Petroleum Engineering

[Type text]

5.0. DRILLING ECONOMICS

To optimise drilling operations, we have to specify the yardstick by which performance is
measured. The most relevant yardstick is cost per metre or foot drilled. Overall cost must
be looked at since individual costs can be misleading. The rig operating rate represents
only a fraction of the overall cost, therefore a cheap rig day rate does not always coincide
with a cheap well.
Holes are drilled in the ground to provide information (in the form of cores or logs or test
information), to provide production of oil and gas or to provide an injection point into a
reservoir. These objectives of the well should never be forgotten during the drilling
operation.To optimise drilling economics, we must achieve the objectives of the well as
economically as possible. To do this, we must understand the cost allocations and
proportions in drilling operations and use our technology to fine-tune these to reduce
expenditure without affecting safely or efficiency.
This chapter looks at these cost allocations, discusses exactly who is controlling which
costs and how they can be minimised.
COST SPECIFICATIONS
Drilling costs can be broken down into three groups:
Fixed
Daily
Unit
Fixed costs
Fixed costs are those which are determined mainly by the nature of the well and include
the following:
Wellheads
Site preparation
Casing, cement, tubing and packers
Effecting economies in fixed costs, therefore, is the direct responsibility of the Drilling
Manager and the Drilling Engineers, who planned the well. The Drilling Supervisor has
little impact on these.
Daily costs
Daily costs are related to the time spent on the operation. On offshore rigs, they are
usually the largest items of expenses and are listed below:
Payments to drilling contractors (rig time)
Tool rental
Payment to specialist services
Salaries, wages etc
Fuel

Petroleum Engineering
[Type text]

Lubricating oil, grease

Drilling consumables (rope, soap and dope)
Transport of materials
The Drilling Supervisor on site, the Drilling Manager and Drilling Engineers can all have
an effect on daily costs.
Unit costs
This is the price of a unit or a commodity such as the price per tonne of barryte or
benetonite. This can usually be optimised in the tendering process, which is usually the
responsibility of the Drilling Manager. Furthermore, good site supervision can ensure that
consumption is not excessive.
COST BREAKDOWN OF DRILLING OPERATIONS
At present, as the oil industry is coming out of recession, the costs for individual types of
rig is varying considerably. The table below illustrates the average cost comparisons
between rig types at time or writing:

Rig type

Total daily drilling costs

drilling costs
($/day)

Land rig (shallow)

Land rig (deep)
Platform rig
Jack-up rig
Semisubmersible

15 000
25 000
50 000
95 000
75 000

These figures are general and should only be used a guide. Even though jack-up costs
have been traditionally cheaper than those of semis, demand for deep water jack-ups has
pushed their day rates above most semis.
Specific cost breakdown offshore exploration wells
To quantify the costs, we must look at real well expenditure Below is quoted a typical
cost breakdown for a 1990 UK North Sea exploration well. This is based on TDAH of
3500 m with 7 inch casing to TD and includes four days of coring and four days of
testing. The total time spent on the well is 60 days.
Cost group
Location survey
Rig mob/demob
Rig positioning
Casing
Wellheads
Rig costs
Drilling equipment

Cost in US $
(thousands)
160
270
8
570
180
1400
50

% of well cost
3.0
5.1
0.2
10.8
3.4
26.6
0.9

Petroleum Engineering
[Type text]

rental
Fishing tools
Drill bits
Mud
Cementing
Electric logging
MWD
Mud logging
Coring
Directional control
Supply boats
Standby boats
Helicopters
Diving/ROV
Weather forecasting
Medical services
Testing equipment
Storage/onshore
transport
Contract staff
Base office

9
140
220
170
320
14
160
60
240
370
160
212
130
4
3
100
26

0.2
2.7
4.2
3.2
6.1
0.3
3.0
1.1
4.5
7.0
3.0
4.0
2.5
0.1
0.1
1.9
0.5

250
41

4.8
0.8

5267

100

Discussion
In this cost breakdown, there are 26 groups. Four of these, Rig Positioning, Fishing
Tools, Weather Forecasting and Medical Services, all cost less than $10 000 for the well,
so fine-tuning these services will provide us with minimal savings. Our attention must
turn to the remaining 22 large items where a 10 per cent saving on individual costs can
substantially reduce overall well costs.
Listing the remaining groups in order of either fixed, daily or unit, we achieve a spread as
follows:
Fixed item
Location survey
Rig mob/demob
Casing
Wellheads
Drill bits
Cementing
Electric logging
Coring
Testing equipment

