ABSTRACT

For the past three or four years, the oil industry has shown a real awareness of the necessity to conduct its operations in a more economical way than it had allowed to exist previously. Increasing competition from other sources of energy, and a world-wide over-supply of crude oil for the foreseeable future, demand that the domestic industry manifest great effort to include in its operations every legitimate means which will contribute to the economy of its endeavors. Ingenuity and tenacity are required in this requisite, for there is a very strong built-in resistance to change in many segments of our industry, and many obvious changes for improvement do not occur either easily or readily.

The exploratory and producing segments are keenly aware of the critical need for changes in certain of our long established practices in the spacing of wells--and the beneficial impact which proper well spacing would have on the total economy of the industry. Unfortunately, this recent consideration of well spacing has become identified--almost exclusively--with "wide spacing". A more appropriate term would be--"proper spacing"--and, actually, this is what the industry is striving to bring about. What does "proper spacing" embrace? At least three paramount facets are basis:

PHYSICAL--the efficient recovery of the hydrocarbons contained in the reservoir.

LEGAL--the preservation of individual rights and equities--and

ECONOMIC--A plan which will permit a profitable operation.

Certainly enough is known of reservoir behavior to space wells so that efficient recovery of the hydrocarbons will result; the laws--rules--and regulations to preserve individual rights and equities are well established; and, the profitability can readily be calculated. Why then is so little progress being made in accomplishing something that is critical to the preservation of the economic health of the producing segment of the industry? Is it possible that the "strong built-in resistance to change" is the reason or could it be that the proper incentives do not exist?

PHYSICAL

Our knowledge of reservoir behavior has progressed so that early in the development of a field very reasonable predictions can be made on the producing characteristics which, in turn, normally determine the efficient drainage area of a well. The physical properties of the reservoir rock (porosity and permeability), the character of the fluid contained in the rock (gravity viscosity), and the source of energy (water, gas, or solution gas drive gravity drainage) vary so widely in different reservoirs that there is no single spacing or density pattern that completely satisfies the physical requirement of proper spacing for all reservoirs. For example:

The Kern River Field in California, discovered in 1899, comprises a productive area of 8,695 acres, principally fee lands. The structure is a homocline with lithologic entrapment, with a producing section of 130 feet in thickness. The depth of the reservoir is 1,000 to 2,500 feet. The fluid contained in the reservoir rock is a low gravity viscous oil having a gravity of 13° and a viscosity of 1,500-2,000 CP. The pay section is a very porous (35% porosity) and loosely consolidated non-marine sand of Pleistocene age. By the end of 1958 there had been 3,947 wells drilled in this field, which is an average density of one well to each 2.2 acres, and the cumulative production of the field to that date amounted to 345,527,000 barrels, which was a recovery of 306 barrels per acre foot, or 17% of the oil in place. The operation of the field was spasmodic because the crude was of such character that only a limited volume of its could be used in the refinery crude slate. With the introduction of fluid coking in the refining process, it became possible to use substantially larger amounts of this oil, and it became economically desirable to reactivate development and production. Improved methods of introducing heat to the bottom of the hole increased production from a large percentage of the existing wells from rates of 3 or 4 barrels per day to 30 to 40. During 1959, our Company alone drilled 100 new infill or replacement wells which have initial producing rates of about 25 barrels per day, compared with about 7 barrels per day average of old producers. The latest methods of determining well interference have been applied over a period of two to three years and, as yet, none has been observed even in patterns where well density is as low as one well for each two and a half acres. The wells are drilled and placed on production in less than 24 hours at an average cost of $14,500 and, therefore, are quite profitable. Inasmuch as this program of dense drilling meets the three paramount facets--physical, legal and economic--we consider it to be proper well spacing,

By contrast to Kern River, consider the development of fields in the Far East ...

The Gachsaran Field in southwest Iran is probably one of the world's largest oil fields, with an area, as so

