The Authorization for Expenditure, or AFE, is the budget for a well. Before working-interest partners fund a project, the operator circulates an AFE estimating what it will cost to drill and complete. Learning to read one — and to read what it omits — is essential due diligence for anyone funding drilling.
What an AFE is and isn't
An AFE is an itemized cost estimate and a request for partners to authorize their proportionate share of spending. It is the document that turns "we plan to drill a well" into "here is what it will cost and what we are asking you to commit." Critically, an AFE is an estimate, not a cap. Actual costs can and do exceed it, and the operating agreement usually obligates partners to fund overruns up to a point. Read the AFE as a forecast to be tested, not a guarantee.
The major line items
AFEs are conventionally split into intangible and tangible costs, the same distinction that drives IDC tax treatment, and into drilling versus completion phases.
| Section | Examples | Notes |
|---|---|---|
| Intangible drilling (IDC) | Rig time, labor, drilling fluid, fuel, site prep | Usually the majority of cost; largely tax-deductible |
| Tangible drilling | Casing, wellhead, tubing | Has salvage value; recovered via depreciation |
| Completion | Fracking, perforating, completion fluids | Often exceeds drilling cost on modern shale wells |
| Facilities | Tanks, separators, flowlines, connections | Cost to get the well producing and sold |
| Contingency | Buffer for the unexpected | A realistic AFE includes one; question one that doesn't |
What to scrutinize
A practiced eye looks past the total to the assumptions behind it:
- Is the total in line with comparable wells of similar depth and lateral length in the same basin? An estimate far below local norms is a warning, not a bargain.
- Is there a realistic contingency line? Drilling surprises are normal; a budget with no buffer is an optimistic budget.
- What is the split between drilling and completion? Underestimating completion is a common way to make a well look cheaper than it is.
- Are facility and connection costs included, or will getting the well to market be an unbudgeted expense later?
- What does the operating agreement say about who funds overruns, and up to what limit can you be called for more?
A quick test is to divide the AFE total by the planned measured depth (or lateral length) and compare the resulting cost-per-foot to recent comparable wells. Large deviations, in either direction, are questions to ask, not numbers to accept.
Authorizing an AFE typically commits you to fund your share of the estimated cost, and, under most operating agreements, your share of overruns beyond it. Understand your maximum exposure, not just the headline estimate, before you sign.
From AFE to investment decision
The AFE feeds directly into the economics. The total cost, divided among working-interest owners, sets your capital commitment; combined with projected production and prices, it determines the return. A well that pencils out at the AFE estimate may not pencil out after a 20% overrun, so test the return against a higher cost case, just as you test it against a lower price. An AFE you cannot stress-test is an AFE you do not yet understand.
The AFE tells you what they expect to spend. Your job is to ask what happens when reality costs more.