Page References 1/3/2 Introduction and objectives 13/5 Resumé BIA Topic 1 Cost elements 185 1 Time-dependent costs 5 2 Depth-dependenc costs 7 3. Fixed/once-off costs 7 Topic 2 Cost estimates and cost reporting 3/9 1 The conceptual estimace 9 2 The budget escimace 9 3 The well cost estimace 9 4 Making the estimate 10 5 Cost reporting 10 ‘Topic 3 Budgets vss Appendix 1 : Typical operating costs W313 Questions Uns WDIP - Operating costs Poge 173/1. v2.00References ‘The Part of this WDLP dealing with Contract Management EP 89-2800 - Cost Estimating Manual (Rev. 3.1) Page 2 WDIP - Operating costs vi10Introduction and objectives Responsibility for the budgeting, securing of finance, monitoring and contol of any Operating Unit's operating costs and drilling costs rests exclusively with che Operating Unit (OU) itself. This responsibility ultimately lies with the OU's chief executive, bur he in carn delegates portions of it to his various managers charged with managing differen port ons of the OU's business. Although not yet implemented in all Operating companies it is che ultimate aim chat che accountability and responsibility for budgeting, monitoring, control and optimization of all costs related to the specifically defined activities of the well engineering function is delegated by che OU's chief executive to the Heads of Well Operations, Well Engineers and Site Representatives responsible for the execution of a drilling and/or completion program by man- aging the operations of one or more rigs Ic is clear that in order to be able to accept these responsibilities the above-mentioned drilling staff need to: + Have a thorough understanding of cost elements related to the well engineering function, + Capture and record in an accurate and timely fashion the operating costs of all activities, + Use these data to produce reports and cost indicators which will enable chem co measure, understand and improve the cost effectiveness of the operations ‘+ Apply the same general principles to the budgeting process as to the monitoring of operat- ing and drilling costs. Ie follows that Well Engincers, Civil Engincers, Transport Supervisors, etc., require an under- standing of the different types of cost element, and must also be provided wich che actual val- tues of lump sums and unit rates that are applicable to their own operation. After scudying chis Pare, consulting other relevant documents and, if necessary, discussions with your mentor, you will be able co: + explain the difference becween time-dependent, depeh-dependent and once-off well costs. © explain the difference between direct costs and overheads. + ise che types of direct cost which are classed as time-dependent. + lise che principal depth-dependenc costs. + lise the principal once-off costs, + explain why different types of cost e: of a drilling operation. wate are required ar different stages in the planning. + calculate the actual cost of operations on a well on a given day in such a way that it is comparable with the estimated well cost. + give order of magnitude figures for the cost of operating various different types of drilling, unic. WDIP - Operating costs Page 1/3/3 V20.0Resume In this Pare the various elements are defined which make up the cost of using a drilling unit to drill a well. ‘The differene types of cost estimare are explained, as is the importance of good cost reporting. Page 4 WOIP - Operating costs vitoINTRODUCTION ‘The costs for drilling, completing and servicing a well are broken down into three basic elements: + Time-dependent costs + Depth-dependene costs + Fixed/Once-off costs oS EE 1 TIME-DEPENDENT COSTS 1.1 CONTRACT PAYMENTS: Included in the time related costs are all contractual payments for services applicable during the contract period of the rig that are specified as @ daily rate; For example ‘The above mentioned types of contract mostly specify a daily rate for the rental of equipment with in addition a rate for executing a specific activity wich chat equipment. The latter normally will be converted to a daily rate for estimating purposes. 1,2 PERSONNEL ‘These time-dependent costs relate to costs for Company personnel specifically dedicated co the relevane well. For office-based operations staff working on only one well, the latter will be charged with all cheir costs; this is often the case in a Single String Venture or a small OU. In. the larget OUs there may be more than one well being drilled at the same time, and prepara- cion work for future wells will also be undercaken. In this case the cost of ‘staff will be allocac- ed to the wells according co the time spent on each. WDIP - Operating costs 7 Page 1/3/5 v2.00Examples of che office-based personnel meane here a ‘+ Operations Manager + Head of Well Operations © Well Engineers = Site Represeneatives + Administrative assistants in che Well Engineering Department * Civil Engineer (if solely concerned with access road and location construction/rehabili- tation) © Geologists In an OU solely engaged in drilling activities, i.e. an exploration company, Materials/Transport staff would also be included in chis list. If production and/or engineering activities ate being undertaken they would be treated in the same way as non-operations staff and taken up in the OU overheads which are described in Sub-topic 1.5 1.3 CONSUMABLES cludes payments for che fuel and lubricants relicopters if they are not already covered by the “The cost per day for consumables usually only clay rates for contract payments ‘The sum of the above mentioned time-dependent costs is often referred to as the DAILY. In Appendix 1 there is a table chat will provide an impression of che order of magnitude of che daily operating cost for various types of rig and location. It is only given as an indication because races change quickly in response co supply and demand; any actual figures quoced would probably be out of date within a month. 