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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

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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: Total daily drilling costs drilling costs ($/day) 15 000 25 000 50 000 95 000 75 000

Rig type Land rig (shallow) Land rig (deep) Platform rig Jack-up rig Semisubmersible

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

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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 26 250 41 5267

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 4.8 0.8 100

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

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Cost in US $ Daily item (thousands) Rig (56 days @ 25 000) 1400 Drilling equipment 50 rental Mud logging 160 Directional control 240 Supply boats 370 Standby boats 160 Helicopters 212 Diving/ROV 130 Storage onshore 26 transport Contract staff 250 Base office O/H 41 MWD 14 Daily item total 3053

% of well cost 26.6 0.9 3.0 4.5 7.0 3.0 4.0 2.5 0.5 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

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at a glance how the various well options compare financially. In this section, we look at 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 post-well 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 aprt 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

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perforation 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 br 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 drilledso 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 H2S 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.