Module 11 EWE 2306 Drilling & Well Intervention Economics

Contents
1 Introduction..................................................................................................................... 3
2 Costs............................................................................................................................... 4
2.1 Time-dependent costs...............................................................................................5
2.1.1 Contract payments.............................................................................................5
2.1.2 Personnel...........................................................................................................5
2.1.3 Consumables.....................................................................................................6
2.1.4 Service Fees......................................................................................................6
2.1.5 Company Overhead...........................................................................................7
2.2 Depth-Dependent Costs............................................................................................7
2.3 Fixed Costs or Once-Off Costs.................................................................................8
2.3.1 Fixed Costs........................................................................................................8
2.3.2 Once-off costs...................................................................................................8
3 Authorisation For Expenditure........................................................................................9
3.1 AFE Components.....................................................................................................9
3.2 Drilling Cost Estimation.........................................................................................11
4 Contract......................................................................................................................... 13
4.1 Importance of contracting......................................................................................13
4.2 Division of liabilities..............................................................................................14
4.2.1 Drilling unit, equipment and materials............................................................14
4.2.2 Contractors equipment and materials.............................................................14
4.2.3 Loss of Hole and Cost of Control....................................................................15
4.2.4 Claims by Third Parties...................................................................................15
4.2.5 Types of Drilling Contracts.............................................................................15
4.3 Types of Drilling Contracts...................................................................................15
4.3.1 Day-rate Contract............................................................................................15
4.3.2 Footage Contract.............................................................................................16
4.3.3 Turnkey Contract.............................................................................................16
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5 Conclusion....................................................................................................................18
6 References..................................................................................................................... 19
10 Appendix..................................................................................................................... 20
Appendix A Hay Pulley Correction Factor.................................................................20
Appendix C Accumulator set up illustration...............Error! Bookmark not defined.

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1 Introduction
The oil industry is an industry with high capital intensity and apart from that it is also
high risk. Despite the advancement in technology that has increased the margin of
success of drilling a well with significantly profitable quantity of oil, the fact still remains
that this economic viability could not be deduced until actual drilling of well is done.
Hence, in the journey on well drilling and well intervention, the analysis of cost, potential
expenditure and placement of liabilities are highly crucial prior to carrying out the
activities. All finances are to be accounted for to ensure longevity of the business and
minimal lost. It is useless to start a venture that may end up non-profitable.
EWE 2306 Drilling and Well Intervention Economics gives an introduction on the fiscal
components in a drilling and intervention operation as well as their importance to well
engineers.

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2 Costs
The cost to drill and equip a well varies by such factors as the depth of the well, its
general location, and industry economics that drive demand for drilling rigs in the
immediate area of the well site. In this module, types of costs includes costs to drill a
well, to complete the well and to service the well.
The costs for drilling, completing and servicing a well could be further broken down into
three basic elements with subsets (Figure 1 - Overview):
Time-dependent costs
Depth-dependent costs
Fixed costs or Once-off costs

Contract
Payment

Small Unit

Personnel
Timedependent

Big Unit
Consumables
Services Fees
Company
Overhead

Types of Costs
Depthdependent

Equipment
Consumables

Fixed Cost
Once Off Cost

Figure 1. Types of Costs Overview

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2.1 Time-dependent costs

Well construction costs are categorized according to variable and fixed cost expenses, and
the relative proportion of each will vary from well to well. Variable cost are decomposed
into time-dependent cost.
Time-dependent cost are costs related to the time spent on the operation.

These costs may be in the form of i) Contract payments, ii) Personnel, iii) Consumables,
iv) Service fees and v) Company Overhead

2.1.1 Contract payments

Contract payments refer to all payable services that are contractual and applicable during
the contract period of the rig. This includes the time-related costs such as:

Rig and crew hire

Cementing
Diving
Wireline logging
Geological surveillance
Drilling / completion fluid engineering
Telecommunications
Transport on/off offshore
Insurance
Tool rental

All these types of contracts mostly use a daily rate for the rental equipment. Additional
rate may include the execution of a specific activity with that equipment which would
also be converted to daily rate for estimation purposes.

2.1.2 Personnel
Costs of personnel are calculated according to the time they have spent on their allocated
unit. The unit could either be simply a small operating unit which consist of a single well
and hence, the total time spent on that well would be considered as the cost of personnel
or it could a large operating unit that consists of several wells where the cost of staff will
be allocated to the wells according to the time spent on each.

