bernstein energy drivers of decline rates in mature hydrocarbon

BernsteinResearch.com European/Russian Oil & Gas – April 2012

Bernstein EnergyDrivers of Decline Rates in Mature Hydrocarbon Basins & The Need for Enhanced Oil Recovery

April 2012

See Disclosure Appendix of this publication for important disclosures and analyst certifications

Oswald Clint PhD, ACASenior Research Analyst

[email protected]+44 20 7959 5089

Iain Pyle, CFA, ACASenior Research Associate


Rob WestResearch Associate


Oswald Clint PhD, ACASenior Research Analyst

European Oil & Gas

[email protected]

+ (44) 20 7170 5089

Rob WestResearch Associate

European Oil & Gas

[email protected]

+ (44) 20 7170 0589


Economical control of decline rates is increasingly important in mature hydrocarbon basins – Norwegian & North Sea

1

Norway Oil Production in 2000 – only 9% of production from fields <50kbpd

Norway Oil Production in 2011 – 40% of production from fields <50kbpd

Source: NOAA, NPD, Bernstein Estimates


Economical control of decline rates is increasingly important in mature hydrocarbon basins – U.K. North Sea

2

UK North Sea Oil Production in 1995 – only 11% of production from fields <5kbpd

UK North Sea Oil Production in 2011 – 42% of production from fields <5kbpd

Source: NOAA, DECC, Bernstein Estimates


Median y-o-y changes in production have averaged -12.2% and -9.3% in the UK and Norway, with -21.7% average natural declines in both basins

3

2.4%

-7.6%-12.2%

-24.6%

-12.2%

-20.1%-21.7%

-29.7%

-40%

-30%

-20%

-10%

0%

10%

20%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

y-o-

y C

hang

e in

Fie

ld P

rodu

ctio

n (%

)

Percentile

All Data All Declining Fields with No New Wells Drilled Quartiles Mean Average

Benefits arising from field ramp‐up, infrastructure ramp‐up, EOR, reservoir management and new well completions

3.9%

-4.6%-9.3%

-20.4%

-11.0%

-20.4%-21.7% -30.6%

-40%

-30%

-20%

-10%

0%

10%

20%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

y-o-

y C

hang

e in

Fie

ld P

rodu

ctio

n (%

)

PercentileAll Data All Declining Fields with No New Wells Drilled Quartiles Mean Average

Benefits arising from field ramp‐up, infrastructure ramp‐up, EOR, reservoir management and new well completions

UK North Sea

•240 oil fields• Monthly production data since first oil in the basin•Median y-o-y change in production = -12.2% • Mean Average Natural decline rates of -21.7%

Norwegian Offshore Sector

•83 oil fields• 3700 development wellbores• Monthly production data since first oil in the basin•Median y-o-y change in production = -9.3% • Mean Average Natural decline rates of -21.7%

Source: NPD, DECC, Bernstein Estimates

UK

Norway


Median decline rates across declining UK N. Sea fields: Decline rates are highest initially, and fall over time

4

Source: DECC, Bernstein Estimates

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Med

ian

y-o-

y C

hang

e in

Pro

duct

ion

(%)

Years from First Field Production

Declining Fields Only Smoothed Data

Decline Rates Across Fields’ Lives


Decline rates are significantly lower in chalk carbonate reservoirs than sandstone reservoirs across the UK North Sea

5


-19.8% -21.3% -19.8%-18.1%

-20.4%-18.4%

50%

60%

70%

80%

90%

100%

110%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

Sand

s

Car

bona

te

Terti

ary

Cre

tace

ous

Jura

ssic

Tria

ssic

Reservoir Rock Reservoir Age

Dec

line

Rat

e / Y

ear (

%)

Mean +/- 1 Standard Deviation Median Decline Rate

(Sands vs Chalks t = 2.67 p < 0.01**)

Decline Rates Categorized By Field Geology


“Just drill more wells” – the simplest approach to slowing decline rates

6

-15%

-10%

-5%

0%

5%

10%

15%

0 1 2 3 4 5+A

vera

ge O

il P

rodu

ctio

n (A

ll fie

lds,

y-

o-y

%)

New Wells Completed In Calendar Year

-15%

-10%

-5%

0%

5%

10%

15%

0 1 2 3 4 5+

Ave

rage

Cha

nge

in O

il P

rodu

ctio

n

(All

Fiel

ds y

-o-y

%)

