventional projects has caused the number of conventional discoveries to plunge to a 70-year low. As this chart from IHS Markit shows, the number of conventional new field wildcat (NFW) appraisal and development wells outside Onshore U.S. and Canada lagged behind the number of U.S. unconventional wells from 2013 to 2018 save for two years.

Although unconventional projects give oil and gas firms more flexibility in responding to market changes, the wide disparity in depletion rates between unconventional and conventional wells could become particularly evident in years to come given the shortfall in conventional reserves additions.

“You’re taking from the future and getting immediate gratification,” Keith King, senior advisor with IHS Markit and lead author of the report, told Rigzone. “You’re producing more over a shorter time period and less over a longer time period.”

To illustrate, King explained that an unconventional oil well might experience a 60-percent depletion rate in its first year of production. In contrast, the depletion rate for a conventional well during the same period might be just 12 percent.

“You get all those volumes up front with your investment whereas a conventional well’s production will plateau for, say, 20 years or more,” he continued. “Some conventional wells will produce for 100 years.”

King added the mid-21^st century does not reflect a particularly long time horizon for a conventional oil well.

“Twenty or thirty years into the future might sound like a long time away, but in the conventional world that is not a long time away,” he said. “Conventional wells not being drilled now won’t be producing later on.”

King pointed out that such a scenario makes sense, assuming that a pair of conditions are met.

“What’s strange about that is, in a world with peak demand and where renewables displace fossil fuels, it would be a rational decision – if you believe in peak demand,” he said, adding the world would be short of oil if peak demand fails to materialize at mid-century.

An effect of cheap debt

Tom McNulty, Houston-based managing director with Great American Group, remarked the shift to unconventional “factory drilling” at the expense of conventional development stems primarily from investors gaining access to plentiful debt capital to finance projects.

“The tight-rock, unconventional plays are perfect for a fast-in, fast-out mentality, given their rapid and steep decline curves,” said McNulty.

He noted how the federal government’s response to the “massive credit crisis” toward the end of the previous decade encouraged the investment community to back such projects.

“The government opened up the spigots, ensuring that the economy stayed sound with liquidity and cheap money,” McNulty continued. “Lots and lots of capital became available to fund the ‘Shale Revolution,’ and it was not really all that expensive from a historical perspective. We saw lots of management teams get funded, and lots of private independents got funded, too. Lots of debt capital made it easy to drive up equity returns.”