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05thJuly

In our previous blog, we discussed several cost drivers that have a major impact on the estimating process within the oil & gas industry. Those are: exploration, drilling & completions, production facilities and regulatory & political environment. In this article, we will highlight the implications of these factors on four different cost types.

A. Material Costs

A comprehensive knowledgebase of material prices is really valuable. Compiled from numerous suppliers it is an important asset in preparing competitive tenders, quotations, et cetera. Even more so when it is coupled with an understanding of local conditions which influence the cost of materials.  

B. Labor Costs

Although these expenses tend to vary with time, a more significant determinant of their magnitude is the local productivity levels. The corresponding tariffs have to be adjusted to take into account the variation in productivity levels. The issue gets complicated by the likelihood that labor costs will occur in different parts of the world depending upon where the equipment such as topsides are getting fabricated. It is in this scenario that benchmarks become invaluable in order to justify assumptions used in estimating. A software with the capability to incorporate these variables in a dynamic cost model would greatly enhance the accuracy of the estimate.

C. Allowances

A significant portion of the budget must be earmarked for allowances as the drilling process is highly unpredictable owing to the uncertainty of the underlying geological formation. Minor geological variations can have a tremendous delay on drilling rates which in turn increase operational costs such as drilling rig rental expenditure etc. which are all billed on daily rates. It is important to clarify that allowances must not be mistaken for contingencies. This is an area where the Cleopatra Enterprise estimating software shines through its breakdown structures feature which would allow the user to allocate allowance as a fixed or percentage amount of a specific category of expenses. In doing so, it allows the estimator to quickly drill down to the minutest details of an estimate.

D. Contingencies

As in most industries, Monte Carlo simulations must be run on the above mentioned key cost drivers to quantify the uncertainties and the results should be carefully scrutinized before proceeding with any decision. Contingencies are of utmost importance in the drilling process where they are once again needed for different outcomes such as oil spills or blow outs.

 

Something to add to this article? Or do you have a question? Contact us at contact@costengineering.eu