WELL COSTS AND AFE

 Reasons for well costing:

 There are many elements which comprise the well cost range from rig, casing, people, drilling
equipment etc.
 The AFE “Authorization For Expenditure” is the budget for the well and once is prepared, it
should then be approved and signed by a senior manager from the operator.
 Details of the well will be attached to the AFE sheet as a form of technical justification.
 There are several reasons for producing a well cost, including:
• Budgetary control
• Economics
• Partners recharging
• Shareholders
 The AFE is then used as a document for partners recharging, paying contractors and an overall
control on the well spending.

 Factors Affecting Well Costs

Well costs for a single well depend on:
 Geographical location: land or offshore, country
 Type of well: exploration or development, HPHT or sour gas well
 Drillability: Drilling rate
 Hole depth
 Well target(s)
 Profile: (vertical/ horizontal /multilateral)
 Subsurface problems: (stuck, LOC)
 Rig costs: land rig, jack-up, semi-submersible or drillship and rating of rig
 Completion type
 Knowledge of the area: wildcat, exploration or development

 The total well costs for a development

Drilling program comprising several wells depend on:

 Rig rate
 Well numbers and well type
 Total hole depth
 Well layout and spacing
 Specifications of equipment
 Target tolerances = target size
 Water depth for offshore wells

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 The time spent on a well consists of:

 Drilling times spent on Making hole, including

o Circulation,
o Tripping,
o Directional work,
o Geological sidetrack, and
o Hole opening.
 Flat times spent on
o Running and cementing casing,
o Making up BOPS and wellheads.
 Testing and completion time.
 Formation evaluation time including
o Coring,
o Logging, etc.
 Rig up and rig down of rig.
 Non-productive time

 An accurate “estimate” of the time required to drill the well must be prepared before AFE.

 The time estimate should consider:

 ROP in offset wells, then the total drilling time for each section may be determined.
 Flat times for running and cementing casing, nippling up/down BOPs and nippling up
wellheads.
 Circulation times.
 BHA make up times.

 Non Productive Time (NPT) | reducing drilling time and saving money |
 Definition: The time required for any routine or abnormal operation which is carried out as a
result of a failure is defined as Non Productive Time (NPT)
 Waiting on weather or on orders, people or equipment is not NPT. This is standby time.
 Non-Productive Time in drilling operations currently account for 20% of total drilling time.
 A slight reduction in NPT can result in substantial savings.

 Classification of NPT
o Rig equipment o Logging equipment
o Surface Equipment o Hole problems and well control
o Downhole Equipment o Stuckpipe and Fishing of BHA
o Drillstring Equipment equipment
o Casing and Cementing Equipment
o Fluids

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  CALCULATION OF NPT
o It is as if these operations are not part of the drilling process and they are merely carried
out to get us to where we were before the problem occurred.
o Accurate calculation of NPT is essential if the operator attempts to improve future drilling
operations.
o Details of the NPT should be recorded by the operator on a daily basis and should be
checked against historical NPT in the area to obtain trends and then arrive at solutions.

 Risk Assessment In Drilling Cost Calculations

 Well cost estimates are made up of two major elements:

o Time dependent costs
o Tangible costs
 Time dependent costs are dependent entirely on the time required to drill the well, as each
extra day either under or over the planned duration will impact costs.
 Rig costs and services are greatly impacted by the time estimate.
 Tangible costs can be estimated at the budgetary stage (before a detailed well plan is made)
or at the AFE stage after the detailed well plan is made. The risk involved in estimating
tangibles is usually small.

 Risk assessment is defined in terms of the probability of meeting a given target.

 There are three levels of risks:
o P10
o P50
o P90

o P10 ESTIMATE
 This is an estimate which has only a 10% chance of being achieved. This is a highly
optimistic estimate which can only be achieved under exceptional circumstances.
 This level may represent the limit of technology or some stretched target that the
company believes can be achieved.
o P50 ESTIMATE
 This is the key figure in most well cost estimates.
 As implied, there is a 50% chance that the well will be drilled for less than this figure
and a 50% chance that it will cost more.
o P90 ESTIMATE
 This is an estimate of well cost which is likely to be met 90% of the time and that well
costs cannot be exceeded except under exceptional cases.

