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The Well Test Wall of Shame

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Something's been bothering me about certain press releases from oil and gas companies lately. I'm not even talking about the sickening swell of follow-on share offerings by the likes of Anadarko Petroleum (NYSE: APC  ) , Delta Petroleum, and Mariner Energy, either.

I'm talking about the preponderance of PR that proclaims eye-popping initial production rates. The more I scrutinize the language in these releases, the less informative I find them. Some are downright misleading.

Can I see some IP?
From a stakeholder's point of view, a well's initial production (IP) rate can be useful knowledge, insofar as it provides some indication of future productivity and expected ultimate recoveries (EURs). For example, a rule of thumb in the Barnett and the Cotton Valley is that for every million cubic feet of a well's initial gas production rate, EURs bump up by a billion cubic feet.

The problem is that there seems to be no reporting standard whatsoever when it comes to initial production rates. Some companies quantify this production period (24 hours, 30 days, and so on) while others don't bother. Some report the results of a production test, which implies the use of test equipment that may or may not match real-world production conditions, while others report the average volumes actually flowing through surface equipment to sales.

A few operators even have the audacity to present a well's absolute open flow rate (a theoretical figure that generally multiples higher than the rate sustained under actual production conditions) as a proxy for the well's expected performance. If you ever see this trick, run away. Fast.

Drilling deeper
Consider Goodrich Petroleum's (NYSE: GDP  ) announcement following its first horizontal well completion in the Haynesville/Bossier play of Louisiana, which "tested at a rate of approximately 14.5 MMcf per day on a 24/64 inch choke with 6,000 psi." This kind of reporting leaves many questions unanswered:

  • What kind of test was performed? What sort of equipment was used?
  • Was this only one of several tests conducted? If so, is this the result of a single test run, or is it a composite?
  • What was the duration of the test -- 72 hours … 30 minutes ... something else?
  • Was the rate sustained across the entire test period, or just a portion of it?

Without more context, this test rate doesn't really tell me a lot about the well's reserve or production profile.

Mind the decline
If a well continued to produce at or near its initial production rate over the ensuing weeks and months, I wouldn't make a stink about the shoddy state of IP reporting. But the fact is, we are seeing some stunning declines in today's horizontal gas plays, even within the first weeks of production.

Cabot Oil & Gas (NYSE: COG  ) has drilled 50 wells in its County Line play in East Texas, with an average IP rate of 10 million cubic feet per day. The average 30-day rate is just half of that, at 5 million per day.

Haynesville shale wells, the hottest horizontal play around, tend to come online so strong, and decline so rapidly, that old rules of thumb for calculating per-well reserves are getting thrown out the window. That 1:1 IP-to-EUR ratio I mentioned earlier? According to top-tier reserve evaluators Netherland, Sewell, the ratio's tracking closer to 1:0.37.

In other words, these Haynesville well tests make for big headlines, but the EURs aren't tracking the IP number nearly as closely as many investors are used to seeing. Haynesville players such as Goodrich and Petrohawk Energy (NYSE: HK  ) tend to shout their often vague initial production rates from the rooftops, but I worry that these announcements don't serve investors particularly well, especially at this very early stage of development. It's far from clear today what the "average" Haynesville well will look like over the course of its productive life. Variability is actually running quite high.

I should note that the state of Louisiana invites ambiguity with its requirement that deliverability tests merely "be of such length as to determine an accurate gauge." Texas' guidelines are clearer, requiring that "all deliverability tests shall be performed by producing the subject well at stabilized rates for a minimum time period of 72 hours." The biggest, baddest Haynesville wells appear to lie mostly on the Louisiana side of the border, however.

The prudent way to play
Considering the combination of non-standardized initial production figures and dramatic early declines in many of today's hottest drilling targets, I am much more partial to the practice of reporting 30-day IP rates. That is, the average daily rate of actual production over the first month of a well's life. EQT (NYSE: EQT  ) stands out for its steadfast commitment to this format, and I doff my jester's cap to this company. Penn Virginia (NYSE: PVA  ) is good about highlighting its 30-day IP results, as is EnCana (NYSE: ECA  ) .

As for those E&Ps that are sparing with their details, while the SEC may never force a higher reporting standard upon them, I'm going to hold them to one anyway. They're going on my Well Test Wall of Shame until they put down the pom poms and get with the 30-day program.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (21)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 23, 2009, at 11:01 AM, AEB09 wrote:

    Initial Production (IP) rate should be determined as the average daily rate from the maximum 30-day production period. This is almost never the way that companies or state agencies do it.

