William T. Maloy
Centerline Oil & Gas Inc.
San Antonio
Horizontal drilling in the Giddings field Austin chalk has significantly improved average well recoveries and more than offset increased drilling costs.
Although not the panacea originally promoted, horizontal drilling, in Giddings field, offers economic profits to the average investor. Economic analysis indicates that the typical investor is making money by earning returns in excess of market values.
Field-wide development will, therefore, remain active unless oil prices or average well recoveries fall below $12/bbl or 112,000 bbl of oil equivalent (BOE), respectively.
The application of technological innovation in the Giddings field may culminate in the-drilling of over 2,000 horizontal Austin chalk wells, and has conceivably increased recoverable reserves by 400 million BOE.
THE CHALK BOOM
Inspired by widely publicized reports of spectacular flow and completion rates for horizontal wells, Giddings field and the Austin chalk trend are again in the midst of an unprecedented drilling boom.
Because of the erratic nature of Austin chalk production, recoverable oil and gas reserve predictions have proven to be unreliable. Yet without reasonable, accurate production forecasts, economic analysis cannot be performed.
Often, poor investment decisions are made because historically the Austin chalk has proven financially disappointing.
Questions remain whether newly developed horizontal well technologies and applications will improve oil and gas recoveries enough to offset increased drilling costs.
Perhaps no producing formation is more price sensitive and technology driven than the Austin chalk trend of Texas. The trend extends in a continuous band, 25 miles wide, across Texas from Maverick County to Sabine County and beyond (Fig. 1).
The chalk's petroleum reserves have been classified as a low-risk, low-yield resource. Production is associated with oil and gas contained in naturally occurring vertical fractures. In areas where fracturing is greatest (sweet spots), fields have sprung up.
About 475 million bbl of oil have been produced from Austin chalk fields since 1933. 1 By some accounts, the trend contains 4-8 billion bbl of ultimate recoverable reserves. 2
Along this trend it is nearly impossible to drill a dry hole, but without encountering an extensive fracture system, commercial production cannot be established or maintained. 3
Average per well yields of oil and gas have been historically low. Coupled with intrinsic price and production volatility, exploration in the Austin chalk has proven risky.
To be produced commercially, the Austin chalk requires a high oil price and/or high levels of technology that improve recovery efficiencies.
All too often in the Austin chalk "disappointment consistently overwhelms hope." 4
Opinions as to economic viability of the Austin chalk plan, vary as widely as chalk production itself.
HORIZONTAL DRILLING
During late 1989 and 1990, improvements in horizontal drilling technology coincided with rapidly rising oil prices. These factors began the Texas horizontal drilling boom.
Horizontal drilling, in certain reservoirs, has proven to dramatically increase producing rates while reducing dry hole risk.
The horizontal well market accounted for over $1 billion in capital expenditures in 1990. For 1991, the projection is over $2 billion. 5
The Institute for Oil & Gas Recovery Research estimates that 90 billion bbl of oil and 260 bcf of gas are left recoverable in already discovered fields. 6 Horizontal drilling has provided a means of recovering a portion of those reserves.
While horizontal drilling reduces discovery risk, it increases drilling cost. A typical horizontal well will cost almost two times more than a comparable vertical well. To be commercially feasible, the higher drilling cost must be offset by increased oil and gas production.
In late 1989, the improved horizontal drilling technologies were successfully applied in a number of Texas Austin chalk fields. This trend accounted for 60% of all worldwide horizontal activity in 1990. 7
Prior to 1989, only 73 Texas horizontal well permits were issued. In 1990 alone, the number reached 1,098. 8
Horizontal drilling increases a well's chance of intersecting a greater number of vertical fractures. Early production results have been spectacular. Initial potential flow rates have been recorded as high as 19,568 bo/d. 9
Higher initial rates are expected to translate into higher average recoveries. Wildly speculative estimates of oil recovery have reached as high as 1 million bbl/well. 10 The vast majority of all horizontal wells drilled have less than 1 year of production history.
As oil prices fell from an Oct. 9, 1990, future's market high of $40.40/bbl 11 to a recent price of $20/bbl, the producing rates of many horizontal wells fell just as precipitously.
