Experience RS / Market News

Turn Up the Base (Decline)

An intimate relationship exists between an operator’s base production decline and its capital expenditure program. Base decline is defined as the natural drop in output over time if no new wells are added, primarily due to reservoir pressure depletion resulting from production. Volumes contributed by new wells offset production declines from existing wells, thereby affecting aggregate production growth for the period. Operators with a higher base decline need to add more production to remain flat or grow, thus requiring higher capital expenditures. Calculating an operator’s capital efficiency, or the cost required to add an additional barrel per day to a given period’s exit production, helps quantify the effectiveness of capital deployment (Figure 1). We believe capital efficiency is a fundamental metric when benchmarking operators against their peers within the E&P landscape.

The interplay between the base decline and corresponding production growth is also relevant when considering total US production. In theory, during periods of production growth associated with a high level of new well additions and/or productivity improvements, the average base production decline increases. During a period of US oil production growth over 2013-15, the base decline for oil reached a peak of ~32% (Figure 2). After oil prices started collapsing in mid-2014, the decline dropped to as low as ~26% over 2015-17, in harmony with stifled production. The US has since emerged as a global oil superpower, fueled by both rising activity and substantial improvements in well-level productivity. With current US oil volumes reaching the highest levels they’ve ever been, the base decline danced commensurately to a peak of ~35%, surpassing the 2014 peak. US gas production base declines analogously fluctuated in the same regard, from a 2015-17 low of ~18% to a present high of ~24% (Figure 3).

FIGURE 1 | RSEG Calculation for Capital Efficiency

FIGURE 1 | RSEG Calculation for Capital Efficiency

FIGURE 2 | Monthly US Oil Production and Corresponding Base Decline 

FIGURE 2 | Monthly US Oil Production and Corresponding Base Decline 

FIGURE 3 | Monthly US Gas Production and Corresponding Base Decline

FIGURE 3 | Monthly US Gas Production and Corresponding Base Decline

 

RS Energy Group Disclosure Statement:   

© Copyright 2019 RS Energy Group Canada, Inc. (RSEG). All rights reserved.  

All trademarks, service marks and logos used in this document are proprietary to RSEG. This document should not be copied, distributed or reproduced, in whole or in part. The material presented is provided for information purposes only and is not to be used or considered as a recommendation to buy, hold or sell any securities or other financial instruments. Information contained herein has been compiled by RSEG and prepared from various public and industry sources that we believe to be reliable, but no representation or warranty, expressed or implied is made by RSEG, its affiliates or any other person as to the accuracy or completeness of the information. Such information is provided with the expectation that it will be viewed as part of a mosaic of analysis and should not be relied upon on a stand-alone basis. Any opinions expressed herein reflect the judgment of RSEG as of the date of this document and are subject to change at any time as new or additional data and information is received and analyzed. RSEG undertakes no duty to update this information, or to provide supplemental information to anyone viewing this material.  To the full extent provided by law, neither RSEG nor any of its affiliates, nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of the information contained herein. The recipient assumes all risks and liability with regard to any use or application of the data included herein.

Caution Regarding Forward-Looking Statements:

This public communication may contain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These statements are based on our current expectations about future events or future financial performance. In this context, forward-looking statements often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," or "target” or other words that convey uncertainty of future events or outcomes.

These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. When evaluating the information included in this communication, you are cautioned not to place undue reliance on these forward-looking statements, which reflect our judgment only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances that arise after the date hereof.

Note to UK Persons:

RSEG is not an authorised person as defined in the UK’s Financial Services and Markets Act 2000 (“FSMA”) and the content of this report has not been approved by such an authorised person.  You will accordingly not be able to rely upon most of the rules made under FSMA for the protection of clients of financial services businesses, and you will not have the benefit of the UK’s Financial Services Compensation Scheme. This document is only directed at (a) persons who have professional experience in matters relating to investments (being 'investment professionals' within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "FPO")), and (b) High net worth companies, trusts etc of a type described in Article 49(2) of the FPO (all such persons being "relevant persons").  RSEG’s services are available only to relevant persons and will be engaged in only with relevant persons. This report must not be acted or relied upon by persons who are not relevant persons.  Persons of a type described in Article 49(2) of the FPO comprise (a) any body corporate which has, or which is a member of the same group as an undertaking which has, a called up share capital or net assets of not less than ( i ) in the case of a body corporate which has more than 20 members or is a subsidiary undertaking of an undertaking which has more than 20 members, £500,000 and (ii) in any other case, £5 million, (b) any unincorporated association or partnership which has net assets of not less than £5 million, (c) the trustee of a high value trust within the meaning of Article 49(6) of the FPO and (d) any person ('A') whilst acting in the capacity of director, officer or employee of a person ('B') falling within any of (a), (b) or (c) above where A's responsibilities, when acting in that capacity, involve him in B's engaging in investment activity.