New Wells Completed In Calendar YearSource: NPD, DECC, Bernstein Estimates

0

10

20

30

40

50

60

70

80

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Cum

ulat

ive

Dev

elop

men

t Wel

ls D

rille

d Pe

r Fie

ld

Norway (All Fields)UK (Oil Fields)

Wells Per Field in Norway & the UK y-o-y production -vs- the number of new production wells completed

UK

Norway


We are cautious on whether material value is added by infill drilling at mature fields

7

-40

-30

-20

-10

0

10

20

30

40

50

60

70 80 90 100 110 120

NPV

of A

dditi

onal

Dril

ling

($M

/ Wel

l)

($/bbl)

NPV per Infill Drilling Well on Norwegian Contintnal Shelf

1.0 kbpd 2.0 kbpd 2.5 kbpd 3.0 kbpd 3.5 kbpd 4.0 kbpd

Source: NPD, Bernstein Estimates


Wide variation in production added per well – 2.5kbpd is the average

8

2.53.5

0

2

4

6

8

10

12TY

RIH

ANS

VILJ

ED

RAU

GEN

KVIT

EBJØ

RN

VOLV

EVO

LUN

DR

ING

HO

RN

E Ø

STAL

VETA

MBA

RFR

AMH

EIM

DAL

SYG

NA

TUN

ESK

IRN

ETO

RD

ISST

ATFJ

OR

D N

ORD

NO

RN

EU

RD

VIG

DIS

FRØ

YG

RAN

EÅS

GAR

DSN

OR

RE

STAT

FJO

RD

ØST

ALVH

EIM

OSE

BER

G Ø

STBA

LDER

OSE

BER

GVE

ST E

KOFI

SKH

EID

RU

NO

SEBE

RG

SØ

RU

LAG

LITN

EG

ULL

FAKS

JOTU

NYM

EEM

BLA

STAT

FJO

RD

GU

LLFA

KS S

ØR

NJO

RD

ALBU

SKJE

LLVI

SUN

DBR

AGE

VESL

EFR

IKK

VAR

GEK

OFI

SKC

OD

GYD

ATO

RTR

OLL

HO

DED

DA

ELD

FISK

VALH

ALL

Impl

ied

Prod

uctio

n Pe

r Wel

l -fie

ld-b

y-fie

ld (k

bpd)

Oil Recovered / Production Well / Year (kbpd) Median Mean


Implied production per well at Norwegian Oil Fields


The past five years have seen an acceleration in production from smaller fields – how does this change the economics of infill drilling?

9

0%

10%

20%

30%

40%

50%

60%

Jan-85 May-87 Sep-89 Jan-92 May-94 Sep-96 Jan-99 May-01 Sep-03 Jan-06 May-08 Sep-10

Prop

ortio

n of

Pro

duct

ion

From

Fie

lds

Belo

w

Each

Thr

esho

ld

Proportion of Fields Producing Below Threshold Values

60kbpd 50kbpd 40kbpd 30kbpd 20kbpd 10kbpdThreshold:



Reliance on infill drilling increases vulnerability to rising rig rates

10

0

50

100

150

200

250

300

350

400

450

500

0

50

100

150

200

250

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Nor

th S

ea R

ig R

ate

(Tho

usan

ds D

olla

rs / D

ay)

Nor

way

-N

umbe

r of D

evel

opm

ent W

ells

Dril

led

Norway Development Wells Drilled Y-o-Y Change in Rig Rate

Norway – New Development Wells Drilled versus Rig Rates

Source: DECC, ODS-Petrodata, Bernstein Estimates


The difficulty of economical EOR is exacerbated by the UK higher supplementary tax rate - Are Operators Just Shutting Down?

