Chapter 10

Drilling Economics
10. Introduction
Ø Drilling Costs in Field Development - is quite common for Drilling costs to make up 25-35% of
the total development costs for an offshore oilfield. The costs of the development will not be
recovered for some time since in most cases production is delayed until the first few platform
wells are drilled.
Ø These delays can have a serious impact on the economic feasibility of the development and
operators are anxious to reduce the lead time to a minimum. the development wells are being
drilled.

Ø Economics and Economic Analysis are Vital to the success of the oil & gas industry Expense.
Ø Petroleum Economics is all about the allocation of scarce resources. Investment capital is
certainly that scarce resource at the moment. In this environment, companies are looking for
people to develop highly advanced skills in upstream petroleum economic and financial analysis

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 Con’t…….
v Oil is classified using two traits; these are
Ø The first classification; is light or heavy which is based
on the API gravity and is a measure of density.
Ø The second classification; is sweet which is a measure
of how much sulfur the oil contains.
Exploration cost
v Exploration is expensive, and drilling is sometimes a condition of
the contract, companies will drill on deposits and keep wells
going even if prices are depressed. As with any resource-
extraction industry, production can’t turn on a dime.

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 Con’t……
Ø The last economic consideration should really be the first in most industries is the question
of supply. There is no doubt that the amount of oil out there is large, but it is finite.
Ø the price of oil is based on the supply at the moment based on projected production. So,
when companies continue to produce in a period of oversupply, the price of oil continues to
weaken.
Operating costs
§ Upstream costs analyzed within this study include capital and operating costs
associated with drilling, completing and operating wells and facilities.
1. Drilling – Within onshore basins drilling comprises about 30-40% of total well costs.
2. Completion – Within onshore basins completion comprises 55-70% of total well costs
3. Facilities – Within onshore basins facilities construction comprises 7-8% of
total well cost.
4. Operation – These comprise primarily the lease operating expenses. Costs can
be highly variable, depending on product, location, well size and well
productivity.

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 Objectives of economics Š

v The objectives of petroleum drilling economics includes the following

projects. These are;

Ø Basic knowledge and techniques for performing investment analysis

Ø Use the tools and concepts on petroleum investment projects Š
Ø A field development project Š
Ø An exploration project Š
Ø Be able to understand the concepts used and do the economic
calculations needed in the case study.

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 Basic economic conditions of the oil industry

Supply Demand
• High capital intensity and high risk Low price elasticity
• High scale and scope economies High income elasticity
§ Increasing plant specificity Differentiated elasticity
• Low price elasticity Cross elasticity

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 Investment analysis of economics
• Š Investment analysis - main economic terms which can determined by
Ø Š Cash-flow
- inflation
-time value of money
-uncertainty Š
Ø Economic Decision Criteria
-net present value
- internal rate of return (IRR)
-payback & maximum exposure.

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 Petroleum operation
Ø Petroleum operation are the operations devoted to exploration,
development, extraction and supply of oil and gas.
Ø Major parts of the operation costs are
a) upstream operations ; is the explorations, geo-sciences and drilling
activities of natural gas.
b) Mid stream operations; is the storage, processing and
transportation of products.
c) Down stream operations; is the refining, marketing and the change
of crude oil into final products of fuel.

Ø Operating Costs: the high variability of operating costs for lease

operation, gathering, processing and transport, petroleum disposal and
G&A offers operators an opportunity for cost reductions in the future.

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 Con’t………
Ø Requirements from petroleum economics aspect
-Eestimates of production rate for each period
- Estimates of gas calorific value
--API gravities of the liquid products
Ø Range of uncertainty associated with reserve estimates.
Normally there are three levels of drilling confidence. These are
1) Proven: the amount of petroleum which geophysics, geological, and engineering
data indicate to be in place.
v Determination there is a 90% chance that the actual quantity will be more than
the amount estimated as proven and a 10% chance that it will be less.
2) Probable: the amount of petroleum which geophysical, geological and
engineering data indicate to be in place.
v There is a 50% chance that the actual quantity will be more than the amount estimated as
Proven + Probable and a 50% chance that it will be less.
3) Possible: the amount of petroleum which geophysical, geological and
engineering data indicate to be in place or recoverable but to which a high degree risk
associated.
v There is a 10% chance that the actual quantity will be more than the amount
estimated as Proven + Probable+ Possible and a 90% chance that it will be less.

