Initial Production Rate

What Is the Initial Production Rate?

The initial production (IP) rate measures how many barrels of crude oil a day a new oil well produces. It is used as a proxy for an oil well’s future productivity and to estimate the amount of recoverable reserves there are. Recoverable reserves are oil and gas reserves that are economically and technically feasible to extract at the existing price of oil.

In the initial production phase, the flow of oil or gas remains relatively steady, as pressure stays nearly constant. After pressure builds, the rate of production increases up to the well's peak production, after which the flow of oil or gas declines rapidly as the quantity of recoverable assets and pressure in the wellbore decreases.

Understanding the Initial Production Rate

The initial production rate is important because it is used to extrapolate a well’s total production, its peak production level, and the rate at which production will decline – using decline curve analysis to come up with a well's estimated ultimate recovery (EUR).

Without an estimated ultimate recovery, oil companies would not be able to make rational investment decisions. Like all projects, management needs to be able to estimate accurately the net present value (NPV) of an oil drilling project. This valuation exercise requires several inputs, like the cost of bringing the first barrel to production, the cost of capital, the long-term price of oil, and the ultimate amount of oil that will be produced, or EUR. Without an EUR, it would not be possible to reach an accurate valuation of the potential oil reserves.

The exploration and production industry provides guidance to investors on average IP rates, and how that production is expected to rise/decline over the next two years. Initial production rates are reported inconsistently, but companies increasingly use 24-hour, 30-day, 60-day, and 90-day initial production rate periods.

Calculating the decline curve involves a curve-fitting exercise to interpolate the future rate of production based on past production levels. Therefore, a somewhat lengthy period of time-series data is needed to estimate the projected trend.

Special Considerations

Oil wells typically have an initial production rate that is fairly small compared to peak production, because oil production follows a bell curve. But shale oil wells decline much more rapidly after the initial surge. Production can fall to 50-85% of the IP rate within a year, and less than 10% of their IP rate after three years.

Given these rates of decline, some analysts argue that U.S. shale production could hit peak oil sooner than expected and that shale oil fields like the Bakken Shale and Eagle Ford Shale have already seen peak production rates.