January 3, 2018
Author: Artem Abramov, VP of Analysis
Publisher: Oil & Gas Financial Journal
Figure 1 illustrates a breakdown of monthly Colorado oil production by vintage (i.e. the month when a well is turned-in-line and delivers first oil volumes). The pre-2015 vintage aggregates volumes coming from the wells that were producing as of December 2014. While this legacy vintage includes thousands of legacy conventional wells with very stable output, it is largely driven by pre-2015 horizontal Niobrara and Codell completions with steeper decline rates. Therefore, even in 2017, this legacy part declines by 22% during the first eight months of the year with some anomalies in May-June 2017, when APC shut down nearly 3,000 operated marginal wells following a fatal house explosion. The official data for July-August 2017 indicates that 360 of these wells came back online, pushing total legacy vintage production upwards.
When it comes to new activity in the DJ Basin, from 2015 to 2017, steep decline rates are clearly visible in Figure 1. Despite the fact that new additions were fairly strong in selected months of 2016, they were not sufficient to offset the base decline from historical vintages, and total state oil production was not able to grow. The situation changed drastically in 2017, as each month’s vintage has been adding 30-38 MBbld of new volumes in the peak month since March 2017. Such strong and persistent production additions have not been seen since March 2015. As of August 2017, the 2017 vintage already accounts for 50% of the total state oil production.
Figure 2 illustrates that a significant expansion in the completion activity was observed in 2017. Yet the number of horizontal completions in Q3 2017 has been observed at the level 25-30% below the peak levels of Q2-Q4 2014. However, modern wells appear to be significantly more intensive, resulting in higher completed footage, frac stage count and particularly proppant consumption in Q3 2017, as compared to the levels observed three years ago. Operators such as Noble Energy, Extraction Oil & Gas and Bill Barrett Corporation contribute to the average with even more intensive proppant loading per foot than the average for the basin in 2017, while the same companies along with SRC Energy also exhibit laterals above average.
The shift towards more intensive completions, along with a high-grading of drilling locations, has naturally boosted well productivity in recent years. Looking only at the oil production stream, we observe that the first year recovery per horizontal well increased from 52 MBbl in 2013 to 72 MBbl in 2016 (Figure 3). A significant improvement over 2016 levels has been observed so far in 2017, as an average horizontal completion tracks first-year oil recovery of 96 MBbl, a 35% improvement over the previous year.
Therefore, it is no longer a surprise that Colorado’s oil production has been recovering strongly since the early 2017. The presence of dedicated operators that treat the DJ Basin as their core play, positions the state’s production for a continuous expansion throughout 2018, if WTI prices stay above 50 USD/bbl. Despite severe service cost escalation in 2017, latest breakeven prices in the core areas of the DJ Basin remain in a 35-45 USD/bbl range, and major players are still able to absorb additional cost increases in 2018.
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David White, Marketing Manager
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Artem Abramov, VP of Analysis
Phone: +47 24 00 42 00