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far delineated, of 130 square miles, an oil column of 7,150, and estimated recoverable reserves of several billion barrels. Individual well potentials are in the order of 20,000 to 40,000 B/D from the Asmari limestone of Oligocene-Miocene age. The structure is a folded pattern of large anticlines and synclines. The field was discovered in 1928 but, due to the relatively heavy (32 gravity) and highly sulphurous (2.6% sulphur) nature of the crude, little development was carried on until 1956. There have been four separate phases in the development. The current phase of drilling, commencing in 1956, comprises the principal development of the field. Productive capacity of the field prior to that time had been about 100,000 B/D, but production had been limited to 60,000 B/D by pipeline capacity. In 1957, plans were approved for large scale development to raise productive capacity to 600,000 B/D by the first of 1961. This plan envisaged the drilling of 36 wells at approximately one mile intervals along the periphery of the structure. This plan was later modified to provide drilling at two mile intervals in the first instance, to be followed by one-mile infills in the more permeable areas as required to meet production demands. Up to early 1959, twenty-one wells had been drilled in the field and three wells were drilling at that time. Of the twenty-one wells drilled, eight were oil producers two were gas wells, two were observation wells, four were abandoned before reaching the Asmari formation, four were unproductive, and one was suspended due to drilling difficulties. Here again, with very wide spacing, the three paramount facets (physical, legal and economic) have been met, and it must be considered to be proper well spacing.

Much study has been given to well spacing, not only in this country but throughout the oil producing countries of the world. An article by A. Landoni and B. L. Astiz, entitled, "Oil Well Spacing--A Technical and Economic Analysis" was presented at the Fifth World Petroleum Congress. These gentlemen from Argentine concluded from their studies that:

1. "The minimum spacing can be determined from the very beginning of exploitation by means of appropriate technical tests and studies and thus avoid the drilling of unnecessary exploitation wells" ...
2. Minimum spacing is defined as ... "That distance between two or more wells which does not bring about interference in their production when exploited in accordance with the characteristics of the field" ... and
3. Having determined, within reasonable approximation, the minimum spacing of sufficient wells without interference between them, wider spacing has greater economic advantage by comparison.

They further recognize that the decision as to what spacing to adopt depends on the drilling costs, the recovery per unit of surface area, the initial production, the price of oil, the drilling program and the overall duration of exploitation. Our domestic industry is in direct competition with enlightened concepts of well spacing such as expressed in this comprehensive study.

While the bulk of our effort falls some place between the two extreme examples cited and is usually further complicated by legal and economic requirements, the physical requirements of proper well spacing are not being given appropriate weight in the development of our reservoirs.

LEGAL

Irrespective of what spacing should exist to satisfy the physical requirements, it must be modified to protect the individual's rights and equities. This is no more than proper--for it is one of the great heritages of our nation that the minerals under the earth's surface are individually owned and are not the property of the state, as is the case in nearly every other country in the World. It would be unrealistic, however, not to recognize the complications that arise and the limitations imposed on the drilling and producing of a field necessary to satisfy the individual's rights of ownership. Each state has its own laws to insure these rights, and its administration of the rules governing the activities of the oil industry must be compatible with and satisfy the legal requirements. This is not to imply, however, that the laws should not be subject to change or modified to accomplish obvious results which will inure to the benefit of the individual, the state, and the industry. Equity laws are man-made and designed to satisfy the requirements of a given situation at a specific time, as contrasted to the laws of physics which are constant. It follows, therefore, that if there is conflict in the manmade laws and the physical laws controlling the recovery of hydrocarbons from a reservoir, it behooves man to change or alter his laws accordingly. While the ultimate in absolute compatibility will never be achieved, certainly every effort should be extended to bring this about within practical limits. Recognizing the conflict between these two laws, many states have incorporated into or made changes in their statutes which brought about beneficial results and still preserved the individual's rights. Most of the states have recognized the need for the creation of drilling units to permit a field to be developed in an orderly and equitable fashion. At present, 22 states have forced pooling laws governing the formation of drilling and/or producing units. While these laws differ somewhat in requirements, they do accomplish the desired results. The states of Texas and California are conspicuous by their absence from this list; and yet, they are two of the largest and oldest producing states. Voluntary pooling offers the only solution to this urgent need in these two states and, as difficult as it is to work out sometimes, this approach is being used extensively and effectively. It cannot be denied, however, that in too many instances, unnecessary development and unjust inequities are occasioned by the lack of appropriate statutes.

Logically, if one were seeking the most up-to-date laws and regulations, it seems that he would search in our oldest producing states since they should have had the most time and experience to consider the problem. Is this the case? No, in actual fact, the reverse is true! Our best conservation laws and regulations usually occur in our youngest producing states, and our most inadequate laws and regulations occur

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in our oldest producing states. This is prima facie evidence of inflexibility within the industry--an inflexibility that can hardly be tolerated under today's competitive energy market and perhaps cannot be tolerated under tomorrow's conditions.

