DRILLING MARKETS
Comparison of different models
for integrated services contracts
shows how cost savings fluctuate
Petronas shares its process behind identifying
the ‘lump sum cost per hole section’ model
as having the highest cost savings potential
BY STEPHEN WHITFIELD, SENIOR EDITOR
Cost optimization is a critical aspect of
any drilling operation. Humam Al
Darkazly, Senior Wells Engineer at
Petronas, estimated that drilling costs
make up between 50% and 70% of the
CAPEX for the operator’s typical develop-
ment projects. To help mitigate financial
risks and uncertainty, the company is
increasingly relying on integrated drilling
services (IDS) contracts, both to achieve
cost efficiencies and to allow for greater
adaptability to changing market condi-
tions. “We’re trying to maximize cost savings.
We want to ensure profitability regardless
of any volatility we may see in oil price,
ensure financial stability and minimize
risk,” Mr Al Darkazly said at the 2023
ADIPEC on 3 October.
However, there is no one-size-fits-all
contracting model that can guarantee the
most cost savings. So, Petronas utilizes
three cost models in its tendering process
for IDS contracts: lump sum cost per well,
lump sum cost per meter drilled (as deter-
mined by the estimated total depth of the
well), and lump sum cost per hole section.
In his presentation, Mr Al Darkazly com-
pared the advantages and disadvantages
of each model based on an evaluation the
operator conducted on IDS contracts in the
Middle East.
As part of the evaluation, the operator
compared contract terms for the drilling
of various wells in an unnamed Middle
East reservoir drilled in 2022. For the
evaluation, three separate land rigs that
possessed identical specifications were
contracted, which Mr Al Darkazly said
ensured “consistency and comparability.”
Each well employed an identical casing
design. Petronas provided the necessary
casing, tubing and wellhead, while the
drilling contractor was responsible for all
other materials and services required for
the drilling operation.
Of the three models, Petronas noted the
most cost savings was achieved under
the cost model structured by hole sec-
tion drilled – in fact, savings were up to
50% more than the other two cost mod-
els. The calculated percentage of saving
was based on the prices specified in the
awarded contracts, and Mr Al Darkazly
said savings from the hole section model
were due to the effective categorization of
hole section prices based on well inclina-
tion. Under the hole section model, the drill-
ing contractor has the opportunity to pro-
pose lower costs for wells with lower
inclinations. This is primarily because,
with these types of contracts, the total
number of meters drilled is typically less
compared with higher-inclination wells.
As a result, the contractor can allocate
fewer resources while reducing drilling
and tripping times, leading to less equip-
ment usage, manpower and associated
expenses. Additionally, lower inclination
wells generally entail reduced drilling
complexities and risks compared with
wells with higher inclinations. The con-
tractor is then able to offer more competi-
tive pricing for these wells.
The other two models – cost per drilled
well and cost per meter drilled – do not
incorporate well inclination as a factor,
since well inclination is only useful for
determining the lengths of a given hole
section. However, although well inclina-
tion does not have a direct impact on the
number of wells drilled or the total depth
of a given well, it does mean that the drill-
ing contractor assumes the maximum
risk regardless of the well’s inclination
and are likely to incorporate that into their
bid. In such cases, the contractor must
account for the possibility of drilling more
meters and encountering more challeng-
ing conditions downhole, resulting in a
higher proposed price to compensate for
the added risks.
By integrating well inclination into the
hole section model, the contractor can
assess and evaluate drilling conditions
more precisely, allowing for more opti-
mized bids based on the specific complexi-
ties and risks associated with each well’s
inclination. This approach ultimately
leads to the additional cost savings com-
pared with the other two models.
Even though Petronas saw greater
cost savings overall with the hole sec-
tion model, Mr Al Darkazly noted that the
specific savings Petronas saw in a given
well depended on external factors. Such
factors could make the other two models
more palatable to other operators utilizing
IDS contracts.
For instance, while a contract utilizing
the drilled wells model has a fixed budget
dependent on the number of wells to be
drilled, the hole section model is based on
fixed drilling targets, and changes to the
well target by reservoir engineers can neg-
atively impact the budget estimation. Also,
S-shaped wells may increase costs for the
hole section model due to increased well
inclination, though some operators may
opt for shallower kick-off points and high-
er doglegs to reduce inclination and lower
costs. Well inclination has no impact on
well cost for the drilled wells and meters
drilled models because it was not incor-
porated into either model, so if the inclina-
tion category is not specified, the operator
may prefer to use one of those models.
The drilled wells and hole section mod-
els also provide easier invoice processing
than the meters drilled model because
they are fixed costs. More auditing is
required to process invoices in the meters
drilled model, as the operator must check
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