Cost in US $
(thousands)
160
270
570
180
140
170
320
60
100
1970

% of well cost
4.0
5.1
10.9
3.4
2.7
3.2
6.1
1.1
1.9
38

Petroleum Engineering
[Type text]

Daily item
Rig (56 days @ 25 000)
Drilling
equipment
rental
Mud logging
Directional control
Supply boats
Standby boats
Helicopters
Diving/ROV
Storage
onshore
transport
Contract staff
Base office O/H
MWD
Daily item total

Cost in US $
(thousands)
1400
50

% of well cost
26.6
0.9

160
240
370
160
212
130
26

3.0
4.5
7.0
3.0
4.0
2.5
0.5

250
41
14
3053

4.8
0.8
0.3
58

From this figure and knowing that the well lasted 60 days, we can calculate the average
daily cost.
Average daily cost = $3053000 = 50 000/day
60
Unit Item
Mud
Unit item total

Cost in US $
(thousands)
220
220

% of well cost
4.2
4

To summarise these groups, we find the following:

Fixed cost items
Daily cost items
Unit cost items

$1 970 000
$ 3 053 000
$ 220 000

What this means in real terms is that saving a day on the well will save 1/60 of $ 3 053
000 and not 1/60 of the overall well cost of 5 267 000. It also means that an extra day
spent on tripping, directional correction, treating the mud, waiting on weather and
making spurious trips will cost the operator a minimum of $ 50 000.
AUTHORISATION FOR EXPENDITURE (AFE)
The AFE is the tool that is used for predicting the cost of a proposed well. The accuracy
of the AFE depends on the amount of available information used to construct it. As
operators, we need to know how much a well is going to cost if it is dry, tested or
completed. Consequently, AFEs should be broken down into sections to allow us to see
at a glance how the various well options compare financially. In this section, we look at

Petroleum Engineering
[Type text]

the component parts of AFEs for onshore and offshore wells. At Norwell, we have a
standardised 100-point AFE for both onshore and offshore wells. This is probably overkill
as in most wells there are probably only 60 or so cost centres, but having the additional
codes for special operations built into every well AFE makes it easier to carry out postwell assessment and cost comparisons between wells.
AFE components
Both the onshore and offshore AFEs are broken down into the following sections:
preparation
drilling and abandonment
testing
completion
Preparation
This part of the AFE covers the costs incurred to the point at which the rig is brought on
to location. For onshore wells this would include site building and well engineering as the
main cost centres. For offshore wells, the maincost centres are site surveying and
wellengineering. Included in this section should also be all the costs required to bring the
location back to its original condition.
Drilling and abandonment
This is the dry hole drilling component of the well. It assumes drilling to TD, logging
and finding nothing of interest. The well is, therefore, proposed for abandonment and
costed accordingly.
Testing
This is the additional cost incurred by a testing programme. It is only merely the testing
cost charged by the testing company but must also include all the ongoing daily costs
associated with the rig such as:
rig day rate
fuel oil
site personnel
office personnel
office overheads
Completion
This is the further additional cost incurred following testing once the decision to
complete the well has been made. As with testing, the cost centres are not only the cost
of completion equipment and services but also the costs of:
rig day rate
fuel oil
extra casing string if run
perforation

Petroleum Engineering
[Type text]

site personnel
office personnel
office overheads.
Estimating costs
If there are similar, recent wells in the area to be drilled, most costs can be estimated
fairly readily. If, on the other hand, you are planning a well in a new area, then the task is
much harder. By calling up the following service companies and asking for budgetary
figures, the main cost centres can be addressed:
drilling contractors
mud loggers
electric logging companies
mud companies
cementing companies
bit companies
casing companies
wellhead companies
tool rental companies
coring companies
Most service companies will be pleased to provide figures for AFE budgets and talking to
them serves a secondary purpose of updating your knowledge of the demand for certain
services and any new deals or equipment that is available. It also allows the service
company to express an interest in the work which will be put out to tender at a later date.
The Time Depth Graph created for the Drilling Programme provides an estimate of the
days to be spent on the well. By costing in the charges for these days, the AFE begins to
take form. It is difficult to fix charges such as coring on an exploration well with the
limited knowledge available regarding formations to be drilled so some assumptions must
be made. The AFE could either include one 20 m core or several runs.
Similarly for the testing programme and completion programme some assumptions must
be made. It is, therefore, good practice to list the assumptions which have been made as a
postscript to the AFE. For example, AFE assumes four days open hole testing, or AFE
assumes single 3 1/2 inch H 2S tubing completion with single permanent packer. After
estimating costs, a contingency factor should be built into the AFE. This can be in the
form of a lump sum or as a percentage of well costs.