How to Forecast Production for an Oil and Gas Asset

Investing in energy assets such as oil and natural gas wells gives investors a hedge against market volatility. Even Warren Buffett, renowned equity investor, has allocated a portion of Berkshire Hathaway’s portfolio to energy assets. If you currently are or have considered investing in this sector, it’s important to understand how oil and natural gas production forecasts are created.

Since revenues and returns are a function of oil and gas production, understanding how production is forecasted is crucial to understanding oil and gas valuations.

Understanding Volume Forecasting

Volume forecasting is the process of estimating the amount of oil and gas that an asset is expected to produce over its lifetime using historical data, well characteristics, reservoir properties, and operational factors. By forecasting production volumes, companies can assess the financial viability of their assets and make informed investment decisions.

Factors Affecting Production

The rock quality within the reservoir, drilling and completion techniques, as well as operational controls, all play significant roles in determining production levels. Additionally, external factors such as market conditions, geopolitical events, and technological advancements can impact production forecasts. By considering these factors, one can develop a comprehensive understanding of a well's production potential.

Importance of Accurate Data

Accurate and up-to-date data is the foundation of any production forecast. Oil and gas companies in the United States are required by law to report their production data either on an individual well basis or leasehold basis to the appropriate state regulatory agencies which in turn is publicly accessible. To ensure data integrity, it is advisable to use private data directly obtained from oil and gas companies when evaluating an investment. This ensures the trustworthiness of the data used in the forecasting process.

The Arps Decline Curve Analysis Method

Decline curve analysis is the industry standard graphical method used to forecast future production performance. Most modern forecasting methodologies and algorithms are based on the empirical approach developed by U.S. geologists J.J. Arps in 1945.

Key Inputs in Decline Curve Analysis

The ArpsDCA equations rely on four key inputs that influence a well's production forecast:

1. Initial Production Rate: The initial rate at which a well produces oil or gas, serving as the starting point for the decline curve analysis.
2. Initial Decline Rate: The rate at which a well's production declines in the first year after its initial production.
3. B-Factor: A unitless variable that describes the rate of change from a well’s initial decline rate to terminal decline rate. Wells with higher B-factors tend to have longer lifespans and higher expected ultimate recoveries.
4. Terminal Decline Rate: The decline rate at which a well's production stabilizes. Unless there are mechanical issues, the well production rate is expected to decline at this constant rate until it is shut-in or plugged.
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The Hyperbolic and Exponential Arps Equations

Decline curve analysis for modern unconventional wells use two primary equations: the hyperbolic and exponential Arps equations. These equations capture the decline behavior of a well over time and form the basis of production forecasting.

The hyperbolic Arps equation describes the steep decline in production during the well's early life before it transitions into the well’s terminal decline rate. Conversely, the exponential Arps equation represents the constant rate of decline during the well's later stages as described by the terminal decline rate. The exponential equation excludes the B-factor variable as the well's decline rate is no longer changing and held constant.

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The combination of these equations provides a comprehensive model for forecasting production performance. It is essential to understand these equations and their inputs to develop accurate production forecasts.

Energia’s Approach to Forecasting

Energia combines decline curve analysis and AI to forecast over 150,000 unconventional wells across the contiguous United States. As new wells get drilled and additional public data becomes available over time, the Energia data science team gains access to more data to further train our AI models to improve our volume forecasting ability which gives us and our customers a competitive advantage.

As of 2024, our proprietary analytics platform has helped facilitate over $1.1B in investment-grade oil and gas asset-backed securities transactions.
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Fundamental knowledge in oil and natural gas production forecasting is important to understand how the economics of oil and natural gas assets are evaluated. Accurate production forecasts enable sponsors to make better investment management decisions.

Investing in energy assets, such as oil and gas, can help diversify portfolios and provide stability in volatile markets. Visit energia.com to learn more information.

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