Given current pricing, what remains in question is: Will the higher initial flow rates of horizontal wells translate into improved long-term recoveries, and will those recoveries be commercial?
GIDDINGS FIELD
The largest field in the Austin chalk trend is Giddings field, which stretches for 60 miles and covers portions of five counties including Burleson, Lee, Fayette, Brazos, and Washington counties (Fig. 1).
Since being discovered in 1961, the field has produced more than 200 million bbl of oil and 800 bcf of gas from approximately 4,000 vertical wells. 12 In 1981, it was the most actively drilled field in the world, climaxing with 80 active rigs. 13
Once again, Giddings field is in the midst of a boom; this time a horizontal well boom. Through July 29, 1991, over 475 horizontal wells had been drilled or permitted there. 14 At the end of 1991, 33 rigs remained active. 15
Giddings field ranks second only to Pearsall field in numbers of horizontal wells permitted and drilled. At its current pace, it will surpass Pearsall field in quantity and quality of horizontal wells.
HISTORICAL RESERVES
Austin chalk production from vertical wells is typified by high initial producing rates with rapid decline, short economic life and, all too often, uneconomic recoveries.
A study in 1982 determined that in the Giddings field area less than one half of the vertical wells could be classified as highly profitable. One third were determined unprofitable, and the remainder marginally profitable. Average recoveries were estimated at 67,650 BOE/well. 16
Well economics were determined at the then-current price of $32.50/bbl. It is understandable why in 1986 when oil prices fell below $10/bbl (after declining 5 years straight) Austin chalk drilling virtually ceased until recently resuscitated by horizontal drilling.
FORECAST MODEL
To begin an economic study of horizontal drilling in Giddings field, oil and gas production must be forecast to determine the timing and magnitude of future cash flows.
Estimation of future production rate behavior in fractured reservoirs, like the Austin chalk, is difficult and often unreliable. This hurdle has proven the historical impediment to Austin chalk reserve valuation and has led to a near absence of substantive literature on Austin chalk economics.
Inaccurate reserve predictions can lead to impractical decision making and result in financial loss.
A practical method of estimating future production rates of new wells involves matching their abbreviated performances against similar wells with full production histories.
Giddings field has an abundance of old vertical Austin chalk wells, with complete production histories, from which type curves can be generated.
Using these curves, a cumulative production-vs-time coordinate can be entered from new horizontal wells. The production forecast then can be made by extrapolating alone, a matching curve. This approach generally assumes that horizontal well decline will follow vertical well decline.
By selecting vertical well records with a full production life, a set of type curves in various increments from 50,000 to 500,000 BOE were generated (Fig. 2). The historical data represent average cumulative well recoveries over time.
The resulting time-vs.-cumulative curves have declines that are neither constant nor proportional. Typical decline shape follows a hyperbolic curve as matrix flow progressively dominates initial fracture flow. 17 A time period of approximately 6 months is required before individual curves establish themselves as unique. Once established, the cumulative production curves are useful for estimating and scheduling production, given a limited production life.
HORIZONTAL WELLS
A study of 91 horizontal wells with at least 6 months of production history was undertaken in the Giddings (Austin chalk) field. These wells include only horizontal wells drilled after August 1989.
Average well performance for that period is presented by county and field in Table 1.
Ultimate oil and gas reserves can then be estimated using the production functions and coordinate (44,165 BOE and 6 months) established as Fig. 2 and Table 1, respectively.
It appears by extrapolation, that an average Giddings field horizontal Austin chalk well will produce 195,000 BOE over its economic life.
Approximately three fourths of that total will be produced in the first 3 years of production, 40% in the first year.
Of all wells studied, 78% were drilled in Burleson County. Recently, Brazos and Fayette counties have become very active, as successful horizontal well completions extend the field east and west. In time, these counties and perhaps others, will have a more significant impact on field-wide averages.
ECONOMICS
Using certain standard case assumptions (Table 2), average horizontal well economics can be determined.
On average, a Giddings (Austin chalk) field horizontal well will return a discounted (10%) after tax investment of 1.6:1, have a net present value of $650,923, and payout in 1.1 years (Table 3).