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Examples of the personnel are:

Operations manager
Head of well operations
Well engineers
Site representatives
Administrative assistants in the Well Engineering Department
Civil Engineer
Geologists
Materials / Transport staff

2.1.3 Consumables
The operating costs can be classified either by their nature (personnel, services, supplier)
or by their purpose (production, maintenance, security, etc).
Where items are classified by their nature, they should generally conform to the
accounting conventions, which may have statutory character in the particular country
concerned. They will also include consumables which is basically are anything that can
be consumed or destroyed after use.
Examples of consumables are fuels, energy, lubricants, chemicals, office supplies,
technical equipment such as piping, drill strings, joints, catalysts, molecular sieves,
cladding, laboratory supplies, individual items of security equipment, spare parts,
household supplies and food.
The sum of these costs is commonly known as Daily Operating Cost for the rig.

2.1.4 Service Fees

This refers to the cost charged if an operating unit require the support from Shell
International Exploration and Production (SIEP). SIEP is a subsidiary of Royal Dutch
Shell which is responsible for their exploration worldwide.
An operating unit will have its own geologists, reservoir engineers and petrophysics but
may seek assistance and expertise from SIEP to help with geological interpretation and
well evaluation or any advice on specific borehole difficulties.
The cost charged depends on the amount of time spent on the well where assistance is
required. In large operating units, this cost is not usually included in the overall well cost
and vice versa.
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2.1.4 Company Overhead

Expenses related support facilities and activities should be allocated to those activities
receiving benefits. Hence, all the ongoing expenses of the company during the duration
of the project is considered as company overhead of the drilling project.
The four major subheadings of the overhead section are as follows:
1.
2.
3.
4.

OverheadDrilling and Producing Operations,

OverheadMajor Construction,
Catastrophe Overhead, and
Amendment of Rates.

Examples of these expenses:

The salaries of administrative staff

The cost of housing
Office rental
The rental of yard space, wharves and warehouses
The cost of company vehicles
The cost of air fares for company personnel

2.2 Depth-Dependent Costs

It refers to those payments for equipment and consumables which are used and/or
remain down hole.
These items include:
o Bits
o Casing and casing attachments
o Cement and additives
o Mud chemicals and lost circulation materials
o Completion tubing and attachments
o Completion fluids and chemicals
Depth-dependent costs can vary from approximately 350 to 600 USD/meter (500 to
800 BND/meter) of well depth depending on whether the well is on- or off-shore and
in a remote are or not.

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2.3 Fixed Costs or Once-Off Costs

In addition to time-dependent and depth-dependent costs, a large part of total well
costs can be taken up by costs which do not fall into either category.
These costs are known as fixed costs or once-off costs.
Fixed costs usually refer to a single lump sum payment specified in a contract.
Once-off costs are the costs of something that happens or is used only once per well.

2.3.1 Fixed Costs

Examples of fixed costs
Cost to mobilize a rig from one well to another
o Can be done on a fixed price basis or on unit rate per kilometer basis (latter
rather classified as once-off cost)
o Charged to the well to which the rig is moved.
Cost to transport service contract equipment or personnel from one part of the world
to another
o Dependent on the distance to be covered and the means of transportation.

2.3.2 Once-off costs

Common cost in new or remote areas.
Involves the spending on the installation of an infrastructure and facilities such as
office construction, installation of long distance telephone network, etc.
For onshore wells, this includes costs related to building drilling locations and access
roads.
For offshore wells, this includes costs related to seabed surveys, seabed preparation
and rig positioning.

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3 Authorisation For Expenditure

The purpose of planning the drilling program is to provide a basis for the safe and
successful drilling and completion of a well at the lowest overall well cost.
The details of well planning will include:
Drilling programs (mud, drill bit, drill string, hydraulic, casing/cementing, well
control)
Wellhead equipment
Rig specification (type of rig used, onshore/offshore)
Evaluation phase (sampling, coring, logging and testing)
Emergency (contingency plans for all encountered problems)
Miscellaneous (contracts, rentals, etc)
Well engineers should be familiar with these and they should be able to assess each of the
costs and ultimately, estimate the well cost as accurately as possible. Apart from that,
with AFE they could extrapolate the cumulative cost to date of the operation to ensure
budget is not exceed on a daily basis and hence, are capable of informing the
management should the budget are exceeded.

