Oil & gas extraction cost breakdown: well drilling cost and natural decline
Costing upstream oil and gas extraction - no purchased material like mining, plus two features unique to this industry: per-well drilling cost and natural production decline over time.
Oil and gas extraction shares one basic trait with mining: there is NO purchased raw material - oil and gas come directly from the reservoir. But it has two features mining doesn't: a very large one-time drilling investment per well, and production that naturally declines over time regardless of how well the well is operated.
The costing unit: ONE BARREL OF OIL EQUIVALENT (or cubic meter of gas) produced - not "one well", since every well has a different reserve size and decline rate and doesn't repeat.
The upstream sequence
- Seismic survey - identifying potential reservoir structures.
- Drilling - exploration, then production wells once reserves are confirmed.
- Well completion - casing, wellhead equipment installed.
- Production/lifting - natural flow or artificial lift, depending on reservoir pressure.
- On-site separation - splitting oil/gas/water at the wellhead or field facility.
- Transport to the gathering point or processing plant.
- Well abandonment & decommissioning once economic reserves are exhausted.
Two features unique to this industry
1. Drilling cost - a one-time investment depreciated per well
Drilling a well costs a very large amount upfront (the rig, casing, cementing, drilling services) before the well produces a single barrel. Depreciate drilling cost against that well's OWN ESTIMATED TOTAL RESERVES, not a fixed number of years like ordinary equipment - two wells with the same drilling cost but different reserves will have very different depreciation cost per barrel.
Rigs are usually leased by the day (rig day rate) at a very high rate, so actual drilling days versus plan directly and heavily affects well cost.
2. Production decline over time - not equipment wear
A well produces its highest output right after completion, then declines naturally as reservoir pressure drops - this happens even with flawless operation, unlike equipment wear. Fixed costs (drilling depreciation, fixed operating cost) get allocated against THAT MONTH's output, so cost per barrel naturally rises over a well's producing life.
Everything else
Labor (rig/well operations), consumables (drill bits, treatment chemicals - including water-separation chemicals, which grow as water cut rises over a well's life), subcontracted work (drilling services, geophysical surveys), rework (well intervention to restore production), freight (pipeline or tanker to the gathering point), overhead (field management, AND the provision for well abandonment/decommissioning - similar to mining's rehabilitation provision).
Related guides
- Mining cost breakdown: the strip ratio drives most of the cost
Costing mineral extraction the way the industry actually works - no purchased material, the biggest cost is the overburden strip ratio allocated across equipment and labor, and tailings replace scrap.
- The Ten Manufacturing Cost Categories, in Production Order
The ten cost categories Costdown uses to price a product — material, machinery, labor, tooling, scrap, rework, outsourced processing, packaging, logistics, factory overhead — with the formula and a worked example for each.
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