Setting and Managing Capital Budgets in 2015: Now’s the Time for AFE Process Optimization

Home  »  Blog  »  Setting and Managing Capital Budgets in 2015: Now’s the Time for AFE Process Optimization

With the drop in oil prices, many of our oil and gas clients are understandably reexamining their capital budgets for 2015. While establishing the capital budget defines the plan for the year, individual drilling projects must still be budgeted, reviewed and approved internally throughout the year as the annual plan is executed. Authorization for expenditure (AFE) documentation and procedures are the mechanism most folks use to drive and control that process.

“Walking” Your AFE . . .

For some companies, the AFE is still a physical folder containing all the relevant documentation for the drilling and completion of a well, along with a cover sheet to track who has reviewed it, contributed to it and approved it. In an attempt to clearly distinguish these AFE folders from the average office clutter, a really bright color is often selected to signify importance. The idea is to make these folders really “stand out” from your average ordinary folder. When you see a bulging, oversized, bright <RED, GREEN, PINK, ORANGE, insert your chosen color here> item sitting on your desk, you know it’s time to take immediate action and then walk it on to the next person in the AFE chain.

While color-coding your AFE folders is a step in the right direction (excuse my feeble attempt at humor), a better approach is to look at automating all or significant portions of the AFE process. Many, many years ago, Stonebridge built custom software to do just that for our clients. While these projects streamlined the AFE process, the solutions were not completed overnight. In addition, the inevitable change and enhancement requests that came up eventually became the responsibility of our clients and were often simply added to an existing IT request backlog.

Good News: Configurable AFE Software Solutions Emerge

A better alternative to custom AFE software has become mainstream over the last five years or so as a number of software vendors brought commercial software products to the market to automate the AFE process. These solutions have built in workflows that can be configured to meet a company’s needs. Common capabilities that can be managed with control tables include things like:

  • Definition of AFE types (e.g., Drilling & Completion, Workover) and AFE fields
  • Definition of required budget account and sub-accounts for each AFE type
  • Routing rules to drive who contributes information to an electronic AFE folder provided by the application
  • Approval rules to determine who needs to sign off based on dollar limits

The software also allows the AFE creator to easily determine:

  • Where the heck is my AFE?
  • Who is holding up the process?
  • How many more steps are required?
  • Do I need to add more information to the AFE request?

Integration, Monitoring and Analytics

Once an AFE is approved, some of these products provide interfaces to share budgets with other systems and import field costs and/or actuals. With integration in place, it becomes possible to determine:

  • How am I tracking against my planned spend based on field estimates?
  • How does my budget compare to my actuals and my field costs?
  • Which AFEs are close to needing some type of supplemental AFE?

It should be noted that if you’re an analytics guy (like me), you’ll likely find these reporting capabilities a bit primitive. While that may be true, they do fill the immediate need for summary level visibility and can be used as a starting point for deeper analysis that can done using other tools.

Oil and Gas Software Selection for the AFE Process

If you’re interested in automating your AFE process, it often makes sense to do a brief review of the capabilities of the leading vendors or current products you own to see how they will meet your specific needs. For an AFE solution, the evaluation does not need to take months and can potentially be executed while you’re mapping your current AFE process and identifying areas for improvement. A short list of vendors matched against your high priority needs can quickly confirm that the selected vendor solution will meet the short- and long-term needs of your company.

Final Thoughts

2015 will undoubtedly be an interesting year for all of us in the oil and gas industry. Some of our clients are using the year to improve the way they operate internally and prepare for a rebound since key internal players have more availability to help streamline operations. Some have commented after years of doing whatever it takes to “get ‘er done,” it is time to “get their house in order”. For these clients the reduction in activity level provides an opportunity to address things that have been neglected for quite some time, and for many, the AFE process is one such area of opportunity to pursue.