By David White (Bloomberg) — The cost to drill and frack new wells in US shale basins is expected to drop about 10% this year as explorers look to get more oil for less amid record output, according to a report from Wood Mackenzie. [Note: Please refer to the added section on AFEs at the end of the document for an in-depth explanation of how well expenses are calculated.]
The energy data and analytics firm said in a report earlier this week that while costs should come down another 1% next year, any further reductions will be tough as oil field contractors look to keep their own margins high.
“Both E&Ps and service providers are emphasizing significant efficiency improvements, albeit for different reasons,” Wood Mackenzie’s Nathan Nemeth said in the report. “If E&Ps look to reduce costs more, it must come from additional efficiency improvements, as OFS pricing is unlikely to fall.”
The world’s biggest oil field service providers and their clients have been pushing for longer sideways wells, faster frack jobs, and greater use of automation to reduce shale costs. Service providers are using efficiency gains to keep their prices from slipping, while explorers want to bring down the job’s overall cost to send more profits back to shareholders.
©2024 Bloomberg L.P.
What goes into drilling costs? It all starts with an AFE.
An Authorization for Expenditure (AFE) is a crucial financial and management tool oil and gas companies use to estimate and control the costs associated with drilling wells. Here’s an overview of how companies construct and create AFEs for shale drilling projects:
Understanding AFEs
An AFE is essentially a detailed budget that outlines the estimated costs associated with drilling and completing an oil or gas well. It serves as a formal request for capital expenditure and requires approval from the company’s management and sometimes its partners or stakeholders. The AFE process ensures that all parties involved understand the financial implications and risks of the proposed drilling operation. By providing a structured framework for cost estimation, AFEs facilitate effective financial planning and decision-making within oil and gas companies.
Constructing an AFE
The construction of an AFE involves collaboration among various departments within the company, including engineering, geology, finance, and procurement. The process typically begins with a technical assessment of the proposed drilling project by geologists and engineers. They evaluate the subsurface conditions, design the well plan, and identify the necessary equipment and services. This technical evaluation forms the basis for the cost estimates.
Once the technical team has prepared a preliminary budget, the finance department reviews the cost estimates to ensure accuracy and alignment with the company’s financial policies. They also assess the project’s financial viability, considering factors such as the expected return on investment and cash flow implications. The AFE is then presented to management and, if applicable, joint venture partners for review and approval.
AFE Approval and Monitoring
After approval, the AFE becomes the official budget for the shale drilling project. Throughout the drilling operation, project managers use the AFE to monitor actual expenditures against the budget. Any significant deviations from the AFE must be documented and justified, often requiring additional approvals. This monitoring process helps companies manage costs effectively and make real-time informed decisions.
In conclusion, the creation of an AFE is a critical step in the planning and execution of oil and gas shale drilling projects. By providing a structured approach to cost estimation and approval, AFEs enable companies to manage financial risks, allocate resources efficiently, and enhance the overall success of their drilling operations.
