What it means
When a drill bit grinds through rock, it creates fragments called cuttings that must be removed, and it generates a great deal of heat. Drilling mud is pumped down the inside of the drill pipe, out through the bit and back up the space between the pipe and the wall of the hole.
On the way it carries cuttings up to the surface, where they are filtered out and the mud is reused. The fluid has other jobs too.
Its weight creates pressure that stops oil, gas or water from rushing into the well before the crew is ready, which helps to prevent dangerous blowouts. It also forms a thin cake on the wall of the hole that seals it and helps to keep the hole stable.
Muds fall into three broad families: water-based, oil-based and synthetic. Water-based mud is cheaper and simpler, oil-based mud performs better in difficult formations and high temperatures but costs more and needs careful disposal, and synthetic mud is a compromise with lower environmental impact.
Engineers choose the type, weight and additives to suit the rock, depth and pressure of each well. From a financial point of view, drilling mud is part of the cost of drilling, which often runs into millions of dollars per well.
Mud, additives, specialist engineers and waste handling are usually billed by service companies, and the amounts depend on depth, well design and how many problems are encountered. A well that hits trouble, such as lost circulation where mud escapes into cracks in the rock, can burn through extra mud and days of rig time.
In accounting, most of the cost of drilling a well, including mud, is treated as intangible drilling costs, meaning costs that have no salvage value. How they are recorded depends on the method the company uses and, in some countries, on special tax rules that allow part of these costs to be deducted quickly.
Budget owners compare mud cost per foot drilled against previous wells to spot overspending.
In practice
Real-world examples.
Example
A drilling engineer is planning a deep well in a high-pressure area. She selects a heavier, oil-based mud to control the pressure, even though it costs more per barrel. The finance team adds $150,000 to the budget to reflect the higher price.
Example
A drilling crew loses circulation when mud starts flowing into a fractured rock layer. They must pump in extra mud and special material to seal the fractures, which adds two days and $90,000 to the cost. The project accountant records the overrun and explains it in the weekly report.
Example
An energy investor reads a company's presentation and notes that its drilling costs per well have fallen from $8,000,000 to $7,200,000. The management attributes part of the saving to better mud design that reduced problems. The investor asks whether the saving is sustainable.
Formula
Calculation
Mud cost per foot = Total mud cost / Total feet drilled
Worked example: a well is drilled to a depth of 9,000 feet, and the total bill for drilling fluid, additives and related services is $180,000.
Step 1: Total mud cost = $180,000
Step 2: Feet drilled = 9,000
Step 3: Mud cost per foot = $180,000 / 9,000 = $20 per foot
If the next well, of 10,000 feet, has a mud budget of $20 per foot, the planned mud cost is 10,000 x $20 = $200,000. A final bill of $260,000 would show a $60,000 overspend that needs an explanation.Case study
Seen in the real world.
Redmesa Energy is an illustrative, fictional exploration company that drilled a series of wells in the same field. Its first well cost $6,500,000, of which $480,000 was for mud and related services.
The drilling team reviewed the data and found that the mud had been too light in one section, causing hole instability and two extra days of rig time at $75,000 a day. For the next well they changed the mud programme and monitored it more closely.
The second well cost $5,900,000, with mud costs of $430,000, and no stability problems. The illustrative lesson is that spending slightly more on good mud engineering can reduce total well cost, because rig time is far more expensive than the fluid itself.
Watch out
Common mistakes.
- Treating mud as an insignificant cost, when it can be hundreds of thousands of dollars per well.
- Choosing the cheapest mud without considering the risks, when poor choices can lead to lost time and well problems.
- Forgetting disposal and environmental costs, when waste mud must be handled to strict rules.
Questions
People also ask.
What is drilling mud made of?
It is a mixture of a base fluid, which can be water, oil or a synthetic liquid, and additives such as clays and weighting materials that control its weight and behaviour.
Why is it called mud?
The early drillers used water mixed with clay, and the name stuck even though modern fluids are complex engineered products.
How is drilling mud treated in the accounts?
It is normally part of intangible drilling costs, which are accounted for under the company's chosen method for well costs.
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