Drilling cost per foot is up, as cost per bbl declines

Day rates, technology, manufacturing backlog key factors

Marshall DeLuca
Business Editor

• Drilling Cost per well for offshore wells [35,453 bytes]
• Wells drilled and wells not completed [60,647 bytes]
• Estimated costs of drilling and equipping wells, by depth interval- 1996 [75,179 bytes]

With low oil prices a continuing presence in the market, oil and gas operators have begun making ready cutbacks in their drilling programs. Rigs that were in short supply in the not so recent past, are now being stacked. Drilling programs that once were in the planning stages, are now being set aside to await more prosperous times when costs can be better justified by a higher price of oil.

Most observers believe that with the technological advances the industry has experienced in the past several years, even with low oil prices, drilling would continue at its recent break-neck pace. Hence, efficiencies in exploration and development drilling have achieved enough growth to lower drilling costs such that a program would remain economically viable at $12/ bbl oil prices.

The industry consensus holds that even with the recent drop in rig day rates, drilling costs are continuing to rise. A group consisting of the American Petroleum Institute, the Independent Petroleum Association of America, and the Mid-Continent Oil & Gas Association, track drilling costs in a publication called the Joint Association Survey on Drilling Costs. The survey is published for the year two years prior, the most recent being 1996.

The survey gives state-by-state drilling expenditures in the US and includes figures for both exploratory and development drilling offshore as well as sidetrack wells. This information is listed by number of wells, total footage, and total cost. According to the survey and a comparison with present drilling costs, offshore well costs are definitely rising. In the period from 1988 to 1996, costs showed a fair rate of increase, with costs rising more steeply from 1994 to 1996.

Figures listed in the 1996 report state that the average cost per well based on footage drilled (0-20,000+ ft) offshore was just above $4.3 million. In 1995, this figure was $3.7 million, up from $3.4 million for 1994.

This suggests an average increase of about $500,000/well per year, or between 11 and 12% per year for 1994 - 1996. At this inflation rate, drilling costs should approximate an average of $6.3 million/well by the year 2000. This is strictly an empirically speculated number that does not include the myriad of factors that impact well costs.

Many factors play a role in increasing well costs, far too many to list. Everything from equipment to catering could be factored into the total cost of a well. But, three specific factors have recently taken the lion's share of raising the sticker price of a well.

• Day rates: Drilling day rates account for between one-third and one-half of the total cost of a well in the Gulf of Mexico, and can vary slightly for other drilling theaters. Day rates have, until recently, been on the rise. This has been one of the major causes of cost increases.
  In fact, in the past few years, the day rate reached levels that in certain instances in the Gulf of Mexico spoiled the economics necessary to develop smaller shallow water finds, causing some of these projects to be shelved. However, the recent drop in rig rates would seem to lower well costs. But, with lower rates comes lower rig utilization and less drilling. This counteracts to some degree the drop in day rates with regard to drilling costs, at least for the short term.

• Technology: Advanced technology equipment such as improved drilling muds, fluid treatment and monitoring, drill bits, and other elements have helped drill and develop wells optimally, but this technology gain has come at a high price. The more advanced the technology, the more specialized the resources needed to implement it.
  Included in this factor is the increased use of horizontal and extended reach drilling. The cost per foot of a horizontal or extended reach well is much higher than that of a vertical well. The Joint Association Survey does not account for the cost per foot of horizontal wells in its cost figure.
  Horizontal wells naturally have a higher cost per foot. Using that basis, overall drilling costs are skewed, when added to vertical well costs. Horizontal well costs are listed separately in the survey. According to the survey, 11 wells were drilled during 1996 to a total footage of 71,721 ft, and a total cost of $26.4 million. That averages to about $2.4 million per well. The survey states that these total horizontal costs (not offshore specific) are down from previous years. However, the increased use of this technology significantly adds to the total cost.

• Manufacturing backlog: The third factor deals with the current manufacturing backlog of wellheads and other equipment. The backlog in some cases is almost one year. Rigs are sitting idle in shipyards waiting for equipment to be delivered, and the delays are in turn hiking up the net costs.
  These are not the only factors affecting the cost increase, just some of the more obvious ones. Other factors such as seismic acquisition or lack of skilled labor could also increase total cost.

Drilling success ratio

Drilling costs may be on the rise but, in comparison to the success ratio, it may be a much smaller factor in the decision-making process for an operator. With the advent of the latest technology, costs are going up, but so is the success ratio of finding a discovery versus a dry hole.

A global industry standard in the past for a successful well versus a dry hole was one success to five dry holes. With the use of 3D seismic and other methods of pinpointing reservoirs, the success ratio has risen to one success for every three, or according to some, two dry holes. With success increasing at this rate, the increase in well costs is being counteracted, and the overall net cost of finding a bbl of oil is falling.

This drop in the net cost per bbl is also aided by the use of extended reach and horizontal drilling. The increased use of this technology is allowing for the better penetration of the reservoirs, better positioning of the completion system, and consequently higher flow rates.

Therefore, drilling costs are continuing to rise because of the rising investment in each well. But on the same notion, so is the success ratio. This is resulting in a lower net cost per bbl of oil. This net cost should continue declining as long as reserve volumes found don't drop too drastically and advancements in the technology of identifying and reaching productive structures continue. But can the operators afford to produce these discoveries at weak oil prices and rising well costs? Only time will tell.

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