D ri l l i n g

$
Costs !

Presented by –
Divya Deep Srivastava, IDT,ONGC
Session Take-Aways
Introduction to Basic Financial
Management and Cost Concepts.
Costing Framework for Drilling
Activity at ONGC.
Cost Structures in Onshore /
Offshore Conditions in ONGC.
Conclusions
Spudding - The Topic
Financial Management
 Managing the Finances of an Entity to
Maximise Stakeholders’ Value.
 Managing  Financial Planning, Financial

Control and Financial Decision Making.

 Stakeholders  Investors, Employees,

Vendors, Customers, Industry, Society…

 Value  Wealth/Growth, Cash, Returns.

 Maximise  in a Risk Environment.

 Financial Planning
 A Financio-Strategic document that
translates the vision and objectives of the
Co. into physical and monetary specifics.
 Physical Plan identifying the MOU targets

and types and level of Activities required.

 Indicative Financial Outlay based on

previous year Cost of Activities per unit.

 Natural Head-wise Breakup of Resources.

 Sales & Cash Budgets, Profitability. Risks.

 Financial Analysis
 Horizontal / Vertical Common Size
Statements
 Cash & Funds Flow Analysis.

 Ratio Analysis

i. Profitabiltiy / Activity / Gearing /

Liquidity and Market Ratios.
ii. Du-Pont Analysis
 Working Capital Mgt
 WC = Current Assets – Current Liabilites
 Short Term Decisions for Maintaining

Liquidity with least investment in WC.

I. Cash & Cash Equivalents.

II. Inventory – JIT & EOQ.

III. Debtors – Discount & Allowances Policy.

IV. Short Term Financing – Creditors /

Overdrafts.
 Capital Budgeting-I
 The TIME Value of MONEY.

 The Rule of 72.

 Wealth Maximisation Criteria.
 Tools of Capital Budgeting Analysis
i. Payback Period
ii. Discounted Payback / NPV / IRR
iii. Prifitability Index.
 Capital Budgeting-II
 Weighted Average Cost of Capital- WACC.
 Cost of Equity is the minimum Return rqd

on equity shares to keep prices unchanged.

Ke =Rf + Beta * Market Return
(CAPM - Capital Asset Pricing Model)
 Cost of Debt
Kd = Interest Rate on Debt *(1-Tax rate)
 WACC = We*Ke + Wd*Kd
 Capital Structure
 Optimum Mix of Equity-Preference-Debt
that maximises share prices and minimises
Cost of Capital.
 Essentials of a Good Capital Structure –
 Profitability / Return
 Solvency / Risk
 Flexibility
 Conservation / Capacity
 Control
 Dividend Decision
 Factors influencing
the dividend decision
 Stability of earnings
 Financing policy of the
firm
 Liquidity of funds
 Dividend policy of
competitive firms
 Past dividend rates
 Debt obligation
 Ability to borrow
 Growth needs of the
company
 Profit rates
 Legal requirements
 Policy of control
 Corporate taxation policy
 Tax position of
shareholders
 Effect of trade policy
 Attitude of the investor
group
 Understanding Costs
 Inputs are ‘Scarce’ and have ‘alternate
uses’ at any given time.
 To Divert an Input from its next best

use an effort or ‘Sacrifice’ is required.

 This element of ‘Sacrifice’ is Cost

 With every Diversion the ‘Sacrifice’ rises

and ‘Satisfaction’ fall at a rising rate.

(Laws of Diminishing Returns / Utility.)
 Cost-Volume-Profit

 Based on Variable / Fixed Cost Concept

 Profit Targeting and Break-Even Analysis.

 Relevant for Short Term Decisions and for

small deviations from current sales level.

 Cost Concepts
1. Cost : “An amount that has to be paid or given up
in order to attain an intended objective.
In business - It is a monetary valuation of (1) effort,
(2) material, (3) resources, (4) time consumed, (5)
risks incurred, and (6) opportunity forgone in
production and delivery of a good or service ”
2. Costing : “Technique & process of ascertaining
costs of a product, process or activity.”
3. Cost Accounting : “Process of Tracking,
Recording, Allocating and Analysing the costs of a
Product / process / Activity for the purpose of
ascertaining & controlling costs.”
 Cost Concepts
4. Cost Accountancy : “Application of costing & cost
accounting principles, methods & techniques for
cost control & to ascertain profitability.”