Proper well spacing must of necessity be modified to satisfy the legal requirement, regardless of how drastically it violates the physical and economic requirements. The well spacing rules vary materially in the different states, and the administration of the rules by the responsible commission determines to a large degree the pattern of development. In a great many instances, there is much room for improvement. The Legal Committee of the Interstate Oil Compact Commission in its report entitled, "A Form for an Oil and Gas Conservation Statute" sets out a principal for well spacing that has so much merit that it could well become the goal of all regulatory bodies. This principle is embodied in Section 5. Well Spacing. It reads:

"5.1 The Commission shall promptly establish spacing units for each Pool except in those Pools that have been developed to such an extent that it would be impracticable or unreasonable to establish spacing units at the existing stage of development.

"5.2 An order establishing spacing units shall specify the size and shape of the units, which shall be such as will, in the opinion of the Commission, result in the efficient and economical development of the Pool as a whole. The size of the spacing units shall not be smaller than the maximum area that can be efficiently and economically drained by one well; provided, that if at the time of a hearing to establish spacing units there is not sufficient evidence from which to determine the area that can be efficiently and economically drained by one well, the Commission may make an order establishing temporary spacing units for the orderly development of the Pool pending the obtaining of the information required to determine what the ultimate spacing should be."

If these principles could be realistically carried out in the administration of our well spacing rules, and if industry would conduct its own spacing efforts in such a way to make it possible for the Commissions to apply these principles, the industry would be a long way toward the solution to one of its most critical problems.

Recently, the state of Louisiana has extended its laws on unitization, which formerly applied only to cycling projects, by passing into law a new statute for compulsory field-wide unitization for pressure maintenance and, by so doing, has taken a step forward in the field of conservation. The provisions of this statute are such that the rights and interests of the majority of the owners are protected, and yet the individual's property cannot be confiscated. And this is as it should be! Oklahoma, Alabama, Arkansas, Florida, Georgia, and Washington have similar laws, although they are not identical in all respects.

The need for field-wide units is recognized throughout the industry; the question in many states that has not been resolved is whether they should be compulsory or voluntary. When it is recognized that over one half of our domestic reserves must be produced either through secondary recovery or pressure maintenance, the importance of appropriate statutes to allow this to be accomplished becomes apparent. The number of such projects is increasing steadily, and its is highly desirable that pressure maintenance be initiated very early in the productive life of a surprisingly large number of our fields. Statutes which augment the formation of field-wide units are a prerequisite to the efficient exploitation of a large portion of both our present and future reserves. Again, the Legal Committee of the Interstate Oil Compact Commission recognized this when they suggested the following under Section 7, Unit Operations:

"7.1 The Commission upon its own motion may, and upon the application of any interested Person shall, hold a hearing to consider the need for the operation as a unit of one or more Pools or parts thereof in a field.

"7.2 The Commission shall make an order providing for the unit operation of a Pool or part thereof if it finds that:

"7.2.1 such operation is reasonably necessary to increase substantially the ultimate recovery of Oil or Gas, and

"7.2.2 the value of the estimated additional recovery of Oil or Gas exceeds the estimated additional cost incident to conducting such operation.

"7.3 The order shall be upon terms and conditions that are just and reasonable and shall prescribe a plan for unit operations $hellip;"

This section proceeds to outline in quite some detail a method by which field-wide unitization can be accomplished in a fair and equitable manner. It is certainly a comprehensive guide for any state to follow in its consideration of an appropriate statute for this vital need in our oil and gas laws.

ECONOMICS

Proration of oil and gas has purposely been omitted from both the physical and legal aspects of proper well spacing. The allocation formulae has so much impact on the economic aspect that it must be considered in that respect. While there are innumerable formulae usecl for the determination of a well's allowable, in the overwhelming number of cases, the formulae does not provide an economic incentive for proper spacing. On the contrary, it usually results in an economic incentive for closer spacing than necessary to satisfy either the physical or legal requirements of proper spacing. Basically, too much emphasis is placed on the well factor of the formulae.

One of the crying needs of the industry is more effective use of its development money. This is basic to prudent operations, but it is emphasized during these times of low allowables. It must be a continuing concern of the industry, even though production rates increase materially, if we are going to remain competitive with our competition from other sources of energy nere at home, and oil produced abroad.

Lease after lease may have the wells necessary to produce at a rate of five times in excess of the maximum

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rate it actually attains during its life. This unused capacity wastes development money. Likewise, there are instances where one operator has sent two or more wells after the same ultimate barrel simply because wells were a large factor in the proration formulas. Needless to say, physical laws divided up the barrel among the wells. This also is a waste of development money.