    I did a correlation in the Haynesville Shale between reported IP and the maximum 30-day average for wells that had enough production history to allow this calculation. The 30-day daily average was about 80% of the IP.

    The correlation of IP to ultimately recoverable reserves (EUR) is a risky proposition because it assumes a uniform production decline rate for all wells. Since shale wells are highly variable in decline rates, even when closely spaced, this is an unreliable approach.

    In the case of the Haynesville Shale, most wells have either no production history (only an IP because they are not yet connected to sales), and most producing wells have an average of about 90 days of production.

    This is not enough data to say much of anything about decline rates beyond the immediate period of production or, perhaps, a few months out. There is no problem with using this as a crude approximation (generally you would rather have a high IP to a low IP), but when Netherland Sewell Associates gets as precise as 1:0.37, I get very nervous. A high IP with a high decline rate will produce a lower EUR than a lower IP with a lower decline rate.

    In addition to the many problems with IP rates correctly reported in your post, there is also an issue of choke size, the diameter of the orifice through which the gas flow is measured. A small choke will result in a lower flow rate and visa versa.

    Calculated open flow (CAOF) is always bogus because it simply involves taking a measured pressure and extrapolating it to a 24-period. The problem here is the calculation assumes perfect permeability (the capacity of the rock to allow gas to flow through its pores). Since this never happens, it is always too optimistic. In the case of unconventional gas reservoirs, there is generally no permeability other than the artificial permeability created by fracture stimulation.

    As a rule, anything based on IP is questionable, and should be treated with a healthy wait-and-see approach.

  • Report this Comment On June 26, 2009, at 9:04 AM, susan400 wrote:

    Smarter operators are shying away from haynesville,

    declien rates are sky high,

    EUR projections are way off/

    I think Haynesville stks are shorts..

  • Report this Comment On July 08, 2009, at 6:44 PM, tocktick wrote:

    Not all IPs are created equal, even in Haynesville. And there are at least a few E&Ps being tarred with non-existent research for a hip shooting article.

    There i, in fact, statistics of nearly a year (may be a full year now) show that the original Petrohawk Haynesville Horizontal, Elm Grove Plantation 63, has continued to produce a very high rate, such that it has exceeded 4 bcf in less than a year. Louisiana's Sonris database shows there's something else that's being overlooked by lazy researchers. Production began on June 26, 2008 and data goes through 4/01/2009. The last four months of EGP 63 production are greater than the first four full months.

    Formatting here doesn't allow a coherent listing of the Sonris data, but the well serial number, used in Sonris Lite, will take you to the production figures.

    This is the initial report.

    #237344 LCV RA SUF;ELM GROVE PLANTN 063-COMPLETED 6-26-08; GAS, LOWER CV, 17076 MCFD, 5 BCD, 3415200/1 GOR, 24" CHOKE, 48 GVTY, 5525 CP, 11383-15026 (MD), 10999 - 11006 (TVD)

    For the 11 months (including partial month) EGP 63 Extracted 4485337 mcf, plus a bonus of 1160 barrels of oil.

    In the first three full months of production EGP 63 gave up 808749 mcf, in the last three month, the well produced 1286409 mcf or 1.286409 BILLION CF.

    in the 304 days of production, EGP has averaged 14.474 mmcfe/d. That is a bonanza in anyone's book.

    There are other wells with different production/decline curves. It is too early in Haynesville to do more than theorize about the decline curve. There are wells with what look like typical shale decline and others don't.

  • Report this Comment On July 13, 2009, at 12:51 AM, warrland wrote:


    You may be failing to account for the fact that while the EGP 63 is a horizontal Haynesville Shale completion, its production is currently aggregated with all other Lower Cotton Valley wells in the unit due to a peculiarity in the unit order which redefined the Haynesville within the Lower Cotton Valley zone. Virtually all other wells within the unit (except for EGP 63 and the Goodwin 9 #5-ALT decline more on a logarithmic decline.

    More importantly, the Goodwin 9 #5-ALT was completed within this unit around Thanksgiving 2008. Its IP was listed as around 21.3 MMcfd, and the production numbers are ALSO included in the unit production totals from 11/2008 forward.

    This would confirm as to open source data and disclosures of decline rates at T+1 yr. of 75 - 80%.

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