OBJECTIVES OF COST ACCOUNTING –

 Ascertainment of cost per unit of Product / Activity.
 Cost control & cost reduction
 Determination of selling price
 Ascertaining profitability, Valuations for FS. CARR.
 Budgeting for future Performance.
 Managerial decision making.
 Understanding Costs
 COST CONTEXTS 9. Relevant costs
& CONCEPTS 10. Sunk cost
1. Direct costs 11. Explicit costs
2. Indirect costs 12. Implicit costs
3. Capitalized cost 13. Fixed /Semi–Variable
4. Expensed cost 14. Variable Costs
5. Out of pocket cost 15. Marginal cost
6. Ammortised Cost 16. Shut down cost
7. Period/Product Costs 16. Differential cost
8. Standard cost 17. Opportunity Cost
 Understanding Costs
CLASSIFICATION OF COSTS-
1. BY NATURE:- Material, labor, Expenses,
Overheads (Rent, Interest, Depreciation).
2. BY FUNCTION:- production, selling, distribution,
administrative, research & development, pre-
production, conversion
3. BY VARIABILITY:- fixed, variable, semi variable
4. BY CONTROLLABILITY:- controllable,
uncontrollable
5. BY NORMALITY:- normal, abnormal
 Understanding Costing
 TYPES OF COSTING :  METHODS OF COSTING

 Marginal  Job
 Direct  Contract
 Absorption  Batch
 Historical  Process / Operation
 Standard  Operating
 Uniform  Single / Output
 Multiple

Understanding Costing
ELEMENTS OF COST-

 Indirect costs can be termed as overheads.

 Four main types of overheads are :
1. Production overhead
2. Administration overhead
3. Selling overhead
4. Distribution overheads
Costing of Drilling Activity at ONGC

Legal Framework.
Drilling Activity
Finance Manual on Costing of
Drilling Activity.
Drilling Cost Flow.
 Legal Framework
 Central Government, in exercise of the powers
conferred by the Companies Act, 1956, issued Cost
Accounting Records (Petroleum Industry) Rules,
2002 (CARR) which made it mandatory to maintain
Cost Accounting Records w.e.f. 1st April 2003.
 Cost statements showing cost element wise details
are prepared for different products and activities of
the Company in Pro-forma A to I.
 Pro-forma C pertains to Cost of Exploratory /
Development Drilling.
 Final Activities
 Acquisition of Mineral Rights in Properties for Exploration,
Development and Production of O&G.
 Exploration covers Prospecting Activities including
Surveys, Test Drilling, Drilling of Exploratory and
Appraisal Wells.
 Development covers Completion of Successful
Exploratory wells, Completion / Recompletion /Testing of
Development and Service Wells. Setting up Pipelines,
Platforms, installations and Facilities for O&G.
 Production cover Pre-wellhead and Post Well Head Activities.
 Extracting of VAP –LPG/Naptha/ATF/SKO/HSDLSHS/C2-C3/Sulphur.
 Seliing & Distribution Activities for O&G and VAP.
 Overview of Costing Process
 Recording Expenditure in relevant Cost Elements and
Cost Objects at the time of Initial Booking.
 Segregating Non-Allocable Cost Elements and charging
them directly to P&L.
 Allocation / Apportionment of Operational and Support
Services costs to relevant Cost Objects.
 Settlement of PM/ Producton / Process / WBS / CWIPs
etc Orders to Cost Objects.
 Settlement of Workshop Orders to Assets/Basins/Plants
 Allocation/Apportion of Surface /Sub surface cost to
producing wells and tpt cost to processing facilities.
 Allocation /Apportioning above to logical Product COs
 Drilling Services
 Drilling Base / Support CC expenditure is allocated to
Drilling Rigs Based on Rig Days. (lower weight of 30% to
contractual rigs and 10% to deepwater contract rigs)
 Mud CC cost (except chemicals) is allocated to Rigs
based on no. of chemists deployed at Rig (for Drilling
CC) and based on Fluid used in well. (for Work-over CC)
 Drilling and Mud costs collected at Rigs are allocated
directly based on Operating Rig Days to Exploratory /
Development wells
 Well Material like – Drill Pipes, Casing, Tubing, X-mas
Tree are consumed directly in well WBS.
 Similarly Oil Well Cement and Mud chemicals are booked
directly to well WBS.
 Drilling Services
 Cost attributable to Abnormal Idle time on rigs is
transferred to General Expense CC as ‘unallocated’ rig
costs and charged to P&L as idle rig.
 Costs attributable to Rig Repair time are expensed
separately as unallocated rig costs.
 Dry Docking expenditure is amortised over Dry Docking
Cycle.(Not exceeding 5 years)
 Cementing Base Costs are allocated to Cementing Units
based on Primary Expenditure at each unit.
 Cementing unit costs are allocated based on Operating
Cementing hours or billed hours at each well.
 Drilling Costs Flow
Cementing Drilling Mud Base
Base CC
Base CC CCs
Primary Rig
Costs Days Chemists
Mud
Cmntg Chem
UNIT OWC WM Rig Mud
Used
Cementing. Rig
Hours Hours

