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 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
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
Site preparation
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.
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 postwell 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.:
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.
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 wells 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 tradeoffs.
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:
Drilling cost equation

Breakeven calculations
Cost-effective decision making
Drilling Cost Equation
Also known as the cost per foot equation.

Cdrill
Cbit Ctools Cmud Crig Csupport Ctool rental Ttrip Tbit Tlost
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
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
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:
EV C1 P1 C2 P2
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
Cdrill
Cbit Ctools Cmud Crig Csupport Ctool rental Ttrip Tbit Tlost
Tbit ROPavg
Cdrill
3, 000 100 5, 000 800 200 100 6 30 0

30 35
Cdrill
8,100 39, 600

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, highefficiency 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:

Cmud
D 2h 1 Eff 1 Sactive
Lint Cmud/bbl
1, 029 Sactive
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:

Cmud
132 1 0.65 1 0.06

6, 000 15
1,
029
0.06
C mud 6, 000 15 0.9006

C mud $81, 051
If new shale shakers were purchased:

Cmud
D 2h 1 Eff 1 Sactive
Lint Cmud/bbl
E cost
1, 029 Sactive
Ecost = equipment cost, $

Cmud
132 1 0.75 1 0.06

6, 000 15
E cost
1, 029 0.06
C mud 57,894 E cost
Breakeven occurs when the cost of existing

shakers equals the cost of new shakers.
81,051 57,894 E cost
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.
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.
RCJB
not
rented
Not
requir
ed
Requir
ed
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
RCJB
not
rented
Not
requir
ed
Requir
ed
RCJB
rented
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
RCJB not rented
RCJB on standby
Total EV = $150,000 + $51,050 =

$201,050
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.

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JAMES A.

Drilling Cost Prediction

Drilling Cost Equation

Drilling cost predictions are made so that

Location governs the cost of preparing

Drilling costs tend

Drilling costs can be broken down into

Fixed costs are determined by the

Daily costs are related to the time spent on the

Payments to drilling contractors (rig time)

This is the price of a unit of a

The operators, should know how much

AFEs are broken down into the following

Drilling and Abandonment

Costs can be estimated fairly for

The Time Depth Graph created for the

It is difficult to fix charges such as coring on

A contingency factor should be applied

Drilling optimization is minimizing the

The optimization process is a cycle that

The process of optimizing drillling

The following optimization techniques

Drilling cost equation

Drilling Cost Equation

Also known as the cost per foot equation.

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

Ctool rental = rental of tools, $/hour

Ttrip = round trip time, i.e. time to pull and run a

Eleven variables are listed in the

Breakeven calculations are economic

The typical variables are as follows:

Bit life, ROP

Bit life, ROP, Trip

Bit life, ROP, Trip

The procedure is as follows:

Solve the drilling cost equation for present

The breakeven calculations can also be

It is difficult to exactly calculate the

a decision is made to implement the course of

Expected Values Method

The best decision is that which has the

P1 = probability of first event, fraction

C2 = cost of second event, $

P2 = probability of second event, fraction

Example 1 Cost per foot

Round trip = 6hrs Bit purchase cost = $3,000

3, 000 100 5, 000 800 200 100 6 30 0

8,100 39, 600

Example 2 Breakeven calculation

When planning a well. It has been determined

Old shale shaker solid control efficiency = 65%

We use mud interval cost equation:

Cmud = cost of mud to drill the interval, $

For the existing shale shakers:

132 1 0.65 1 0.06

C mud 6, 000 15 0.9006

If new shale shakers were purchased:

Ecost = equipment cost, $

132 1 0.75 1 0.06