AUTHORIZITION OF EXPENDITURE
AUTHORIZATIONS FOR EXPENDITURE (AFES) ARE TYPICALLY RAISED BY
COMPANIES TO PROVIDE A DRAW DOWN AGAINST THE BROADER CAPITAL
BUDGETS IN RELATION TO SPECIFIC PROJECTS AND ACCOUNT FOR THE BUDGET,
PROJECTED FIELD COSTS AND ACTUAL COSTS BASED ON A STANDARD CHART
OF ACCOUNTS WHICH DEPENDS ON THE TYPE OF PROJECT.
WHEN YOU'RE USING IT IN THIS CONTEXT, AN AFE IS A DOCUMENT THAT LAYS
OUT THE PROJECTED EXPENSES FOR A PARTICULAR PROJECT AND AUTHORIZES
AN INDIVIDUAL OR GROUP TO SPEND A CERTAIN AMOUNT OF MONEY FOR
THAT PROJECT. YOU CAN USE THIS FORMAT IN ANY ORGANIZATION, TO
ALLOCATE MONEY TO PROJECTS OR MEMBERS FOR ANY PURPOSE THAT FALLS
WITHIN YOUR ORGANIZATION'S GUIDELINES.
In the oil & gas industry, an estimate of the costs incurred in conducting an
operation, such as drilling, completing, reworking, equipping, or plugging an
oil or gas well.
The process of managing Authorization For Expenditure (AFE) is core to
practically all E&P companies. Authorizations For Expenditure (AFEs) are
typically raised by companies to provide a draw down against the broader
capital budgets in relation to specific projects and account for the budget,
projected field costs and actual costs based on a standard chart of accounts
which depends on the type of project. AFEs are typically circulated between
all concerned parties for review and approval prior to capital expenses being
accrued. The process of managing AFEs also includes the working interests of
partners in joint ventures which are so typical in the upstream sector of the oil
and gas industry.
Most exploration is undertaken on a project basis, with work on a project
sometimes extending over a considerable period of time, frequently
several years. Approvals are usually required because of the large
expenditures incurred, the length of time involved, and the need to
maintain tight control over cash expenditures. Depending upon company
policy, approvals for specific expenditures in excess of some specified
amount are necessary. Endorsements and approvals are usually required
from one or more individuals having functional responsibilities. The
procedure for giving written approval for large expenditures may
require an authorization for expenditure (AFE), containing a description
of the project, a listing of proposed expenditures, and spaces for
appropriate approvals.
Many companies in the industry reserve the term AFE for those
expenditures involving the drilling of exploratory or developmental
wells. They use other procedures and forms, such as project
approvals, for other activities. The procedures involved are
basically the same; therefore, no attempt is made in this chapter to
distinguish between the different types of authorization. In any
case, an expenditure of a major amount requires approval of one
or more individuals in any organization and, for a joint venture,
approval by all working interest owners. Accordingly, the term AFE
is used in this book for any planned expenditures where approval
is required.
For example, assume that Our Oil Company is contemplating exploration in an area and that
the estimated amount of direct expenditures involved is $50,000, requiring an approved AFE
before work can commence. The form illustrated in Figure 6-1 has been initiated by a district
geologist.
The detailed items specified on the exploration AFE correspond to the subsidiary accounts for
exploration expense, discussed later in this chapter. The amount for overhead is simply an
estimate (in this case, 20 percent of direct costs) and does not indicate expected cash
expenditures on the project.
Approval of the AFE does not require an entry in the formal accounting records; its purpose
is for internal control of expenditures. Even though exploration budgets are somewhat
flexible, the AFE encumbers some portion of the budget. Costs are accumulated for each
project to be compared with the amounts authorized. The columns entitled Actual Cost and
Variance provide the means for making comparisons between estimated and actual costs
when the project is completed, as shown in Figure
Figure Completed AFE
AUTHORIZATION FOR EXPENDITURE – EXPLORATION
REQUEST FOR AUTHORITY AFE NO. 99008
J. Smith, Exploration Dept. DATE 05/12/00
LOCATION: T7N, R21E, Haskell Co., Oklahoma
PURPOSE: To conduct exploration activities for possible leasing and
subsequent drilling and development in area.
ESTIMATED ACTUAL
ITEM COST COST VARIANCE
01 – G&G Contract $40,000 $38,000 $2,000
02 – G&G Services – Other 0 0 0
03 – Field Party Salaries 7,000 7,400 (400)
04 – Field Party Supplies 0 0 0
05 – Field Party – Other 1,000 1,200 (200)
06 – Support Facilities 0 0 0
07 – Shooting Rights and Damages 2,000 2,300 (300)
08 – Mapping Expense 0 0 200
09 – Equipment Rental 0 0 0200
10 – Other Geological and Geophysical Costs 0 0 0
11 – Purchased Geological and Geophysical Data 0 0 0
TOTAL DIRECT $50,000 $48,900 $1,100
12 – OVERHEAD 10,000 9,780 220
TOTAL $60,000 $58,680 $1,320
APPROVALS: (signed M. Jones) 05/20/00
PROJECT VS NON PROJECT
PROJECT WORK IS WORK THAT IS DIRECTLY ASSOCIATED WITH
COMPLETING A PROJECT. NON-PROJECT WORK IS OVERHEAD
WORK THAT HAS TO BE DONE THAT ISN’T DIRECTLY
ASSOCIATED WITH COMPLETING ANY PROJECT GOAL.
PROJECT WORK MOVES THE PROJECT FORWARD, NON
PROJECT WORK MOVES THE ORGANIZATION FORWARD OR AT
LEAST KEEPS IT GOING.
AFE REVISION, AND SUPPLEMENT
AFE CONTROL AND REPORT
WE TAKE THIS PROBLEM AS AN EXAMPLE IN INDONESIA.
SKK MIGAS REGULATES ALL POLICIES REGARDING PETROLEUM.
EXAMPLE :
AS PART OF THE SKK MIGAS SUPERVISION AND CONTROL OVER THE EXECUTION OF THE PSCS
EACH OF THE PROJECTS IN AN EXPLORATION AND DEVELOPMENT PHASE SHOULD PREPARE AN
AUTHORISATION FOR EXPENDITURE (“AFE”) FOR BP MIGAS APPROVAL. FOR OTHER PROJECTS
BP MIGAS APPROVAL IS REQUIRED IF BUDGETED EXPENDITURE IS EQUAL OR GREATER THAN
US$ 500,000.
An AFE should include the following Information:
1. project information in sufficient detail to allow for BP
Migas analysis and evaluation;
2. total budgeted costs; and
3. total costs that have been incurred.
The time required for AFE approval, AFE revision and AFE
close out is around 10-15 days although the process is
considerably longer for complex and large project AFEs.
An AFE can be revised:
• twice before the project commences or before the tender has
been awarded.
• where the project has commenced prior to reaching 50% of total
expenditures and prior to reaching 70% of physical completion.
Revisions should be made if the total AFE costs are projected to be
over/
under-run 10% or more and/or the individual AFE cost component
is
projected to be over/under-run more than 30%.
The Cost Estimate and Authorization for
Expenditure (AFE) report is define estimated costs
of activities taking place during an Event. These
estimates can later be compared to actual costs.
This report is typically completed in the office by
a Well Planning team, rather than in the field.