Consider, in recent years, the industry's rapid transition toward multiple completions where possible. Note, also, the sensitivity of the industry recently when Louisiana curbed this practice. Why did these things occur? Because these innovations were in the direction that provided a more reasonable ratio between development money spent--and utilized capacity and ultimate recovery.

Shall we, as an industry, make an effort to correct our practices? Or shall the correction come about originally by the loss of position to competitive fuels and, finally, by dire economic necessity, with a resulting microscopic profit margin?

In the final analysis, no more oil is sold than is consumed. This is without respect to the number of wells involved. The consumer, as such, does not care how many wells are involved, he only wants you to have enough. Why does industry continue to penalize itself with needless development expense? How long can it do so?

No single factor today is having as much effect on the industry's development operations as the proration of oil. Some regulatory agencies are actively exploring methods for improvement, and others should.

The inadequacy of the weight given to wider spacing under the Texas regulations for determining allowables is well brought out in a paper presented by Mr. Harold Decker at the "Oil Recovery Symposium on Southwest Texas", sponsored by the Texas Petroleum Research Committee and the A.I.M.E. at Corpus Christi, Texas, on October 29-30, 1960. For example, in Table 4 of that paper, it was shown that under the present law and regulations, for an 8,000 to 8,500 foot well an increase of 300% in the acreage in a drilling unit (from 20 to 80 acres) results in an increase of only 53% in allowable (from 113 to 173 barrels per producing day).

In other words, for a well of this depth, acreage is given a weight of only 18% in the present formulae. Mr. Decker goes on to state that anything less than 75% credit for acreage results in an economic incentive for closer spacing. It appears obvious that something must be changed if we are to eliminate the investment "featherbedding" that is the natural economic result of the present methods of determining allowables in Texas.

The Louisiana Department of Conservation held a hearing on September 28, 1960, to consider proposed revisions in the method of allocation which is now a per well allowable adjusted for depth. The proposed order would establish a 40-acre pattern, and give 50% weight to acreage, for spacing wider than 40 acres, and 100% weight to acreage for spacing of less than 40 acres. Such an order is certainly a step in the right direction because it eliminates the incentive to drill unnecessary wells and provides a reasonable increase in allowable for wells drilled in excess of 40 acres where such spacing will efficiently drain the reservoir.

Other results of the present economic incentive to drill more wells than necessary for proper well spacing are the building up of unnecessary producing capacity, adding unnecessarily to the new oil brought on the market which must be accommodated by the restriction of established production, and using capital for development which would better be used in exploring for new reserves, which the country so vitally needs.

The impact that new production has on the allowable necessary to meet the market demand is found in the comparison of actual production in the states of Louisiana, Texas and New Mexico during 1958 and 1960. By coincidence, these three states had the same degree of proration in the Spring of 1958 as existed in the Summer of 1960. Louisiana had 33% of the March 1953 allowable; Texas had eight producing days; New Mexico's unit allowable was 33 barrels per day. During this two-year period, new production offset the decline in old production and provided a daily increase of 238,000 barrels, or 29% in Louisiana; 214,000 barrels, or 9 1/2; % in Texas; 23,000 barrels, or 8.6% in New Mexico.

According to figures released by the A.P.I., domestic demand increased only 7% during the period in which new production was increasing at substantially higher rates. The vast amount of capital being spent for development on unnecessary close spacing would be better spent to increase reserves of oil and gas which are lagging behind the increase in demand.

At the onset of this paper, the question was posed--Why is so little progress being made toward accomplishing proper spacing? I am convinced, from my consideration of the subject, that the primary reason is that the present methods of allocation in most states provide the incentive to drill more wells for purely economic advantage and far in excess of the number required to satisfy the physical or legal requirements of Proper Well Spacing. If the allocation formulae will provide the incentive to go to proper spacing, I am confident that progress will be made and the "strong built-in resistance to change" can be overcome.

Where does the geologist fit in to the problem of proper well spacing? Actually, he is squarely in the middle of it from the very first exploratory well drilled. The industry has been justifiably criticized for not starting off development in such a manner that wells can be spaced efficiently. How many places can you cite where there are four wells drilled as close to a common corner as the law allows? Too many, I'm sure. How many times have you refused to give dry hole money or support a well unless it is drilled as close to your lease line as the law allows? Too many, I'm sure. The geologist has an opportunity, and a responsibility, to plan ahead in the location of wells so that they can be fitted into a reasonable and efficient development pattern. Exploration effort is an expense, and, from some place within the earning structure of an individual operator, or of a company, enough profit must be generated to support this activity. The money spent in drilling unnecessary wells could well flow to the geologic effort for finding new reserves, which is your prime responsibility.

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