Recent Efficiency Improvements in the Natural Gas Production Industry

Efficiency improvements in the natural gas production industry since the introduction of wellhead price deregulation and open-access transportation can be gauged by examining a number of secondary measures. Indirect measures must be used, because per-unit production costs cannot be measured directly for a number of reasons, including:

• Co-production of natural gas, natural gas liquids, and oil from the same wells

• Reporting of natural gas reserves additions and natural gas well drilling activities at different points in time

• Inability to apportion “dry well” drilling costs precisely to oil and natural gas production

• Reporting of wells that produce both oil and natural gas as “oil wells”

• Lack of reporting on lease payments and geophysical expenses or, when they are reported, inability to apportion them to oil and natural gas.

Two secondary measures of natural gas production industry efficiency can be evaluated from 1985 through the present, a period when the industry has operated in a fully competitive market environment.

The initial flow rate of new natural gas well completions is an indicator of how well natural gas producers are doing in replacing depleted wells. As shown in the following figure, lower 48 gas wells have demonstrated higher initial rates of production, going from 1,341 thousand cubic feet per day per completion in 1985 to 1,712 thousand cubic feet per day per completion in 2000. Because initial production rates vary from year to year, a comparison of 5-year averages best illustrates the trend. From 1986 through 1990, the initial gas well completion averaged 1,451 thousand cubic feet per day per completion; from 1996 through 2000, the average initial completion rate was 1,900 thousand cubic feet per day per completion, an increase of 31 percent. Much of the improvement can be attributed to Texas, where the average initial flow rate increased from 975 thousand cubic feet per day per completion in 1985 to 1,732 thousand cubic feet per day per completion in 2000, a 78-percent increase. In comparison, the increases in other regions were less impressive: 3.8 percent for the Gulf of Mexico, 11.9 percent for Oklahoma, and 10.4 percent for the Rocky Mountain region.

Perhaps one of the least ambiguous measures of increased drilling efficiency is the percentage of dry holes drilled by the oil and natural gas industry in the pursuit of new oil and natural gas reserves. (Because dry holes cannot be strictly attributed to either the oil or natural gas side of the industry, the percentage of dry holes drilled in the search for natural gas cannot be determined.) Irrespective of the type of well drilled, dry holes have declined as a percentage of the total oil and natural gas wells drilled, as shown in the figure below.