Does "I.P." Mean "Investor Problems?"
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In a recent article, Keith Schaefer asks the question whether there should be standardized rules for reporting IP (Initial Production) rates for newly drilled wells. As Keith points out, currently there is no standardized methodology for these reported tests and some operators choose to report instantaneous rates while others report average rates over some period of time; however, even these average rates are not consistently reported (24 hrs, a week, a month, etc.).
This is even more critical when looking at horizontal wells drilled in tight formations, which are typically frac'd on completion-- shale plays. These characteristics typically create linear flow near the well and expose a large amount of "virgin" reservoir, both of which give rise to high initial rates which rapidly drop-off before stabilizing at a lower rate.
The IP rate of a new well can impact the economics of the well because the greater the initial rate the more revenue the operator can use to repay the development costs, which directly impacts the ROR (rate of return). The IP alone, however, has little impact on the well's ultimate reserves which is the key to the project's economics.
When determining the well's ultimate recovery, what happens after the IP is more important than the IP itself. The initial decline rate of the well and the hyperbolic exponent (the rate at which the decline rate lessens) give character to the production curve and ultimately determine the well's reserves.
When I read a press release which includes IPs it's usually with a great deal of skepticism. The only thing you can tell for sure from an IP test is that the well isn't dry. Only after several wells have been on production in a given area and a "type curve" established, can the IP rate be used to approximate reserves.
There are several stories in the oil patch about the company who drills a well and based on it's IP, constructs a flowline, production facilities, and stakes several more offset wells (no doubt booking them as PUDs) only to have the well fizzle when put on production. As bad as it would be to be the engineer on a project like this, it would be worse for the investor.
So, as Keith says, when it comes to reported IPs Caveat Emptor.