3.1 AFE Components

Preparing cost estimates for a well and getting management approval in the form of an
AFE is the final step in well planning. The AFE is often accompanied by a projected
payout schedule or revenue forecast. Although an essential part of well planning, the cost
estimate is often the most difficult to obtain with any degree of reliability. Before getting
approval the management to drill a well, the well engineer must prepare an AFE or
Authorisation for Expenditure.
AFE is a detailed cost estimate for the well. The costs included in AFE are drilling csots
and completion costs each can be subdivided into tangible costs and intangible costs.
(Refer to figure 2)
Simple representation of AFE is as below:
Expenditure
Intangible Costs
Tangible Costs
Total Cost
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Drilling
$ xxx
$ xxx
$ xxx
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Completion
$ xxx
$ xxx
$ xxx

Module 11 EWE 2306 Drilling & Well Intervention Economics

Tangible

Drilling
Equipment

Intangible

Nonsalvageable
cost

Tangible

Completion
Equipment

Intagible

Nonsalvageable
cost

Drilling Cost
AFE
Completion
Cost

Figure 2. Authorisation for Expenditure Component breakdown

Tangible Drilling Costs: Actual costs of drilling equipment. E.g. purchasing

wellhead equipment, tubular equipment (including casing)
Intangible Drilling Costs (IDC): All costs incurred in drilling a well other than
equipment which are non-salvageable.
o Any other cost necessary for drilling and preparation of wells.
o Makes up 60 to 80% of well cost.
o E.g. location preparation for drilling rig (clearing of ground, building roads),
transportation (fuel), etc.
Tangible Completion Costs: Well equipment costs incurred from completing a well.
o E.g. completion equipment
Intangible Completion Costs (ICC): Costs incurred with completing a well that are
non-salvageable.
o E.g. labor, completion materials, completion fluids.
For Example of AFE, Refer to Appendix A

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3.2 Drilling Cost Estimation

Overall well cost may be expressed as follows:

Cwdo = Cd + Co
Cd is the drilling cost or hole-making cost (including the cost of each bit used)
Co is all other costs of drilling (e.g. casings, mud, cementing services, logging
services, coring services, site preparation, fuel, transportation and completion).
Co can be easily calculated simply total of each individual costs.
Cd, drilling cost, can be expressed as:

Cd = drilling cost $/m

Cb = cost of bit, $/bit
Cr = fixed operating cost of rig, $/hr
tb = total rotating time, hrs
tc = total non-rotating time (e.g. connecting time), hrs
tt = total trip time (round trip), hrs
D= depth drilled with bit, m/bit

Example:
Using the following data, as well as the data listed in table for different bits with their
respective drilling performance, determine the cost analysis and select the bit that will
result in lowest drilling cost.
Operating cost of the rig is $12,000/day
Trip time is 10 hours

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For Bit A,

Find the drilling cost for bits B, C and D

Bits Band D produce the lowest drilling cost (though the relatively high cost of the bit
and moderate ROP).
Therefore, not simply looking at the ROP alone when deciding the bit selection.
Must assess in terms of the drilling cost.
After the Overall Well Cost [Cwdo= Cd + Co] is estimated, a budget proposal (AFE)
must be presented to the appropriate level of management for approval well
engineers have to justify the final figures
Upon approval, the drilling activity will commence.
The approved budget is the maximum amount that may be spent on the corresponding
activity.
The Well Engineer is responsible to compare the estimated cost with the actual cost
(check daily).
Also able to extrapolate (predict) the cumulative cost to date to the end of the
activity and check that the budget will not be exceeded.
If spending exceed the budget, need to report to management which will decide
whether to reduce the scope of work of the activity or to make funds available for it.

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4 Contract
Drilling and some of the subsequent activities in the oil and gas industry is generally
carried out by independent drilling companies which are coined as contractors such as
Baker Hughes, Halliburton and KCA Deutag. In doing so, an agreement is formed
between the owner of the drilling unit (or contractor or service company) with the
operator such as Brunei Shell Petroleum and Total. This is termed as a Contract.
The reason for delegating out the jobs to the contractor is that the contractors are
specialized in their scope of work and they could normally drill more economically and
efficiently than the oil and gas operator.
The contract sets out the nature of the tasks to be achieved; the functions to be performed
by each party specific responsibilities and expenses assigned to each party. In the
contract, the operator:
Usually has geological, land and personnel who locate the drilling prospects.
Then drills the well with a drilling rig owned by a drilling contractor.
Have field personnel (e.g. field engineers) who supervise drilling operations at the
well site in conjunction with contractors personnel.
On the other hand, the contractor:
Supplies to the operator the basic drilling rig and accessory equipment to drill the
well.
Also supplies the supervisory personnel and drilling crew to operate the rig and
provide all of the equipment, materials and supplies on the rig. (However, supplies
such as drilling bits, casing and mud will be purchased and provided onto the rig by
the operator)
The drilling contract usually gives the operator the right to direct the operations and to
give instructions to the contractor.

