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Some operators have better track records in slowing production declines and squeezing extra value out of the mature fields in the North Sea.
After analyzing production data from 240 fields and 11,000 wells in the U.K. North Sea, analysts from Bernstein Research noted that BG Group, BP and Total have the best track records in managing decline rates in North Sea fields.
In the first part of its research call on global decline rates, Bernstein Research identified seven influences on field-by-field production declines in the North Sea: age, reservoir geology, new wells, use of enhanced oil recovery (EOR), water injection, rig rates and operator track record.
“Because these variables are often overlooked, we argue that the mature portfolios of some of the basin’s operators are undervalued by investors,” according to the analysts. “We do not believe that these differential track records are well captured in market models. More likely, forecasters simply assume a blanket decline rate when modeling production from fields past a certain age.”
In looking at the influences, Bernstein noted that reservoir age does not have a consistent relationship with decline rate. However, fields in the chalky Cretaceous play also have statistically higher decline rates, declining about 1.5% faster on average than sandstone reservoirs.
“We found a strong relationship between the year-on-year change in production recorded at North Sea oil fields and the number of incremental wells that were completed. Each new well tends to reduce the decline rate by 4% on average and two new wells often stabilize year-on-year production,” the researchers noted.
“Fields with water injection decline 2% slower on average each year and water reinjection correlates highly with oil produced.
“However, decline rates also rise when sharp rig-rate increases discourage maintenance, e.g. in 2008,” the analysts emphasized. “The major cost in drilling new wells to stabilize field production is rig rates. Drilling plans are curtailed when rig rates rise, especially for smaller operators. Furthermore, high rig utilization rates can cause both an increase in day rates for rigs and a decrease in availability. Accordingly, there is a 50% correlation between rig rates and North Sea oil field decline rates.”
“North Sea rig rates were relatively flat in 2011, and the North Sea saw one of its lowest decline rates, on average, in the first three-quarters of the year,” added the analysts.
Operators can have a major impact on decline rates. “Fields that are operated by BG, BP and Total have incurred the lowest year-on-year declines across our coverage and the peer group. Furthermore, decline rates at almost all of these operators’ fields are negatively correlated with field size, showing the capability to prioritize the biggest fields and achieve incrementally lower decline rates at (the companies’) most prolific fields,” Bernstein stated.
For example, BG Group tops Bernstein’s coverage on this metric. Overall, BG’s lower decline rates are worth an estimated $1.5 billion of upside to earnings if the company can maintain its 9% decline rate.
Based on the data analyzed, the median year-on-year decline at North Sea fields is 12%. “Overall, top-quartile operators are generating 6% to 7% higher revenues each year from the portfolio of mature assets than the bottom-quartile operators.
“We do not think that these differences in operator track records are well captured by blanket decline rates typically assumed in company models for the sake of simplicity. This suggests the better operators’ upstream assets are being undervalued by the market,” the analysts explained.
Currently, North Sea output comes from over 100 producing fields, half of which are more than a decade old and two-thirds of which are producing less than 5,000 barrels per day (b/d). Bernstein noted it was “striking just how many of the North Sea’s fields remain online. The importance of these mature fields for the overall U.K. North Sea output is therefore greater than at any other time in the history of the basin.”
Oil prices are also a major influence on “the decisions by operators to continue production as fields decline. Spikes and troughs in the oil price visibly alter the production from small, 1,000-b/d fields across the U.K. North Sea. Falling oil prices are a catalyst for these smaller fields to shut down.
“Given today’s $100 per barrel oil price levels, no rapid increase in rig rates this year or new changes in reservoir geology or age, then we expect the decline rates of the last two to three years to be evident again in 2012, i.e., 8% decline for U.K. North Sea oil production,” Bernstein Research concluded.
In this series of research calls, Bernstein Research seeks to investigate and analyze current and historical decline rates across the global supply base and company portfolios.
Contact the author, Scott Weeden, at firstname.lastname@example.org.