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 Uncertainty and risk
Ø

ØUncertainty: is the awareness of insufficient knowledge about current facts or future

possibilities
ØRisk: is the fact that any action may have more than one outcome or value as the results
of the action are not certain.

3.9.1 Oil and Gas Project Risk

During the drilling of oil and gas there are a numbers of risks are determined. These
includes;
1. Geological risk: a closed structure or stratigraphic trap exist and
porous and permeable rock exist in the trap.
2. Technical Risk:
- Poor well productivity than expected
-Water influx and well coning
-Hardware failure such as compressors
3. Economic, commercial and Political Risks
- The path of future product price
- Future capital costs, where lead and construction times are involved
-Future economic costs in the region
- Changes to taxation, royalty or production share terms

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 Drilling and well completion costs
ØTechnology improvements related to drilling:
-Longer laterals (increase performance).
-Decreased drilling rates (decrease cost),
-Minimal casing and liner (decrease cost),
-Multi-pad drilling (decrease cost), and
-High-efficiency surface operations (decrease cost).
Ø Technology improvements related to well completion:
v Increase performance, Number and position of frack stages,
v Shift to Hybrid (cross-link and slick water) fluid systems ,
v Faster fracking operators (decrease cost),
v Less premium proppant (decrease cost), and
v Spacing and stacking optimization (increase performance).

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 Correlation of well attributes
Ø We identified the top drivers that contribute to the overall well cost and the
contributing costs. These are;
• Pumping Units for Fracking which includes Injection rates , Formation
break pressures (psi), and Number of stages
• Drilling which contains true vertical depth (TVD - feet), Lateral length
(feet), and Drilling penetration rate.
• Frack fluids which includes amounts of fluids, amounts of gel and
chemicals.
• Casing and cement which contains TVD (feet), Lateral length (feet), and
Number of casing strings.

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 Drilling Cost Estimates
§ Before a drilling programmed is approved it must contain an
estimate of the overall costs involved.
§ Drilling in a completely new area with no previous drilling data
available the well cost can only be a rough approximation.
§ Some costs are related to time and are therefore called time-
related costs (e.g. drilling contract, transport, accommodation).
§ Many of the consumable items (e.g. casing, cement) are related to
depth and are therefore often called depth-related costs. These
costs can be estimated from the drilling programme, which gives
the lengths or volumes required. Some of the consumable items
such as the wellhead will be a fixed cost.

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 Con’t……..

Optimization of economics
v The optimum of drilling economics could be determined by the
following basic criteria's. These are;
- Cost per foot calculations
- Run cycle speed
- Break even analysis
- Termination of a bit run
Ø Drilling costs for a hydrocarbon well can be subdivided into five origins:
q Pre-spud costs;- includes move-in and move-out costs, site preparation and well design.
q Casing and cementing;- includes the cost of casing and cementing materials as well as
running casing and cementing in place.
q Drilling – rotating costs;- including all costs related to the rate of penetration such as
bits and mud costs.
q Drilling – non-rotating costs;- the bit is not in rotation and include tripping, well control,
waiting, directional control, supervision and well evaluation.
q Trouble costs;- stuck pipe, twist offs, fishing, lost circulation, hole stability problems,
well control problems, cementing and casing problems and directional problems.

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 vThe following several factors affect the
amount of time spent in drilling a well;
• Drilling rate:
• Trip time
• Hole problems
• Running casing
• Measurement while drilling
• Directional/Horizontal drilling
• Well completion
Ø Types of Well Drilling Costs includes;
ü Rig Costs
ü Tangible Costs
ü Intangible Costs
ü Service Costs
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