4.1 Importance of contracting

There may be a lot of possible problems or losses occurred during the drilling activity
what could go wrong
Need to know who will be responsible for what loss when one of those things goes
wrong before any accident occurs. (e.g. who will be responsible for hole damage
operator or contractor)
There is no standard contract it is a give and take negotiations between the
parties.
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Therefore, the drilling contract will allocate certain risks (including personal injury,
damage to property, certain pollution risks and consequential damages) regardless of
fault.
Other risks, such as well control, downhole pollution, loss or damage to the hole or
downhole tools and reservoir damage, are often assumed by the operator.
The drilling contract is one of the most important contracts on operator will enter into
take significant time and resources to create one!

4.2 Division of liabilities

The division of responsibilities may be set out in a drilling contract in varying ways,
but a common one is as follows:
i.
Drilling unit, equipment and materials
ii.
Contractors equipment and materials when in-hole and operating below the
rotary table, and its underwater drilling equipment
iii.
Loss of hole and cost of control
iv.
Claims by third parties i.e. any persons other than the other party to the drilling
contract.

4.2.1 Drilling unit, equipment and materials

This includes any property belonging to both the contractor and the operator.
The contractor owns the drilling unit and its own equipment whereas the operator will
have its own property on the drilling unit such as casing and drill pipe and other
equipment.
Any property lost will be compensated by the one who owns it.
E.g. the drilling unit itself may be lost. The contractor is to be responsible for this loss
regardless if it is resulted from the negligence of the operator.

4.2.2 Contractors equipment and materials

This includes the contractors equipment and materials, when in-hole and operating
below the rotary table, and its underwater drilling equipment. (e.g. BHA)
The operator is usually to bear the risk of loss or damage to these items except in
cases resulted from contractors negligence.
E.g. wear to the contractors equipment while it is in the hole caused by corrosive
elements operator will compensate the contractor

4.2.3 Loss of Hole and Cost of Control

The contract may provide that the contractor should not be responsible for loss of or
damage to the hole or casing, or for any cost of regaining control of the well.
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The exception is if the hole is lost as the result of negligence of contractor, the
contractor will redrill to the point of loss at a reduced rate.
Operators often assume liability for the cost of regaining control of any wild well, as
well as the cost of the removal of debris.

4.2.4 Claims by Third Parties

The drilling contract may provide that neither party shall be liable for injury to or
death of the other partys personnel, howsoever caused.
In the case of pollution where the third party is affected (e.g. physical or financial
damage to the public), both operator and contractor will bear the financial charges and
compensate the damages.

4.2.5 Types of Drilling Contracts

The drilling contracts provide compensation to the drilling contractor in one of three
ways: i) Day-rate (calculated by the amount of time),
ii) Footage (calculated by the amount of depth drilled) and
iii) Turnkey (a lump sum payment or meeting a set predetermined target).
There is a significance difference between the daywork and turnkey or footage contracts
in terms of risk allocation and insurance. The higher the risk (i.e.
Turnkey), the higher
the compensation.

4.3 Types of Drilling Contracts

4.3.1 Day-rate Contract
The day-rate contract is conceptually simple. The drilling contractor is paid a specified
amount for each day worked on the well, regardless of the number of feet drilled. The
drilling contractor furnishes the rig and the crew. Unless the contract specifies otherwise,
all materials, supplies, and other services are furnished by the operator. The method and
manner of payment are stated in the contract.
Usually the contract specifies two daily rates, one for time when the contractor is actually
engaged in drilling and a lesser figure for standby time, during which the operator may be
running tests or having other services performed. The day-rate contract is used for
virtually all offshore work. It is also used onshore in areas where geological conditions
are not well known or the drilling and environmental conditions are considered
hazardous.