1.4 SERVICE FEES Other than thac SIEP also carries out specific tasks at the request of the OU in the same way that any other contractor would do. Such tasks are invoiced at so much per man-hour. type and amount of work involved depends on the size of the OU. A large OU will have its own geologists, reservoir engineers and petrophysicists and will only ask for SIEP assistance with major projects which are not related to specific wells and will chus not be included in ‘well costs. On the other hand a small OU, or NVO, will typically ask SIEP for assistance with geological interpretation and well evaluation, or advice on specific borchole difficul:ies, on a well-by-well basis. These costs will be charged to the well co which they refer. Although this assistance is not strictly time-dependent there is a general correlation between the amount of time spent on a well and the amount of assistance requested, and for convenience these serv- ice fees are both estimated and charged in che time-dependent category. SIEP may also make reconnaissance visits and/or audits on behalf of OUs and NVOs. These are once-off costs as described below. Page 1/3/6 WOIP - Operating costs v2.0.01.5 COMPANY OVERHEAD Costs allocated to company overhead include In the case of a New Venture Operation all overhead costs are charged to che well being drilled (but still under the heading “overheads”. In the case of the larger OUs, they may be created in different ways, either as an independent budget item or by being allocated among the “client” departments by means of a time-based system of internal fees. Examples of the type of expenditure covered by such overheads are: — 2 + DEPTH-DEPENDENT COSTS Costs for depth-dependene items are those reused andor remain down ble, These ems includ : So “ Depth-dependent costs can vary from approximately 350 co 600 USS/meter of well depth depending on whether che well is on- or off-shore and in a remote area oF not. 3 FIXED/ONCE-OFF COSTS 3.1 GENERAL In addition to time-dependent and depth-dependent costs a large part of the total well costs can be taken up by costs which do not fall into either categor ‘These are known as fixed or once-off costs. Tn general the cerzn SeascsetvOHl PS MPSrager naresmmtesment specified in a contract, 3.2 FIXED COSTS (jaar wold co another is very uch Uependenr px we disunca'ey be covered ud the means by which che transport is co take place. This is usually specified as a fixed amoune in the contract(s) and can be in the order of 1 to 4 million dollars, depending on the circam- stances. WO? - Operating costs Page 1/3/7 v200moving may be done on a fixed price basis, or on unit rate per kilometer basis, In the latter case it would be classified as a once-off cost. But in any case (which is admittedly not consise costs between all the wells). 3.3 ONCE-OFF COSTS As mentioned above reconnaissance visits and audits by SIEP would be classed as once-oif costs. ‘The cost of a reconnaissance visit would be shared equally among the wells drilled, bue che cost of an audit would normally be charged co the well being drilled at the time. For onshore wells, costs related co building drilling locations and access roads are “well specif- ic” and added to the well account as once-off costs. The same would apply to water wells if they ate drilled on a unit rate basis (but the mobilisation of a water well drilling unit would still be a fixed cost). For an offshore operation the costs related to seabed surveys, seabed preparation and rig positioning are similarly once-off costs ‘Other than the cases mentioned above once-off costs are those relating to non-time- and non- depth-dependent costs for permanent well equipment and work undertaken for a specific well only. The major item is che wellhead and irs related equipment. If the wellhead is recovered, often che case with exploration wells, the costs allocated to the well are those of refurbishment and depreciation. Page 1/3/8 WOIP - Operating costs. ¥200INTRODUCTION For any activity, three main types of cost estimate are required. The purposes for which they are required are given in che order in which they are macle, The fourth Sub-Topic describes the technique used for making these estimates, 1) THE CONCEPTUAL ESTIMATE Very limited well requirements will be available; probably only the approximate TD, the main lithology and a location description (desert, water depth). Se ore RPE TY Historical data is usually the basis for these estimates, wich adjustments made for location dif- ferences between historical and the proposed area and also for variations in the market costs for equipment and services. 