Malone Petroleum Consulting

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AFE Checklist for a Horizontal Well

An AFE (authority for expenditure) is a budget document used by the oil and gas industry as a cost control measure in order to estimate the cost of drilling a well and obtain an approval by the operator and non-operators. It can also be used for completing a well, doing a workover on a well or doing a construction project, like the construction of an offshore pipeline and/or platform. According the AAPL joint operating agreement (JOA), an AFE must be prepared for Non-Operator approval if the amount exceeds the pre-established limit in the JOA. Some operators will try to put these costs in segments so they can bypass the contractual limit.

Tangibles are very easy to recognize – basically installed well items you can touch; the rest are intangibles. AFE’s include tangible (casing, wellhead, tubing) and intangible (acidizing, bits, cementing, drill rig, fuel, labor, logging, perforating, rentals, supervision, trucking, water), are categories within the drilling and completion categories. If the well is a dry hole, then the completion portion would not be used and the geologist would be questioned for the failure. The well might find production; however, logging might show the well will not be economical; therefore, the expensive production casing should not be run and cemented. If the well is capable of production, later, a cement bond log will be run and the and acid/frac will be performed on the well.

The AFE is usually assigned codes with each item so the actual expenditures can be coded allowing actual costs to be compared to estimated costs. This helps the operator to determine where major over-expenditures are under each category. A variance column would be used to show how much the actual costs varied from the estimated costs, by amount and by %.

Obviously, on a drilling well, the costs depend on how deep the well is since deeper depths take a much longer time to be reached. Location costs can vary significantly based on the condition of the land the projected area. We have seen it in the past, that an AFE can be manipulated, e.g., actual costs (based on actuals of near-by wells), low costs (to sell the project to management of investors), high costs (high estimates as a built in safety for over expenditures.

Development IDC (Intangible Drilling Costs)

Development TDC (Tangible Drilling Costs)

Development ICC (Intangible Completion Costs)

Development TCC (Tangible Completion Costs)

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