Authority for expenditures (AFE)

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.

Overview

A properly prepared well cost estimate may require as much engineering work as the well design. The costs should address dry holes and completed wells. In addition, accounting considerations such as tangible and intangible items must be taken into account. Unfortunately, many cost “guestimates” are the “back of the napkin” type, with only a small amount of engineering work used in the process.

The cost estimate is the last item to be considered in the well plan, because it is heavily dependent on the technical aspects of the projected well. After the technical aspects are established, the expected time required to drill the well must be determined. The actual well cost is obtained by integrating expected drilling and completion times with the well design.

Factors/cost estimates evaluated in an AFE

The following are some of the major cost estimates captured in the AFE:

• Projected drilling time
• Time categories/ time considerations
• Location preparation
• Drilling rig and tools
• Drilling fluids
• Rental equipment
• Cementing
• Support services
• Transportation
• Supervision and administration
• Tubulars
• Wellhead equipment
• Completion equipment

Cost estimate categories

Engineering considerations include:

• Dry-hole and completed costs
• Logical grouping, such as completion equipment or tubular goods
• Convenience groupings, such as rental equipment

Accounting considerations include:

• Tangible items
• Intangible items
• contingency items

The sample AFE summary in Fig. 1 illustrates several cost categories.

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  Fig. 1—Summary of the authority for expenditure.

Tangible and intangible costs

Accounting and tax principles treat tangible and intangible costs in different ways. As a result, they must be segregated in the cost estimate. Although intangible costs are difficult to define precisely, they include expenditures incurred by the operator for:

• Labor
• Fuel
• Repairs
• Hauling
• Supplies

These expeditures are generally used for:

• Drilling, perforating, and cleaning wells.
• Preparing the surface site prior to drilling.
• Construction derricks, tanks, pipelines, and other structures erected in connection with drilling, but not including the cost of the materials themselves.

The fundamental test is defining the salvage value of the item. If the item does not have a salvage value, it is an intangible.

Intangible drilling and development costs do not include the following:

• Tangible property ordinarily considered as having salvage value.
• Wages, fuel, repairs, hauling, supplies, etc., in connection with equipment facilities or structures not incident to or necessary for the drilling of wells, such as structures for storing oil.
• Casing, even though required by state law.
• Installation of production facilities.
• Oilwell pumps, separators, or pipelines.

Detailed cost analysis

It is usually desirable to provide more cost detail than the general summary in Fig. 1. A sample of a detailed summary is shown in Fig. 2. 

Factors considered in the detailed cost analysis will be presented in the AFE page. The cost divisions presented in Fig. 1 will be used. These factors are heavily dependent on company drilling philosophy and, as such, may not apply to all companies.

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  Fig. 2—AFE detailed summary.

See also

Well planning

PEH:Introduction_to_Well_Planning