WHAT IS 'Decline Curve'

The decline curve is a method for estimating reserves and predicting the rate of of oil or gas production. It typically shows the rate at which production is expected to decline over the lifetime of an energy asset. Knowing the decline curve can help a producer estimate the amount of reserves that can be recovered from a well over time; the present and future value of a well; and the rate at which assets should depreciate on a company’s books. In aggregate, the decline curve can also help determine the rate of production for a total reservoir, or even multiple reservoirs.

BREAKING DOWN 'Decline Curve'

The decline curve rests on a set of equations that U.S. geologist J.J. Arps developed in 1945. In theory, the decline curve can apply to most wells in the industry. 

Underlying the decline curve equations is an expectation that well-production typically follows a three-part pattern. In the initial phase production phase, the flow of oil or gas remains fairly steady, as pressure stays nearly constant. Next is a transient period in which the flow of oil or gas declines rapidly, as the amount of recoverable assets and pressure in the well decreases. Lastly, assets deplete to a level at which they approach the well’s defined boundaries. Arps's decline curve equations most often apply to the boundary-defined production phase.

Calculating the decline curve involves a curve-fitting exercise to interpolate the future rate of production based on past production levels. Therefore, a fairly lengthy period of time-series data is needed to make an estimation of the future trend. In addition, the decline-curve equations assume that multiple variables involved in production and operations stay constant during the lifetime of a well asset. Largely based on well conditions, three types of decline curves can apply to the future trend: exponential, hyperbolic and harmonic.

Pros and Cons of the Decline Curve

Analyzing the decline curve can be a simpler way to estimate production levels, relative to more-complex simulations. However, using the decline curve also can be less accurate than simulations. Using the decline curve has several shortcomings, including that it can underestimate reserves, underestimate production rates, and overestimate reservoir performance. Because it relies on past data, the decline curve does not take into account labor, equipment and technology changes that could affect production rates. It also cannot account for the likelihood of geologic changes that more-complex models may be able to include to a degree. However, the Arps equations are still in use today.

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