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 TECHNICAL DRILLING LIMIT (TLD)

 A theoretical limit representing a stretched target of what is theoretically possible in a perfect

world where both ideal and optimized drilling conditions.
 The difference between historical performance and TLD represents an opportunity to reduce
costs.
 TLD requires very detailed planning of every aspect of the drilling operation and this usually
requires every process to be broken down into its smallest possible constituent and the time
for each constituent to be established.

 BASIS OF TLD
o TLD requires detailed numerical answers to the following questions:
 What is the current performance? This gives the normal average
 What is possible? This gives the theoretical limit
 What is needed to get there? This determines the resource investment to achieve TLD.
o TLD requires that drilling estimates are made without the inclusion of invisible lost time
or non-productive time
o Invisible Lost Time: This time is usually absorbed in productive time and is made up of
the total of previously acceptable wasteful events such as lack of personnel.
o Examples of invisible lost time:
 Bit trips before reaching TD
 Check trips
 Mud conditioning
 Double checking directional motors and MWD tools
o In summary, time estimates for TLD are meant to use the limits of current technology
with no restriction on equipment or personnel.

 Cost Reduction

 The objective of all E&P companies is to drill and produce wells in the least possible time,
consistent with safe operations.
 The longer an operation takes, the more it will cost.
 This is because as you spend more time say on drilling operations, the company will be paying
more money for equipment and people which will make the operation more expensive.
 There are two elements of costs which must be controlled:
o Capital Expenditure (CAPEX): This includes the cost of finding and developing an oil/gas
field. The cost of drilling operations is the major cost element and must be kept to an
acceptable value.
o Operating Cost (OPEX): This includes the actual cost of production: cost of maintaining
the platform, wells, pipelines etc. We will not be concerned with these costs as they are
part of production operations.
 E&P companies aim to reduce time to develop fields in order to reduce CAPEX and OPEX.

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  In general the more remote the area the more expensive is the final cost of barrel of oil.

 The following is a list of measures to reduce costs:

o Technical innovation
o Productivity improvement: e.g. faster drilling operations
o Increased operational effectiveness
o Incentive contracts (sharing gains and pains)
o Less people

 DRILLING CONTRACTING STRATIGIES

 There are basically four types of contracts which are currently used in the oil industry:
o Conventional
o Integrated Services (IS)
o Integrated Project Management (IPM)
o Turn Key
 The type of drilling contract used can mean the difference between an efficient and a less
efficient operation.
 The operator must weigh all the relevant factors before opting to one of the above strategies.

o CONVENTIONAL CONTRACT
 In this type, the E&P Company does everything using its own staff or contractors.
 This is the most involved type of contract and can mean handling up to 100 contracts
per well.
 The operator has total control over the operation and carries full risk.
 The contractor has no risk.
 This type of contract has the advantage that lessons learnt during drilling operations
are kept within the company and used to improve future operations.
 The contractor will be paid a certain percentage of the savings made if operations are
completed ahead of the planned agreed drilling time.

o INTEGRATED SERVICES (IS)

 In this type, major services are integrated under two or three main contracts.
 These contracts are then given to lead contractors who, in turn, would subcontract all
or parts of the contract to other subcontractor.
 The lead contractor hold total responsibility for his contract and is free to choose its
subcontractors.
 The operator still holds major contracts such as rig, wellheads and casing. Also the
operator appoints one of its staff to act as a coordinator for the drilling operation.

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 o INTEGRATED PROJECT MANAGEMENT (IPM)
 In this type, a main contractor is chosen. This contractor is the Integrated Project
Management (IPM) contractor.
 The contractor is responsible for 20-30 service companies.
 The drilling operation will be controlled by a representative from the IPM contractor.
 The operator may hold one or two major contracts.
 This type is one of the worst kind of contracts for the operator because there is virtually
no learning for the operator. Lessons learnt are lost as the IPM contractor traditionally
has a large staff turnover.

o TURN KEY CONTRACT

 This is the easiest of all contracts.
 The operator chooses a contractor.
 The contractors submits a lump sum for drilling a well: from spud to finish with
operator virtually not involved.
 The contractor carries all risks if the well comes behind time and also gains all benefits
if he should drill the well faster.
 Contractors only opt for this type of contract if they know the area extremely well or
during times of reduced activities.
 The operator opts for this type of contract if he has a limited budget or has no
knowledge of drilling in the area.

