DRILLING ECONOMICS

JAMES A. CRAIG
TABLE OF CONTENTS

 Drilling Cost Prediction

 Cost Specification

 Authorization for Expenditure (AFE)

 Drilling Optimization

 Drilling Optimization Techniques

 Drilling
Cost Equation
 Breakeven Calculations

 Decision Making
DRILLING COST PREDICTION

 Drilling cost predictions are made so that

sound economic decision can be made.
 Predictions depend primarily on:
 Location – governs the cost of preparing wellsite,
moving rig to location, and daily operating cost.
 Depth – governs the lithologies to be penetrated,
thus the time required to complete the well.
Drilling costs tend to
increase exponentially
with depth.

C = a exp ( bD )

C = cost, $
 a, b = constants depending on well location

 D = depth, ft
 ln C ln a
=
D −
b b
COST SPECIFICATION

 Drilling costs can be broken down into 3

groups:
 Fixed

 Daily

 Unit
Fixed Costs

 Fixed costs are determined by the nature of the

well, such as:
 Wellheads

 Sitepreparation
 Casing, cement, tubing and packers
Daily Costs
 Daily costs are related to the time spent on the operation.
 Offshore rigs have high expenses which listed below.
 Daily costs include:
 Payments to drilling contractors (rig time)
 Tool rental
 Payment to specialist services
 Salaries, wages etc
 Fuel
 Lubricating oil, grease
 Drilling consumables (rope, soap and dope)
 Transport of materials
Unit Costs

 This is the price of a unit of a commodity such

as the price per tonne of barite or bentonite.
 This can be optimized in the tendering process,
which is Drilling Manager responsibility.
 Good site supervision can ensure that
consumption is not excessive.
AUTHORIZATION FOR EXPENDITURE (AFE)

 The operators, should know how much a well is

going to cost if it is dry, tested or completed.
 Consequently, AFEs should be broken down
into sections.
 AFE makes it easier to carry out post-well
assessment and cost-comparisons between
wells.
AFE Components

 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.
 For offshore wells, the main costs are site
surveying and well engineering.
 Drilling and Abandonment
 This is the ‘dry hole’ drilling component of the
well.
 It assumes drilling reached the TD, logging
carried out and no economic finding.
 The well is, therefore, proposed for
abandonment and appropriate cost is allocated
to it.
 Testing
 It is only the testing cost charged by the testing
company
 It 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
 It is 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

 site personnel

 office personnel

 office overheads
 Costs can be estimated fairly for development
wells
 Costing for exploratory wells is a much harder
task.
 The service companies will give the operating
companies the main costs:
 drilling contractors mud loggers
 electric logging companies mud companies
 cementing companies bit companies
 casing companies wellhead companies
 tool rental companies coring companies
 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.
 Some assumptions must be made, e.g.:
 Itis difficult to fix charges such as coring on an
exploration well with the limited knowledge
available regarding formations to be drilled. The
AFE could either include one 20-m core or several
runs.
 A contingency factor should be applied to the
AFE.
 This can be in the form of:
A lump sum, or
 A percentage of well costs.
DRILLING OPTIMIZATION

 Drilling optimization is minimizing the cost of

reaching the well’s objective while maintaining
safety standards.
 This minimum drilling cost is also the optimum
drilling cost.
 The optimization process is a cycle that starts
with using the existing data base of drilling
information.
 More data are collected during the practical
drilling process.
 The new data are then analyzed to update the
data base for future use.
 The process of optimizing drillling process is
not always straight-forward.
 Because of uncertainties involved, there is
always need for some trade-offs.
 For example, optimization might mean paying
more to obtain a better tool, such as choosing a
rig with a higher day rate to obtain better
equipment.
DRILLING OPTIMIZATION TECHNIQUES

 The following optimization techniques are

popular in drilling:
 Drillingcost equation
 Breakeven calculations

 Cost-effective decision making

Drilling Cost Equation
 Also known as the cost per foot equation.
Cbit + Ctools + Cmud + ( Crig + Csupport + Ctool rental )(Ttrip + Tbit + Tlost ) 
Cdrill =
Tbit × ROPavg

 Cdrill= cost per foot for the interval concerned, $/ft

 Cbit = cost of delivered bit at the drill site, $
 Ctools = cost of tools or repair to tools, $
 Cmud = cost of mud to drill the interval, $
 Crig = rental rig rate, $/hour
 Csupport = support cost, i.e. third-party contractor rates,
$/hour
 Ctool rental
= rental of tools, $/hour
 Ttrip = round trip time, i.e. time to pull and run a bit, hours

 Tbit = bit life, i.e. time required to drill the interval, hours

 Tlost = non-rotating time, i.e. time chargeable to non-

drilling task, hours
 ROPavg = average rate of penetration during bit run,
ft/hour
 Eleven variables are listed in the drilling cost
equation.
 Most of these interact with one or more other
variables.
 Because the degree of interaction is often
impossible to determine intuitively, the drilling
cost equation can aid decision making
Breakeven Calculations

 Breakeven calculations are economic

evaluations that determine the change in a
dependent variable that is required to create a
beneficial change in an independent variable.
 The typical variables are as follows:

Alteration in Required Change in

Independent Variable Dependent Variable
Bit type Bit life, ROP
Drilling tools Bit life, ROP, Trip time
Mud type Bit life, ROP, Trip time
 The procedure is as follows:
 Solve the drilling cost equation for present conditions to
determine the cost/ft.
 Specify the independent variable and the dependent
variable to be changed.
 Determine the change in any other parameters that will
result from the change in the independent variable.
 Substitute the cost/ft determined in Step 1, the
independent variable specified in Step 2, and all other
variables into the drilling cost equation.
 Rearrange the equation and solve to find the value of
the dependent variable required for breakeven.
 The breakeven calculations can also be used to
evaluate whether additional rig equipment
should be obtained for purposes other than to
increase the rate of penetration.
Decision Making