Exploratory & Workover

Development Well WBS
Rolla’ COSTER -ONGC
 Rolla’ COSTER -ONGC
PROFORMA 'C1B'
Onshore -
Name of the Unit/Company: ONGC
Area under Development Drilling: Onshore  
Statement showing Cost of Development Drilling  
I Quantitative Information :  
Sl. No. Particulars Unit FY 2008-09
     
1. Meter Drilled mtr. 317880
2. Status of Wells   0
  (a) Under Drilling No. 34
  (b) Under Testing No. 16
  (c) Dry No. 5
  (d) Hydrocarbons Bearing No. 158
  (e) Service Wells No. 15
 Rolla’ COSTER -ONGC
II Cost Information  
Sl. No. Particulars   2008-09
 
 Percentage of Total
    Cost for the year
1. Preparatory Cost    
  (a) Land ( Lease rent / Crop compensation)   0.32%
  (b) Approach Road   0.49%
  (c) Civil Work (Site preparation)   5.84%
  (d) Others   0.00%
  Total Preparatory Cost   6.65%
2. Drilling - cost of Rig or drill ship Operation   0.00%
  (a) Stores & Spares   9.03%
  (b) Salaries and Wages   15.40%
  (c) Administrative Overhead   13.73%
  (d) Repair and Maintenance   1.71%
  (e) Contractual Payments   6.69%
  (f) Transport Expenses   1.22%
  (g) Insurance Expenses   0.11%
  (h) Dry Docking allocation   0.00%
  (i) Mobilisation   0.14%
  (j) Misc Expenses   2.05%
  Total   50.10%
Rolla’ COSTER -ONGC
3. Production Testing Cost   4.99%
4. Other direct expenses   10.63%
  (a) Cementing   2.73%
  (b) Logging   5.51%
  (c) Mud   1.11%
  (d) Others   1.28%
5. Well Materials   5.12%
  (a) Oil well cement   0.99%
  (b) Others   4.13%
6. Depreciation  
  (a) Rigs & accessories   4.16%
  (b) Depreciation transfer in/transfer out   0.02%
  Well Materials shown by way of depreciation   0.00%
  (c) Casing   11.82%
  (d Tubing   1.71%
  (e) Drill Pipes   1.87%
  (f) Well Heads   0.18%
  (g) Others   1.97%
  Sub - Total (6a to 6g)   21.72%
 Rolla’ COSTER -ONGC
7. Royalty or Technical know-how   0.00 0.00%
8. Reasearch & Development   0.00 0.00%
9. Others   xxxx 0.40%
10 Expenditure transfer in/transfer out   Xxxx 0.39%
11. Total Cost   116211.45 100.00%
III Status      
Development
Sl. No. Particulars   Drilling  
       
1. Cost of wells in progress brought forward   37933.80 
2. Additions during the year   116211.45 
3. Acquisition Cost / Transfers / Other Adjustments 0.00 
A Total (1+2+3)   154145.25 
Cost of successful wells transferrd to producing
4. properties   102718.65 650.12
5. Service wells transferred to Producing Properties   3067.28 204.49
6. Cost of abandoned or dry wells charged off   0.00 0.00
7. Cost of wells in progress carried forward   48359.32 
8. Others   0.00 
B Total (4 to 8)   154145.25 
Per metre cost of development drilling
(Rs./Mtr.) 36558
Onshore Exploratory Drilling

Preparatory Cost
Others 7%
11%

Well Material Depreciation

12%

Depreciation
Drilling - cost of
3% Rig or drill ship
Well Materials Operation
4% 46%

Other direct
expenses
13%
Production
Testing Cost
4%
Offshore Development Drilling

Others
Well Material Depreciation 3%
7%
Well Materials
1%
Other direct expenses
7%

Production Testing Cost

1%

Drilling - cost of
Rig or drill ship
Operation
81%
 Observations
Meterage Study for FY 2008-09 Costs shows –
I. Total Meterage is 715 km of which 481 km is
Onshore and 473 km is Development.
II. Cost of Offshore meterage is 5 to 6 times
onshore costs viz 2 to 3 lakhs for Dev & Exp
compared to 36000 to 56000 in onshore.
III. Exploratory meterage is 40-50% costlier than
Development meterage.
IV. Rig operations Costs forms 46-50% costs in
onshore and 81-84% in Offshore.
 Conclusions
Cost Accounting helps in adding stakeholders’
value by optimising costs and managerial
decisions.
Accounting for Drilling Activity Costs is
professionally designed through a system of
Allocation / Apportionment on Sender-Receiver
basis through SAP System.
Reduction of Non Performing Time and Well
complications is the key to cost controls in
Drilling Activity through a holistic process of
planning and implementation.
 Thank
You ! D ri l l i n g
$
Costs !

Presented by –
Divya Deep Srivastava, IDT,ONGC