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Like footage rates, day rates vary, depending on the location and environment where the
well is to be drilled. Day rates may also vary greatly over time with change in demand for
rigs in the area.

4.3.2 Footage Contract

Under the usual footage-rate contract, the drilling contractor is paid a specified amount
per foot of hole drilled. (There is no implication that it costs the same amount for each
foot of hole drilled. Costs increase significantly as the depth of the well increases.)
Payment is irrespective of whether the proposed depth is reached or not.
The contract usually calls for drilling to a specified depth or to a specified number of feet
below a specific geological horizon, whichever comes first. The footage rate is
determined by taking the total estimated costs to drill to that depth, adding a risk factor
and profit, and then dividing the total by the targeted depth.
The contractor furnishes the rig, the crew, services, and certain materials and supplies.
The operator normally furnishes the well equipment and may provide the drilling mud.
Certain activities are not included in the footage rate. For example, taking core samples,
running various tests, and logging are usually treated as activities extraneous to drilling
and are separately charged to the operator on a day-rate basis.
The drilling contract specifies the payment schedule for work performed. Payments under
the drilling contract, including amounts owed for day work performed, may be required
at specific time intervals or may be required when drilling has reached specific depths.
The drilling contractor may require that a portion of the estimated total costs be prepaid.
Except for factors outside the control of the drilling contractor, payment is usually
contingent upon reaching the contract depth.
This type of contract is generally not utilized in offshore drilling.

4.3.3 Turnkey Contract

The turnkey contract has been in use for many years and originates from real property
law in the United Kingdom. The basic feature of a turnkey contract is that the contractor
performs specified services for a set price and the operator merely has to turn the key
when the project is completed.
For a specified sum, the drilling contractor performs all services and furnishes all
materials required to complete the job. The operator has no liability until the contract
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requirements are met. Normally, the turnkey contract specifies day rates for completion
work.
There are advantages and disadvantages to the turnkey contract for both the contractor
and the operator. This contract allows the contractor greater latitude in the way drilling is
done and in the selection of the drilling mud and drill bits in order to drill the well in the
most economical and efficient manner possible.
The advantage to the operator is obvious: no matter what problems are encountered, the
total cost of the well is the contract price. The disadvantage for the drilling contractor is
that the contractor must complete the well as specified regardless of the cost. Many
things can happen in the drilling process to make the turnkey contract a costly risk to the
contractor.
The major disadvantage to the operator is that, because of unknown and unexpected
drilling problems in wildcat areas, drilling contractors are usually reluctant to enter into a
turnkey drilling contract in such areas. Because of the inherent risks of drilling and the
need for the
drilling contractor to charge for these risks, total costs will generally be higher under a
turnkey arrangement than under other types of contracts.

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5 Conclusion
The economics of drilling and well intervention is a major component in terms of well
planning as it determines the viability of the project or the types of components and time
to be allocated to the well. Without proper planning, the industry may not survive. Major
capital are invested into such activities and as much unnecessities are to be filtered out
especially in the falling economy. Identification of costs help trim any unnecessary
spending and placement of liabilities prior to carrying out jobs protect the parties involve
against unfair treatment. Overall, it is an important subject matter for well engineers to be
educated on.

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6 References
Jennings, D., Feiten, J., & Brock, H. (2000). Petroleum Accounting (5th ed.). Texas:
Professional
Development
Institute.
Retrieved
from
http://www.books.mec.biz/tmp/books/TK8OHBLXWEHXZRR2C1VH.pdf
Kaiser, M. (2007). A Survey of Drilling Cost and Complexity Estimation Models.
International Journal Of Petroleum Science And Technology, 1(1), 1-22.
http://dx.doi.org/10.1.1.131.3200&rep
Oil and Gas Exploration and Production: Reserves, costs, contracts. (2004). Paris.
Petrowiki.org,. Authority for expenditures (AFE) -. Retrieved 16 November 2015,
from
http://petrowiki.org/Authority_for_expenditures_(AFE)#Tangible_and_intangible_cos
ts
Petrowiki.org,. Estimating cost and time -. Retrieved 14 November 2015, from
http://petrowiki.org/Estimating_cost_and_time
Petrowiki.org,. Well planning -. Retrieved 16 November 2015, from
http://petrowiki.org/Well_planning#Minimum_cost

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10 Appendix

Appendix A Authorisation for Expenditure Sample

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