 It is difficult to exactly calculate the

consequences of each decision to be made
 Some degree of uncertainty concerning the
consequences are made.
 Decision of this type must be made on a
statistical basis:
a decision is made to implement the course of
action that on average results in the lowest cost.
 Expected Values Method
 An explicit step-by-step approach to the
decision process traditionally used.
 The method is used to make decisions by
evaluating choices that have both different
finanacial returns and different probabilities of
occurence.
 The best decision is that which has the lowest
(or least negative) probability cost product.
 The fundamental form of the expected value
equations is given as follows:
= C1 P1 + C2 P2
EV

P1 + P2 =
1
 EV = expected value, $
 C1 = cost of first event, $

 P1 = probability of first event, fraction

 C2 = cost of second event, $

 P2 = probability of second event, fraction

Example 1 – Cost per foot calculation
 A 17-1/2” bit drills 1,050’ of hole at an average
penetration rate of 35 ft/hr. given the following data,
what is the cost per foot?
 Round trip = 6hrs Bit purchase cost = $3,000
 Bit life = 30 hrs Tool purchase cost = $100
 Rig cost = $800/hr Interval mud cost = $5,000
 Tool rental = $100/hr Support cost = $200/hr

 Ttrip = 6hrs Cbit = $3,000 ROPavg = 35 ft/hr

 Tbit = 30 hrs Cmud = $5,000 Crig = $800/hr
 Ctools = $100 Ctool rental = $100/hr Csupport = $200/hr

 Cbit + Ctools + Cmud + ( Crig + Csupport + Ctool rental )(Ttrip + Tbit + Tlost ) 
Cdrill =
Tbit × ROPavg

3, 000 + 100 + 5, 000 + ( 800 + 200 + 100 )( 6 + 30 + 0 ) 

Cdrill =
30 × 35

8,100 + 39, 600

Cdrill =
1, 050

Cdrill = $45.43/ft
Example 2 – Breakeven calculation
 When planning a well. It has been determined that the
next section requires a polymer mud that costs
$15/bbl. The rig has inefficient shale shakers, which
the drilling contractor will not replace without sharing
the expense. How much should the operator be
prepared to pay for the installation of the new, high-
efficiency shale shakers if the rig is to be used for only
a single well?
 Old shale shaker solid control efficiency = 65%
 New shale shaker solid control efficiency = 75%
 Anticipated average hole diameter = 13”
 Maximum allowable drill solids concentration = 6%
 We use mud interval cost equation:
 D h2 (1 − Eff )(1 − Sactive ) 
= Lint × Cmud/bbl 
Cmud 
 1, 029 × S active 

 Cmud = cost of mud to drill the interval, $

 Lint = length of interval, ft
 Cmud/bbl = mud cost, $/bbl
 Dh = average hole diameter, in.
 Eff = efficiency of solids control system, %
 Sactive = drilled solids in active mud, volume %
 For the existing shale shakers:

132 (1 − 0.65 )(1 − 0.06 ) 

=
Cmud 6, 000 ×15  
 1, 029 × 0.06 

= 6, 000 ×15 × 0.9006

Cmud

Cmud = $81, 051

 If new shale shakers were purchased:
 D 2h (1 − Eff )(1 − Sactive ) 
Cmud =
Lint × Cmud/bbl   + E cost
 1, 029 × Sactive 
 Ecost = equipment cost, $

132 (1 − 0.75 )(1 − 0.06 ) 

Cmud =
6, 000 ×15   + E cost
 1, 029 × 0.06 

=
Cmud 57,894 + E cost
 Breakeven occurs when the cost of existing shakers
equals the cost of new shakers.
= 57,894 + E cost
81,051

E cost = $23,157

 This value ($23,157) represents the most the

operator should pay for the installation of new
shakers.
 Any amount less that this can be negotiated with
the drilling contractor represents a net savings.
Example 3 – EV calculation
 When drilling 12-1/4” hole in an area, experience
shows that a reverse circulating junk basket (RCJB) is
required on 25% of all wells. The average rental period
for wells where a RCJB is required is 3 days, and 12
hours rig time is wasted waiting for the equipment.
 A rig is contracted for a single well in which the 12-
1/4” section is planned to take 25 days to drill.
 Given: Rig rate = $8,000/day
RCJB rental = $150 first day plus $25/day thereafter
 Would it be advantageous to have RCJB on standby at
the rigsite:
 We use the EV method and decision tree.

Not
required
RCJB not
rented

Required

RCJB
rented
 RCJB not rented
 Not required
Rig rate × Interval time
= 8, 000 × 25 = $200, 000

 Required

 Rig rate × ( Interval time + Waiting time )  + [ RCJB rental + Rental time ]

= 8,000 × ( 25 + 0.5 )  + 150 + ( 25 × 2 )  = $204, 200

 RCJB on standby
( Rig rate × Interval time ) + ( RCJB rental + Interval time )

= (8, 000 × 25) + 150 + ( 25 × 24 )

= $200, 750
 C = $200,000
P = 75%
EV = 200,000 x 0.75
Not
EV = $150,000
required
RCJB not
rented C = $204,200
P = 25%
EV = 204,200 x 0.25
Required EV = $51,050

RCJB
rented C = $200,750
P = 100%
EV = 200,750 x 1.00
EV = $200,750
 RCJB not rented
 Total EV = $150,000 + $51,050 = $201,050
 RCJB on standby
 Total EV = $200,750
 RCJB on standby < RCJB not rented
 Therefore, the better economic solution is to
have the RCJB on standby at the rigsite.