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AFE and initial project cost estimate
Obtaining an internal project financing with an authorization for expenditure (AFE) will consist of doing a project cost estimate and schedule for the total internal and external project expenditures and presenting it to management and partners for approval of these future expenditures. Depending on the data available to you from previous similar projects and your skill and confidence levels, you can do this estimate yourself or ask your chosen engineering contractor to help. You should review your company’s standard forms and conditions for AFEs. You should also review the joint operating agreement (JOA) on this subject because its requirements may be different from your company’s requirements.
If you choose to do the AFE estimate yourself, you should consult the equipment and service vendors in your area that will eventually be supplying the project equipment and services for help in both these areas. These vendors are happy to give these types of cost and schedule estimates because it gives them additional market insight and the chance to meet and educate you about their company and its business. It is usually considered fair play to include those companies that supplied estimates on the final bid lists for those items. Do not forget to include intercompany services that may be directly charged to the project under the JOA.
A more standard industry solution is to use the engineering company to assist in the preparation of the AFE estimate. It is always advantageous to have the project engineering contractor involved in the AFE estimating process because doing so would allow the preliminary process flow diagrams (PFDs), process and instrumentation diagrams (P&IDs), schedule, and layout to be completed for presentation with the AFE or at the partners’ meeting called to discuss the project and AFE. By using these more complete documents to do the AFE estimate, you will obtain a much more accurate project cost and schedule. This is usually well worth the extra money and time spent to obtain it. However, this expenditure will occur before approval of the AFE, and you should get management approval before following this course of action. For smaller projects, one way out of this problem is to obtain permission to charge this cost to the well drilling or completion AFE. This solution will generally correctly charge the partners’ accounts.
Although you should use your company’s standard AFE form for formal approval, it may be lacking in detail. The accounting system is geared to its cost codes, and form changes will be difficult in this short time frame. Be sure that the project estimate is detailed enough to allow effective job control and that it is at least based on the initial project execution plan. The AFE cost codes should be noted on the project estimate as appropriate, and the project estimate should show how the estimate’s cost details roll into the AFE cost code amounts.
It is good to remember that, even though these are only estimates, many people (especially management and the partners) will want to believe that these are firm prices not to be exceeded for any reason. Although most of these types of estimates are reasonably accurate, they are based on certain assumptions of conditions known at the time of the estimate. As these conditions become better defined, the final cost of the project will change. For these and other good reasons, it is always important to include a 10% to 15% general contingency in your estimate to account for these unknowns.
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