The internal rate of return is approximately 72%. The present value effects of higher required rates of return are detailed in Fig. 3.
Although opinions are quite diverse, it appears that the average investor, drilling horizontal wells in Giddings field, is making money.
SENSITIVITY ANALYSIS
Few investors are average; therefore, a sensitivity analysis varying certain standard case assumptions has been conducted.
Product price and ultimate oil and gas recoveries hold the greatest potential for variability of future returns. Ultimate recovery, drilling cost, and net revenue interest are other important factors that might significantly impact economics. Unless specifically noted, all other standard case economic assumptions are held constant.
This study makes no attempt to predict future oil prices and accepts price risk as intrinsic to oil and gas exploration.
The impact of product price movement on economics is dramatic and is displayed in Fig. 4.
Below $12/bbl, Austin chalk drilling in Giddings field becomes uneconomic (at required rates of return 10% or greater). At a current price of $20/bbl, drilling activity should remain active and stable until field development reaches commercial fracture limits.
An average Giddings field, Austin chalk horizontal well will produce 195,000 BOE or approximately three times the field-wide average cumulative of a vertical well. This relationship may be transferable to other similar fields.
Approximately 112,000 BOE are required to pay-out an average well (Fig. 5). Below this level, more attractive investment opportunities are quickly identified.
Above average performance can be expected from the most knowledgeable and experienced Austin chalk operators, as historically a handful of operators have outperformed the rest.
A typical horizontal well drilled in Giddings field will cost approximately $1 million (Table 4). This includes drilling costs through completion for a well drilled to a total measured depth of approximately 12,000 ft including 3,500 ft of vertical displacement.
It appears unlikely that significant drilling cost savings can be achieved beyond those already experienced. The largest cost variances will result from differences in drilled depth or through benefits of discounts on use of existing facilities or salvaged equipment. Slim hole drilling also reduces cost but can shorten achievable lateral lengths.
Variable well cost, and its effect on economic outcomes, are presented in Fig. 6.
In Giddings field, royalties paid to the mineral owners vary generally from one eighth (12.5%) for old leases held by production to one fourth (25%) for highly competitive leasehold acquisitions.
Additional burdens are often attached by operators, geologists, and others that further reduce the net revenue interest available to the working interest partners.
Widely reported high flow and completion success rates of early horizontal wells created a frenzy and allowed some operators to secure extraordinary trades.
A common practice was to promote a well on a one third for one fourth basis. In this case, the investor assumes 100% of the drilling cost for 75% of the royalty interest after lease owner, et al., burdens. This effectively reduced the net revenue interest attributable to the investor to as low as 56.25% of total production.
Heavy promotes substantially reduce the profitability of oil and gas drilling as demonstrated in Fig. 7.
REFERENCES
- Popular Horizontal, Jan/Mar 1991, p. 30.
- Ewing, T., Atlas of Major Texas Reservoirs, 1983, p. 41.
- Hammond, The Austin chalk an Overview, HGS Bulletin, April 1991, p. 29.
- Yeargin, D., The Prize: The Epic Quest for Oil, Money & Power.
- Crouse, P., World Oil Regional Conference, San Antonio, Aug. 6-7, 1991.
- Shirley, K., AAPG Explorer, Feb. 1990, p. 28.
- Joshi, AAPG Explorer, May 1991, p. 5.
- Agency Information Consultants Inc., Austin, Tex.
- Petroleum Information, Winn Exploration-No. 25 L. Glasscock.
- Personal communication.
- Hurt, H. III, "New Oil, The Giddings Gamble," Texas Monthly, Feb. 1 1981, P. 190.
- Boynton, B., Lovette, Underwood, Neuhaus & Webb Inc., personal conversation, San Antonio.
- Texas Crude and Gas field summary, Giddings (Austin chalk 3), P.I. Corp., through 1990.
- Ellis, Bill, Horizontal Well List, San Antonio.
- Mellott, J., Rig Location & Permit Report Service, Oct. 18, 1991.
- Holditch, S., "Economics of Austin chalk production," OGJ, Aug. 9, 1982, p. 187.
- Chen, H., et al., "Characterization of the A.C. producing trend," SPE Paper No. 15533, 1986, p. 2.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.