What it means
When a well is drilled, nobody knows exactly how much it will produce. Engineers build forecasts using geological data, flow tests and the production history of similar wells.
As the well produces, these forecasts are revised. The typical pattern is a high initial output that declines over time, known as a decline curve.
Engineers fit a curve to the observed data and project how long the well will keep producing at a level that covers its operating costs. The total of all that future output, added to production to date, is the EUR.
EUR is central to the economics of drilling. A well costing $8,000,000 to drill and complete needs to produce enough over its life to cover the cost and give a profit at expected prices.
Investors compare the EUR of different wells and fields to rank opportunities. Because it is an estimate, it carries uncertainty, and the quality depends on the data and methods used.
Companies often report ranges, such as low, best and high cases, and may be subject to regulatory rules on how reserves are reported. Estimates may rise as technology improves, or fall if a well performs worse than expected.
It is also important not to confuse EUR with reserves. Reserves are the portion of recoverable resources that can be produced economically under current conditions, while EUR covers the total over the life of the well.
Product prices, costs and technology all influence what is economic.
In practice
Real-world examples.
Example
An exploration company drills a new well and, after six months, estimates an EUR of 600,000 barrels. The estimate is based on the early flow rates and the pattern of similar wells nearby. The board decides to drill four more in the same area.
Example
A lender assessing a loan to an oil producer asks for independent engineers' estimates of EUR for each well. It lends only a fraction of the expected value to allow for uncertainty. The loan is repaid from the sale of the oil.
Example
An investor compares two gas fields. One has an EUR of 40 billion cubic feet per well at a drilling cost of $6,000,000, and the other has an EUR of 25 billion at the same cost. The investor prefers the first field because each dollar spent is expected to produce more gas.
Formula
Calculation
EUR = Cumulative production to date + Remaining recoverable volume
Worked example: A well has produced 800,000 barrels so far. Engineers forecast that a further 450,000 barrels will be produced before the well is no longer economic.
EUR = 800,000 + 450,000 = 1,250,000 barrels
At an expected net price of $60 per barrel after costs, the total value of the well's lifetime output would be 1,250,000 x $60 = $75,000,000.Case study
Seen in the real world.
Redmesa Energy is an illustrative, fictional producer with ten wells in a shale field. Its first wells were forecast at an EUR of 900,000 barrels each, and the company raised $50,000,000 on that basis. The company's early results had been strong, which encouraged investors.
After two years of production, the data showed that output was declining faster than forecast. Engineers revised the EUR to 650,000 barrels per well, about 28% lower. Management had assumed the first year's high output would be repeated.
In this illustrative story, the company changed its drilling plan, concentrating on locations with better rock quality and testing different completion methods. It also informed investors promptly about the revision. The case shows why EUR estimates need regular updating and why transparency builds trust.
Watch out
Common mistakes.
- Treating EUR as a certain number, when it is an estimate that changes as new data arrives. Regulators and lenders usually expect ranges and a clear explanation of the method.
- Confusing EUR with reserves, when reserves depend on economic conditions and EUR covers the whole life. A well can have a large EUR but few reserves if prices make production uneconomic.
- Forgetting costs, when a large EUR may still be unprofitable if prices are low or operating costs are high. Cost per barrel is as important as the volume.
Questions
People also ask.
How do engineers estimate EUR?
They analyse production history, fit a decline curve and use data from similar wells to forecast future output. They may also use computer models of the reservoir.
Why does EUR matter for investors?
It determines how much revenue a well can earn, which sets its value and the return on drilling costs. A reliable EUR also supports the borrowing base for bank loans.
Can EUR change?
Yes, it is revised as production data accumulates and as prices, costs and technology change. Companies often disclose revisions in their annual reports.
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