An AFE (Authorization for Expenditure) is the primary capital approval document in the oil and gas industry, serving as both a budget estimate and a management authorization to spend money on a specific well or project. Before a single dollar is committed to drilling a well, the operating company must prepare an AFE that details every anticipated cost — from rig mobilization to completion and facilities — and submit it through the corporate approval chain. Joint interest partners receive the AFE and must either consent (approve their proportional share of costs) or elect to go non-consent under the operating agreement. The AFE process is the critical control point where geological opportunity meets financial discipline.
How It Works
The AFE is a structured cost estimate organized by major activity categories:
- Drilling Costs — Rig day rate and mobilization ($25,000-$50,000/day land, $200,000-$1,000,000/day offshore), directional services, drilling fluids, drill bits, logging, cementing, and casing. For a Permian Basin horizontal well, drilling costs typically represent 40 to 50% of total well cost, or $3 to $5 million.
- Completion Costs — Perforating, hydraulic fracturing (often the single largest line item at $1.5 to $4 million for a multi-stage frac), tubing, artificial lift installation, and flowback. Completion costs represent 35 to 45% of total well cost.
- Facilities and Equipment — Surface facilities including separators, tanks, flowlines, electrical service, and road construction. Typically 5 to 15% of total well cost, or $200,000 to $1 million.
- Overhead and Contingency — Operator overhead charges (typically 5 to 10% of direct costs) and a contingency allowance (usually 10 to 15%) to cover unforeseen costs.
- Total AFE — The sum of all categories represents the total estimated investment. A complete Permian Basin horizontal well AFE typically ranges from $6 to $12 million depending on lateral length, completion design, and location-specific costs.
AFE Approval Workflow — The AFE moves through engineering, operations, and management review. Large operators have tiered approval authorities: a $5 million well AFE might require VP-level approval, while a $50 million offshore development requires board authorization. Joint interest partners have 30 days (per AAPL Model Form Operating Agreement) to respond.
AFE Tracking — After approval, actual costs are tracked against the AFE estimate throughout the project. The variance (actual vs. budget) is the primary measure of cost control performance. Industry benchmarks target actual costs within 10% of AFE.
Why It Matters
The AFE is the financial foundation of every drilling and completion decision. Inaccurate AFEs lead to poor capital allocation — overestimated costs cause companies to defer economic projects, while underestimated costs result in capital overruns that erode returns. A 20% cost overrun on a $10 million well reduces IRR from 35% to approximately 25% and NPV by $1 to $2 million. For joint interest partners, the AFE represents a binding commitment — consenting partners are obligated to pay their proportional share of actual costs, making AFE accuracy a fiduciary responsibility.
How Netora Handles AFE Management
Netora Upstream Platform provides integrated AFE preparation, approval workflows, and cost tracking. Engineers build AFEs using historical cost databases and vendor quotes, with automatic calculations of partner shares based on working interest. The platform tracks actual expenditures against approved AFEs in real time, alerting project managers to variances before they become overruns. Post-well AFE vs. actual analysis feeds back into cost estimation for future wells. Learn more about Netora Upstream Platform.