This document discusses drilling economics and optimization techniques. It covers topics such as drilling cost prediction, authorization for expenditure (AFE), drilling optimization techniques including drilling cost equations and breakeven calculations, and decision making using expected value calculations. Examples are provided for calculating cost per foot, determining breakeven points, and evaluating decisions using expected values.

1. DRILLING ECONOMICS
JAMES A. CRAIG

2. TABLE OF CONTENTS

Drilling Cost Prediction

Cost Specification

Authorization for Expenditure (AFE)

Drilling Optimization

Drilling Optimization Techniques

Drilling Cost Equation

Breakeven Calculations

Decision Making

3. 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.

4. 
C = cost, $

a, b = constants depending on well location

D = depth, ft
()expCabD=
Drilling costs tend to increase exponentially with depth.

5. lnlnCaDbb=−

6. COST SPECIFICATION

Drilling costs can be broken down into 3 groups:

Fixed

Daily

Unit

7. Fixed Costs

Fixed costs are determined by the nature of the well, such as:

Wellheads

Site preparation

Casing, cement, tubing and packers

8. DailyCosts

Dailycostsarerelatedtothetimespentontheoperation.

Offshorerigshavehighexpenseswhichlistedbelow.

Dailycostsinclude:

Paymentstodrillingcontractors(rigtime)

Toolrental

Paymenttospecialistservices

Salaries,wagesetc

Fuel

Lubricatingoil,grease

Drillingconsumables(rope,soapanddope)

Transportofmaterials

9. UnitCosts

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.

10. 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.

11. 
AFEsarebrokendownintothefollowingsections:

Preparation

Drillingandabandonment

Testing

Completion
AFE Components

12. 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.

13. Drilling and Abandonment

This is the ‘dry hole’ drilling component of the well.

It assumes drilling reached the TD, logging carried out and no economicfinding.

The well is, therefore, proposed for abandonment and appropriate cost is allocated to it.

14. 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

15. 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

16. 
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 contractorsmud loggers

electric logging companiesmud companies

cementing companiesbit companies

casing companieswellhead companies

tool rental companiescoring companies

17. 
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.:

It is 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.

18. 
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.

19. 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.

20. 
The optimization process is a cycle that starts with using the existingdata 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.

22. 
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.

23. DRILLING OPTIMIZATION TECHNIQUES

The following optimization techniques are popular in drilling:

Drilling cost equation

Breakeven calculations

Cost-effective decision making

24. DrillingCostEquation

Also known as the cost per foot equation.

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
()() bittoolsmudrigsupporttoolrentaltripbitlostdrillbitavgCCCCCCTTTCTROP +++++++= ×

25. 
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

26. 
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

27. BreakevenCalculations

Breakeven calculations are economic evaluations that determine the change in a dependent variablethat is required to create a beneficial change in an independent variable.

28. 
The typical variables are as follows:
Alteration in Independent Variable
Required Change in Dependent Variable
Bit type
Bit life, ROP
Drilling tools
Bit life, ROP, Trip time
Mud type
Bit life, ROP, Trip time

29. 
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.

30. 
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.

31. DecisionMaking

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 averageresults in the lowest cost.

32. 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.

33. 
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:
1122EVCPCP=+ 121PP+=

34. 
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

35. Example1 –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 = 6hrsBit purchase cost = $3,000

Bit life = 30 hrsTool purchase cost = $100

Rig cost = $800/hrInterval mud cost = $5,000

Tool rental = $100/hrSupport cost = $200/hr

Ttrip= 6hrsCbit= $3,000ROPavg= 35 ft/hr

Tbit= 30 hrsCmud= $5,000Crig= $800/hr

Ctools= $100Ctool rental= $100/hrCsupport= $200/hr


36. ()() bittoolsmudrigsupporttoolrentaltripbitlostdrillbitavgCCCCCCTTTCTROP +++++++= ×()()3,0001005,00080020010063003035drillC+++++++= ×8,10039,6001,050drillC+ = $45.43/ftdrillC=

37. Example2 –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%

38. 
We use mud interval cost equation:

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 %
()()2hactivemudintmud/bblactiveD1Eff1SCLC1,029S −− =××

39. 
For the existing shale shakers:
()()2mud1310.6510.06C6,000151,0290.06 −− =×× mudC6,000150.9006=××mudC$81,051=

40. 
If new shale shakers were purchased:

Ecost= equipment cost, $
()()2mudcost1310.7510.06C6,00015E1,0290.06 −− =×+× mudcostC57,894E=+ ()()2h activemudintmud/bblcostactiveD1Eff1SCLCE1,029S −− =×+×

41. 
Breakeven occurs when the cost of existing shakers equals the cost of new shakers.

This value ($23,157) represents the mostthe 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.
cost81,05157,894E=+ costE$23,157=

42. Example3 –EVcalculation

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:

43. 
We use the EV method and decision tree.
RCJB rented
RCJB not rented
Required
Not required

44. 
RCJB not rented

Not required

Required
Rig rateInterval time×8,00025=×$200,000= ()[]Rig rateInterval timeWaiting timeRCJB rentalRental time×+++ ()()8,000250.5150252=×+++×$204,200=

45. 
RCJB on standby
()()Rig rateInterval timeRCJB rentalInterval time×++ $200,750= ()()8,000251502524=×++×

46. RCJB rented
RCJB not rented
Required
Not required
C = $200,000
P = 75%
EV = 200,000 x 0.75
EV = $150,000
C = $204,200
P = 25%
EV = 204,200 x 0.25
EV = $51,050
C = $200,750
P = 100%
EV = 200,750 x 1.00
EV = $200,750

47. 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.