11

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

Jan-96 Oct-97 Jul-99 Apr-01 Jan-03 Oct-04 Jul-06 Apr-08 Jan-10

NB

P G

as P

rice

($/m

cf)

Shut

In +

Shu

t Dow

n C

apac

ity (T

TM, B

cfd)

Capacity Shut Iin Capacity Shut Down Production UK NPNatural Gas Prices ($/mcf)


UK North Sea Gas Production, Shut Ins and Shut Downs -vs- the NBP Gas Price


Injection wells reduce the decline rates at UK and Norwegian fields, with effects well beyond the years they are initially drilled

12

Effect of Injection Wells on Field Decline Rates

-12.5%

-10.8%

-6.3%

-8.6%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

Norway UK (Water Injection Only)

Med

ian

y-o-

y C

hang

e in

Fie

ld P

rodu

ctio

n (%

)

Fields With No Injection Fields With Injection Wells



Water injection may be a better long-term solution: 78% correlation between water-injected and oil produced at UK N. Sea Oil Fields

13

y = 54.18x0.5632

10

100

1000

10000

100000

1000000

10 100 1000 10000 100000 1000000

Ave

rage

201

1 Pr

oduc

tion

(bpd

)

Average 2011 Water Injection (bpd)

UK North Sea: Water Injection vs Field Production in 2011



Injection wells were successfully used to stabilize and even grow production at Ekofisk, one of Norway’s oldest fields

14

14

14

2 1 25 6 5

7

13

35

13

1

68

25 6 6

913 1414

9

42 3

2

2

77

5

31

1

1

1 2

7

21

1

0

5

10

15

20

25

0

50

100

150

200

250

300

350

400Ja

n-71

Mar

-72

Ma y

-73

Jul-7

4Se

p-75

Nov

-76

Jan-

78M

ar-7

9M

a y-8

0Ju

l-81

Sep-

82N

ov-8

3Ja

n-85

Mar

-86

Ma y

-87

Jul-8

8Se

p-89

Nov

-90

Jan-

92M

ar-9

3M

a y-9

4Ju

l-95

Sep-

96N

ov-9

7Ja

n-99

Mar

-00

Ma y

-01

Jul-0

2Se

p-03

Nov

-04

Jan-

06M

ar-0

7M

a y-0

8Ju

l-09

Sep-

10N

ov-1

1

Wel

ls C

ompl

eted

/ Yea

r

Prod

uctio

n (k

bpd)

Production Wells Completed Injection Wells Completed

Other Wells Completed Ekofisk Oil Production

Large increase in injection wells

Peak drilling to control decline

rates



We expect faster oil production declines out to 2016, based on our analysis of decline rates

15

-1,000

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2011 2012 2013 2014 2015 2016 2017 2018

UK

+ N

orw

ay N

orth

Se\

a Pr

oduc

tion

(kbp

d)

New Project Growth Existing Project GrowthNatural Declines SCBIEA DECC + NPDWood Mackenzie (includes Condensate)

UK + Norway Total Oil Production (kbpd)

Source: NPD, IEA, DECC, Company Reports, Wood MacKenzie, Bernstein Estimates

BernsteinResearch.com European/Russian Oil & Gas – April 2012 16

Disclosure Appendix

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BernsteinResearch.com European/Russian Oil & Gas – April 2012 17

12-Month Rating History as of 02/06/2011

Ticker Rating Changes BG/.LN O (IC) 01/22/09 BP M (IC) 08/03/10 O (DC) 08/02/10 O (RC) 05/10/10 M (RC) 03/03/09 BP/.LN M (IC) 08/03/10 O (DC) 08/02/10 O (RC) 05/10/10 M (RC) 03/03/09 CNE.LN O (IC) 01/22/09 E O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 11/21/08 EAD.FP O (RC) 12/17/09 ENI.IM O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 11/21/08 FP.FP O (IC) 08/03/10 M (DC) 08/02/10 M (RC) 02/16/10 O (IC) 05/30/03 GALP.PL O (RC) 05/26/10 M (IC) 01/22/09 LKOD.LI U (IC) 01/15/09 NVTK.LI O (IC) 01/15/09 OGZD.LI O (RC) 07/16/09 PMO.LN O (RC) 02/19/10 M (IC) 01/22/09 RDS/A O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 RDS/B O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 RDSA.LN O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 RDSA.NA O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 RDSB.LN O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 RDSB.NA O (IC) 08/03/10 O (DC) 08/02/10 O (RC) 02/16/10 M (RC) 03/16/09 ROSN.LI U (IC) 01/15/09 SGGD.LI U (IC) 01/15/09 STL.NO M (IC) 01/22/09 TLW.LN O (IC) 01/22/09 TOT O (IC) 08/03/10 M (DC) 08/02/10 M (RC) 02/16/10 O (IC) 05/30/03 Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

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bernstein energy drivers of decline rates in mature hydrocarbon

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