Persistence in new-well oil production per rig across US regions: Evidence from modified panel ratio tests

ABSTRACT

Understanding the performance of new-well oil production per rig over time and across oil-producing regions serves as an important indicator of current and future production capabilities. As such, this study examines the degree of persistence in response to shocks in new-well production per rig for the six major US oil-producing regions using modified panel ratio tests. The results indicate the instability of new-well production per rig as the degree of persistence changes over time. For companies engaged in the exploration and production of oil, the results highlight the price-taking nature of the industry that is heavily dependent on both physical and financial capital to expand and operate.

KEYWORDS:

• Modified panel ratio tests
• new-well oil production per rig
• persistence
• US regions

Notes

¹ Well completion refers to the set of activities that are necessary to enable the well to start commercial production. Generally, this process involves installing production casing, tubing, perforating the casing, installing valves and fittings that control production at the wellhead (i.e., the “Christmas tree”), and the construction and/or installation of production facilities such as separators, tanks, flow lines, etc. (Wright and Gallun, 2008)

² The U.S. Energy Information Agency defines a new well “as one that began producing for the first time in the previous month. Each well belongs to the new-well category for only one month. Reworked and recompleted wells are excluded.” (http://www.eia.giv/dpr)

³ According to Engler (2011) these include advances in horizontal drilling, changes in hydraulic fracturing technology, slick-water fracing, changes in fluid type and amount, increased use of 3D seismic surveys, downhole commingling/multi-zone completions, multiple well pads, and changes in rules that allow for down-spacing of particular fields to tap undrained areas in existing pools.

⁴ According to the Society of Petroleum Evaluation Engineers, for an area to be defined as a resource play, an extensive list of criteria regarding the characteristics of the area under consideration must be met. In more general terms, wells in a confirmed resource play exhibit a repeatable statistical distribution, and thus offer a predictable performance in a given geological subset (Watson et al. 2010).

⁵ A decline curve depicts the production profile of a well where production decays over time at a predictable rate (e.g., via a hyperbolic function). Decline curves are typically estimated by petroleum engineers.

⁶ See US Energy Information Administration, Drilling Productivity Report, http://www.eia.gov/petroleum/drilling/. Tight oil refers to unconventional reserves that reside in less-permeable formations where improved oil-recovery methods to stimulate the release of hydrocarbons along with hydraulic fracturing techniques are often used to recover oil. In August 2014, the EIA recognized the Utica region of Ohio as the seventh major producing region in the US. However, as this study conducts a time series analysis, the focus is on the traditional six major regions for which a long time series of data are available.

⁷ Moreover, reworked and recompleted wells are excluded from the new-well classification.

⁸ This is because, by definition, new wells fall into the existing well category after one month but retain much of their technological capabilities.

⁹ The presentation of the modified panel ratio tests parallels the methodology presented by Apergis et al. (2015).

¹⁰ Panel ratio tests are one-sided tests; thus the null hypothesis of constant persistence at 1%, 5%, and 10% levels is rejected when the statistic’s value is greater than 2.33, 1.65, and 1.28, respectively. Note that modified panel ratio statistics values are dependent on the significance level.