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 2 | Monthly US Oil Production and Corresponding Base Decline
FIGURE 3 | Monthly US Gas Production and Corresponding Base Decline
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