ValueScope’s Energy Update: Parent/Child Wells

Family Therapy: Parent-Child Issues in Shale Basins

A recent Society of Petroleum Engineers’ article¹ focuses on the disparities in production between parent and child wells in US shale basins, and its impact on the ability of operators to maintain high levels of output over the next few years.

However, Doug Suttles, Encana President and Chief Executive Officer, doesn’t think it’s “a big threat” to the shale sector. Encana’s approach to dealing with interwell communication is called “cube development.” Cube development involves developing dozens of wells at a time with multiple rigs and frac spreads on a single pad.

These megaprojects are delivering much needed economies of scale on everything from sand and water to parts and labor.²

Source: The Oklahoman: Encana to bring cube development to STACK wells in April

However, the bigger motivation lies deep in the ground. That is where shale producers have been battling poor production results for years because of frac hits between older and newer wells (often referred to as “parent” and “child” wells). The root of this complex problem lies in the fact that a child well’s hydraulic fractures often follow the path of least resistance into a reservoir’s most resource-­depleted zones, rather than to areas containing the best reserves. In some parts of the Permian, the effect has caused child wells to deliver a 30% lower recovery rate than their parents (when factors such as well lengths are normalized). The point of cube developments is to put an end to this cycle by creating only parent wells.

While some experts see cube developments as one of the best ways to relieve these pains, they caution against seeing the simultaneous operations as a panacea. Mohamed Soliman (the chair of the University of Houston’s petroleum engineering department whom holds a patent for two of the earliest versions of zipper fracturing) said the cube concept makes sense, in that avoiding the downsides of reservoir depletion moves the shale sector closer to its goal of production optimization.

“But there’s a catch,” he points out. “If you drill and complete all your wells, and you then produce them at one time, you may pay a massive price if the wells are not as productive as you think they will be.” In other words, these large-scale projects make it harder to run individual tests on new well designs to determine which are the best.

There is one more dose of reality to pour on: such massive onshore projects have been reported to cost from $120 million to $250 million, a price tag that for many smaller shale producers is simply out of reach.³

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on July 15, 2019 and predicted crude oil prices based on option and futures markets. The blue lines are within one standard deviation (σ) of the mean and the red lines are within two standard deviations.

Based on the July 15, 2019 prices, the markets indicate that in mid-August there is a 68% chance that oil prices will be between $54.50 and $64.50 per barrel. Likewise, there is about a 95% chance that prices will be between $48.00 and $72.00. In mid-December 2019, the +/- 1σ price range is $48.00 to $70.00 per barrel, and the 2σ range is $35.50 to $87.00 per barrel. In other words, there is a 95% probability that the expected price of oil will be between approximately $35 and $87 per barrel and a 97.5% probability it will not be above $87 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.41 per MMBTU on the Henry Hub. Although more affected by seasonal factors than crude oil, in mid-August 2019, the +/- 1σ price range is $2.05 to $2.65 per barrel (68% probability) and the +/- 2σ range is $1.70 to $3.00 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certainty—but that doesn’t make it any less useful. If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $87 by mid-December 2019, so I wouldn’t count on it.”

[1] Journal of Petroleum Technology, “Shale CEO on Parent-Child Challenges, Well Declines, We Know”, Matt Zborowski, Technology Writer, 13 March 2019

[2] Journal of Petroleum Technology, “In the Battle Against Frac Hits, Shale Producers Go to New Extremes”, Trent Jacobs, JPT Digital Editor, 01 August 2018

[3] Ibid

Tags: Oil & Gas Price Outlook July 2019, Gas Price Outlook July 2019, Oil Price Outlook July 2019

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