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REPORTING DRILLING OPERATIONS
 Importance of Reporting Drilling Data
 Reducing risk.
 Making control on the contractor/operator/third parties.
 Improve and optimize drilling operation.
 Drilling report is used as a legal documentation/invoicing…
 Drilling reports are used to control, to document, to study and analyze, to improve.

 Reports should address data related to

 Equipment
 Personnel
 Operations
 Environment
 Cost
 Filing

 Who reports drilling operations?

1. Operator
2. Drilling contractor
3. Others (3rdparty services)

 Classification of Drilling Reports

 Classification Criteria
o Frequency (twice a day, daily, weekly, monthly)
o Content (operation, equipment, management)
o Others (any useful scheme to fit a special purpose)

o Frequency-Based Scheme
 Twice a day
• Mud Report
• Geological Report
• Morning & afternoon drilling reports
 Daily
• Formal Drilling Reports
• API-IADC Rig Report (International Association Drilling Contractor)
• Catering Report
 Weekly
• BOP, Accumulator… etc
• Rig Survey Report

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  Monthly
• Overtime Sheet
• Rig Time Breakdown Report
• Monthly Meetings

o Content-based scheme
 

 Equipment, Machines, and Tools

 Bit Record
 Monthly DP and DC Report
 Weekly BOP, Accumulator Report
 Equipment Failure Report
 Drill String Design Worksheet
 Inspection Reports ‫تفتيش‬
 Operations-based report
• Casing operation reports
• Cementing operation reports
• Geological reports
• Trip operation reports
• Fishing operation reports
• Management

o Others-based scheme


 Completion
 Accidents reports
 Casual Services
 Work Order
 Prerecorded Well Data
 Rendered Meals Sheet
 Safety

 Imagine drilling without reports?

 If it is now expensive, it will be more expensive.

 There will be no learning from mistakes.
 Drilling will not be a total quality operation.

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DRILLING ORGANIZATION
 Drilling Mission
To drill wells in a safe, economic and environmentally sound way according to good oilfield
practices.

 Functions Required for Drilling (Managerial, Supervisory, Operational)

 Planning operations
 Administering activities
 Implementing and following up
 Procuring equipment
 Taking care of HSE
 Planning personnel career
 Taking care of logistics
 Handling financial issues.

 Location of Operations

 On the rig
 In districts near drilling sites
 At the main office.

 Elements of Job Description

 Name of the job

 Place of work
 Nature of the job
 Organizational relationship
 Functional relationship
 Functional tasks (Planning, Implementing, Checking, Improving)
 Qualifications

 Job Description of Well Site Supervisor (WSS)

 Location:
o On one of the rigs working for the company.
 Organizational relationship:
o Reports to the assign team supervisor
o Supervises rig personnel
 Functional relationship:
o Contact production, material, and support service personnel.

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  Tasks:
o Plans for short term drilling requirements
o Plans movement of equipment, tools, material, personnel,… between rig and base.
o Supervises all drilling operations.
o Reports drilling information to team supervisor.
o Submits daily drilling report.
o Recommends ways to optimize operations
o Implements contingency plan
o Decides bit type to be used.
o Manages company personnel on rig.
 Skills:
o Leadership and managerial skill
o Vision & Sound judgment
o Communication speaking and writing
o Ability to work under pressure
o Being imaginative.

Drilling organization in a Production Company

Partner and EGPC
Chairman and General Manager

Finance
Administration
Explorations
Projects
Operations Managers
Safety
Contracts
Service Companies
Support services
Materials
Communication
Rig
Others

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 Drilling organization (Main Office)
Drilling Manager & Deputy Drilling Manager

Operations Engineering studies Administration

 Support services
 Planning
 Database (Adm.)
 Following up activities  Database
 Invoices
 Training  Investigation
 Contracts
 Career planning  Long-term planning
 Personnel affairs
 Budget
 Filing

Drilling organization (District Office)

