What it means
Drilling a wellbore is the single biggest cost in most oil and gas projects. A drilling rig bores through layers of rock, steel casing is cemented in place to keep the hole stable, and specialist crews and equipment are hired by the day.
Because rigs and crews are expensive, delays and surprises quickly push costs above budget. Finance teams track wellbore costs per well and often per foot or metre drilled.
Costs are usually split into tangible items, such as casing and wellhead equipment, which have a physical value, and intangible drilling costs, such as labour, fuel and drilling fluids. The split matters because the two groups are treated differently for accounting and tax.
Accounting policy also matters. Under the successful efforts method, costs of wells that find commercial reserves are capitalised (recorded as an asset), while costs of dry holes are expensed immediately.
Under the full cost method, all drilling costs are capitalised in a pool and written off gradually, which makes earnings smoother but can hide poor exploration results. Wellbore design affects both cost and production.
A longer or horizontal wellbore reaches more of the reservoir and can produce more oil, but it costs more to drill and carries more technical risk. Investors and lenders therefore look at cost per well alongside expected production before approving a drilling programme.
A wellbore also creates obligations after production ends. The hole must be sealed and the site restored, and companies set aside a provision for these decommissioning costs.
Ignoring this long-term liability is a common reason why oil and gas valuations are overstated. Joint ventures add another layer.
Several companies often share a well, each paying its percentage of the drilling cost and receiving the same percentage of production. The operator sends partners regular cost statements, and finance teams should check those against the agreed budget.
In practice
Real-world examples.
Example
An exploration company drills a wellbore that finds no commercial oil. Under the successful efforts method, the finance team writes the full $4,500,000 cost off to the income statement in the same period, which reduces reported profit.
Example
A lender evaluating a loan to a drilling company asks for a table of cost per foot across the last twelve wells. The bank uses it to test whether the borrower's budget for the next five wells is realistic.
Example
A utility drilling a water supply wellbore compares quotes from three contractors. It chooses the one with the lowest cost per metre drilled that also includes the casing, so it avoids surprise charges after the work has started. It also asks each bidder to state how delays caused by weather would be charged.
Formula
Calculation
Drilling cost per foot = total wellbore drilling cost / total depth drilled in feet
Suppose a company drills a wellbore to a depth of 10,000 feet at a total cost of $5,000,000. Drilling cost per foot = 5,000,000 / 10,000 = $500 per foot. If a neighbouring well costs $6,000,000 for the same depth, its cost is 6,000,000 / 10,000 = $600 per foot, which is $100 per foot more and prompts a review of why costs differed.Case study
Seen in the real world.
Sandstone Ridge Energy is an illustrative, fictional company that planned a programme of eight wells at a budgeted cost of $4,800,000 each. After drilling the first three wellbores, the finance manager noticed that actual costs averaged $5,600,000, about 17% above budget.
An investigation found that drilling through a hard rock layer had slowed the rate of progress and extended rig hire by several days on each well. Each extra day cost roughly $60,000 in rig and crew charges.
The company redesigned the next five wells to use a harder drill bit for that layer and revised its budget to $5,200,000 per well. The illustrative lesson is that wellbore cost per foot should be tracked as drilling goes on, since early overruns can be corrected before they repeat across a whole programme.
Watch out
Common mistakes.
- Budgeting drilling on the basis of a single estimate and ignoring the range of costs that geology can cause.
- Treating all wellbore costs as the same, when tangible and intangible costs have different accounting and tax treatment.
- Forgetting the future cost of sealing and decommissioning the wellbore, which should be provided for over the life of the well.
Questions
People also ask.
Is a wellbore the same as a well?
Often the words are used interchangeably, but the wellbore is strictly the drilled hole, while the well includes the equipment installed to produce from it.
Why does cost per foot vary so much?
Rock type, depth, well design, rig rates and delays all change the number, so comparisons are only meaningful between similar wells.
When are dry hole costs written off?
Under the successful efforts method they are expensed when the well is found to have no commercial reserves, while under the full cost method they stay in the capitalised cost pool.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related