2 THE BUDGET ESTIMATE This is required for annual expendicure calculations normally included in the OU’s Country Although the actual well programme is unlikely to have been prepared more information will) ‘As a result a combination of historical costs and local informacion can be used to compile a simplified drilling cost break down along the lines described in Topic 1. ‘required for this eype of estimace is 15% co 20% 3 THE WELL COST ESTIMATE This is che lasc cost estimate made prior to drilling che well. A well proposal, a well pro- gramme, a detailed well design and che costs related to specific service contracts need -0 be available in order co meet the accuracy requirements of this estimate. FF and which becomes the reference cost for the end of well reconciliation of actual and planned well costs. Comparing the actual final well costs with che well cost estimate, and analysing the differ- ences, is a powerful cost control tool which can lead to increased efficiency in fucure wells. Such differences can be due not only to estimating errors or cost variances, buc also due co WDIP - Operating cosis ~ Page 1/3/9 v2.00performance variances. In case of the latter, fucure operations can be modified and tuned towards better performance and efficiency. 4 = MAKING THE ESTIMATE estimates can reasonably be made on Of the information available. Initially chis involves more work than using so-called “broad brush” estimates, but in the longer run it will save time and effort. There are several reasons: ‘© Ie reduces the amount of uncertainty chat has eo be buile in when combining historical costs with the specific circumstances. In any given situation it will usually be possible co find a precedent for each of the elements but not necessarily from the same historical oper- ation. © The well cost estimace described in che previous sub-topic is in practice made by stating off with an approximate figure and refining it as additional informacion becomes ava lable tuncil the final well cose estimate is made when all contracts have been awarded and rates have been fixed. ‘The additional information becoming available will always be at the level of the individual cost elements. Updating and refining che estimate as new informa- tion arrives is chen a question of a few minutes if ic is a matcer of changing one unit race figure for another, but «Iris a fact of life that the Well Engineer will have co make cost estimates on the basis of insufficienc informacion. Estimating the individual cost elements and chen summing them enables che known data co be included and the uncertainties of the remaining data to be quantified. ‘The resulting cost estimate, expressed as a range, can be justified and will be accepted by che OU management whereas quoting unjustifiable figures would not. broken down as described in de ‘This data is included ia che daily activity reporting system, which requires the OU Site Representative to enter the cost data for services, well equipment and consumables, in addition to che operations details. ‘At regular intervals che actual costs must be compared with the corresponding amounts ‘rom the well cost estimate in order to highlight where improvements are being mace in compari- son with previous similar operations, and of course where problems are occurring and where extra attention needs to be focussed. Page 1/3/10 WOIP - Operating costs v2.00INTRODUCTION This is a brief description of-budgets and their significance 1 BUDGETS A budget must always be based on a "budget estimate" which is the ‘leno troy RATT This will inevitably be deperdent on the judgement of the engineer making the estimate, given that detailed planning can only be done after the budget has been approved. Such judgements can only be made by using rele- vant previous experience and ‘mentioned in the previous Topic. From che point of view of the Well Engineer in charge of a particular activity for which there is an approved budget, orepalimnaiin? The Well Engineer therefore has co use the cost reporti only to compare the estimated cost with the actual cose, but ¢o ex system not work of the activity or, hopefulley, eo make more funds available for it WOIP - Operating costs Page 173/11 v200Page 1/3/12 WDLP - Operating costs v200The tabulation below is presented co provide an impression of the order of magnitude of the daily operating costs for various types of rigs and operations, Ie must be emphasized that they are not actual rates taken from any existing operation, but are given only ¢o illustrate che range of different day raves that exist. ‘These are approximate figures reflecting the situation for the year 2004, Rig rates can howev- er fluctuace quite aggressively and normally follow the oil and gas market price; the figures quoced are chose estimated co correspond co a mid-range price for Brent Crude. In offshore operations, especially in the North Sea, the same market conditions will also heavily influence total operating rates through che supply boatitransport market sicuation. Daily drilling Total unit rencal Operating cost incl. rig USS/day USS/day Drillship in remote operation 100-165,000 200-350,000 Semi submersible (standard) 30-60,000 70-120,000 Semi submersible (high spec.) 90-100,000 _200-250,000 Deep water operations 80-180,000 _200-450,000 Platform rig 20-25,000 100-125,000 Jack-up (standard) 30-50,000 60-100,000 Jack-up (heavy) 50-90,000 -100-150,000 Land rig (light). 15-20,000 40-60,000 Land rig (heavy) 20-25,000 40-80,000 WOLP Operating costs s—s—<“is~‘;*SCSCCéCR ge BB v2.00Page 1/3/14 7 WOLP - Operating costs v2.00