Drilling Manager & Superintendent

Operations Engineering Administration

 Following up  Material handling

 Following up rig activities  Studies  Drilling tools
 Supervising  Projects  Rig services
o Foremen  Training  Invoices
o Trainees  Planning  Contracts
o Rig teams  Completion  Personnel
 Support  Logistics

Drilling organization
Rig manager (Office)
Toolpusher

Drilling Non Drilling Operator

 Mechanics
 A. Toolpusher  Electricians  Foremen
 Driller  Medical  Trainee Engineers
 A. Driller  Galley personnel  Geologists
 Derickmen  Warehouse men  Production
 Floormen  Laundry/Cleaning  Third party
 Roustabout AR  Radio Op.  Others
 Others

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DRILLING CONTRACTS
 Contracts is a set of rules governs drilling relationships between business partners.

 Types
 Day rate contracts
 Footage rate contracts
 Turnkey rate contracts

 Incentive (motivation) contracts

 Encourage drilling quality-wells quicker, safer and in an environmentally friendly manner.
 In incentive contracts, the money saved is shared between the operator and contractors.

 Control exercised by the operator over implementation

 High in day rate.
 Relatively low in turnkey.
 Operators have full control over logging and perforating.

 Contractor’s risk is high in turnkey and footage rates. Operator’s risk is high in day rate.

 Day Rate Contracts:

 Fixed daily sum against rental and services.
 Includes (or does not include) incentive.
 Supervision is required.
 Rates  Operating rate, Reduced rate, and Special rates such as (Move rate, Standby rate,
Break-down rate, Wait-on-weather rate, Workover rates, Zero rate)

 Footage Contracts:
 The contractor is paid a scheduled amount based on depth.
 In special operations, the contractor is paid on daily-rate basis.
 Footage contract represents a higher risk to the contractor than the daily-rate type.

 Turnkey Contracts:
 Drilling the well or a part of the well against an agreed lumpsum.
 Contractor procures materials.
 Minimum control from operator.
 Turnkey contracts involve higher risk than any of the other types of contracts.

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  Exhibit A:
 Lists basic equipment of the rig for implementing all major and the less major operations
needed for drilling and workover.

 Exhibit B:
 Lists the necessary personnel on board for the drilling and workover operations

 Exhibit C:
 Shows schedules of responsibilities supplying of material, equipment and services on for the
contracted operations.

WAYS OF COST ESTIMATE

 Use of Historical Cost Data
 Use of Historical Penetration Rates
 Use of Historical Record Wells
 Itemized Cost

 Use of Historical Cost Data

 Planners refer to accumulated data showing local figures of cost versus depth.
 Inflation is a factor that affects historical cost figures. Corrective factor is used to account for
inflation

 Use of Historical Penetration Rates

 Average penetration rates and average well depth are calculated using historical data.
 Cost = (depth/average rate) x average drilling cost/day
 The cost obtained using this formula is function of the change in technology used in
obtaining the average ROP versus the technology that will be used to drill the planned well.
 The predicted cost will not be accurate if there is a change in the techniques and the drilling
plans.

 Use of Historical Record Wells

 Record and average wells need big data or source of data relative to an area.
 For each area there is a learning curve where the drilling performance (if everything is
maintained the same) improves due mainly to improvement in planning, in optimization and
in crew performance.
 The record performance can used as a reference for cost estimate, and can, therefore,
represent the “minimum” expected cost.

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 Itemized Cost
 A breakdown of the drilling operation is made
 The accuracy of the forecast depends on the completeness of the analysis of cost centers.
 Breakdown operations:
Operations are split into categories and cost centers such as
o Rig, moving, drilling, tripping, casing, cementing, logging.
o Tangibles.
o Intangibles.
o Apply contingency for problems.

 Contingency

 Contingency of 10%, 15%, or 20% is applied on the estimate of well cost (itemized or others)
depending on
o the type of the well: exploration/development
o well depth
o drilling difficulties
o remoteness
o other risks
o weather
 availability of data
 personal feelings

 Categories of cost of services or equipment rental based on way of payment:

o daily, weekly, monthly, lump sum
o rig controlled (RC), or Not Rig-controlled (NRC): the cost is depending on rig operation
and performance (fishing, logging, cementing, running casing, …)
o Approved price list
o Actual cost plus overhead

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