SPE 37495
Economic Analysis of Horizontal Wells
Samuel 0. Osisanya, SPE, The University of Oklahoma
Copyrighl1996, Society of Petroleum Engineera, Inc.
Introduction
SPE 37485 ftrlt JnllfUd.8l ~ Production Operation Symposium March 9-11, 1997 Horizontal well technology has become an economic reality,
Permluion to copy II rellrlcted to an abalr8ct of not more than 300 words. Illustrations may and the result has been a dramatic upsurge in the number of
not be copied. The abstract should contain conspieuoua acknowledgment of where and by horizontal wells being drilled and completed. However,
whom the p11per wa1 presented or published. Write Librarian, SPE, P.O. Box 833836,
Richardson, TX 75083-3836,m U.S.A, fax 01-214-952-9435. horizontal well projects are much more complicated than
vertical well projects and require good management approach.
Abstract The majority of horizontal wells were drilled because of
Horizontal drilling technology has become an economic reality, expected productivity increases of 2 to 20 times higher over
and the result has been a dramatic upsurge in the number of vertical wells. Generally, an improvement of about 2 to 2.5
horizontal wells being drilled. Horizontal wells have proven to times could warrant sufficient economic justification for a well
be cost effective in optimizing hydrocarbon recovery. Although drilled horizontally} The economics of horizontal wells is
the majority of wells were drilled because of expected concerned with minimization of drilling, completion, and
productivity increases, they have not always been a solution to maintenance cost and optimization of profit. Real cost
the economic success of the project. As the industry's efficiencies or profit optimization cannot be achieved with
experience of drilling, completing, and producing horizontal technology alone. In fact, the best way to improve cost
wells increases, so does the realization that horizontal well efficiency and thereby maximize profit is through planning
technology is not always a solution to the problem of more cost and execution. Today's management must allow the most
effective production. Economic analysis of horizontal well appropriate people to have a hand in making decisions.
projects are much more complicated than that of vertical well Horizontal well economics involves the following:
projects because of the many variables involved. Several understanding the technology by all concern and good
parameters are evaluated for the economic success of horizontal management approach (good planning, good wellsite
well projects. These include drilling and completion options, decision). For example, an excellent drilling fluid program
hydrocarbon pay zone thickness, well spacing, fracture may involve drilling the vertical section with water-based mud
intensity, vertical communication, formation damage, and multi- and drilling the lateral section with oil-based mud. This
well prospect. The total well cost for the horizontal well is approach enhances well bore stability, reduces torque and
divided into two components: the vertical section cost and the drag, provides good hole cleaning characteristics, and reduces
horizontal or lateral section cost. The horizontal or lateral formation damage.
section cost is strongly time-dependent. The type of completion The economic success of horizontal well technology
also affects horizontal well performance, and certain completion program depends directly on well costs. Hence, effort must be
options are only possible with certain drilling techniques. available to drill and complete the wells more efficiently. The
This paper presents a step-by-step procedure that can be main objectives for drilling, completing and producing
used when performing an economic analysis of a horizontal well horizontal wells are (1) to maximize the ultimate recovery of
project. The analysis is based on cost estimates associated with hydrocarbons, (2) to maximize the economics of recoverable
all phases of the project. To ensure the economic success of a · reserves, and (3) to sustain a high production rate for as long as
horizontal well program, multi-disciplinary efforts are required possible to optimize the ultimate recovery?·'
in all preplanning phases of the program. This includes From a reservoir management perspective, the main
obtaining pertinent information before the well is actually objective is the best exploitation of petroleum resources in the
drilled, with a post review of the program after production has development and production phases, which includes the
been established. prevention of non-economic developments and the maintenance
of a flexible response to production opportunities. From the
discussion above, the economic success of a horizontal well
project depends on the answers to the following questions: (1)
2 ECONOMIC ANALYSIS OF HORIZONTAL WELLS SPE 37495
why drill a horizontal well?, (2) what advantages does it offer?, can be adequately developed with fewer platforms, locations,
and (3) what will be the well productivity? It has been shown and the number of wells.
that horizontal well productivity is affected by the reservoir
thickness, lateral length of the well, reservoir heterogeneities Planning
such as faults, shale barriers, and permeability variations, ratio l]Iis is related to operation because cores must be obtained
of vertical to horizontal permeability, and, location of the lateral and analyzed while drilling the vertical section and the first
section of the well within the reservoir. horizontal well. These are used as calibration logs and for
Evans 8 recently presented a detailed economic evaluation determining formation permeability and formation mechanical
model accounting for the time value of cash flow, including properties. Well stimulation must be based on the initial
the effects of interest rate and inflation rate of horizontal wells production data which is obtained immediately after
completed in natural fractured reservoirs. This model can be completing the well. This must be done after well begins to
used for identifying the optimum horizontal drilling plan for produce. This is essential to determining the most probable
optimum recovery from naturally fractured reservoirs. Balen stimulation treatments, forecast reserves, and to optimize
et al. 9 used the net present value (NPV) concept in the profit. It is also necessary to estimate the cost of stimulation
optimization of hydraulic fractures. The approach involves after selecting the preferred method. Both the stimulation cost
graphing of a range of fracture lengths (or other treatment and the reservoir performance will be incorporated into the
variables) against the NPV and the optimum fracture length economic analysis. Also, post-stimulation well tests and/or
corresponds to the maximum NPV. Lacy et al. 10 presented a monitor production are run monthly during entire life of the
review of horizontal well field case histories with summaries well. This is useful for determining whether the well is
on the parameters essential for economic success. Reiss 11 producing at the optimum rate.
concluded in his paper that success in drilling horizontal wells
means overcoming the overall cost by the overproduction. In Reservoir Parameters for Economics Success
other words, reaching· this target means selecting adequately The key parameters for the success of horizontal well
the potential horizontal well candidates, improving the technology based upon several results appear to be: fracture
horizontal production, and cutting down total drilling and intensity, hydrocarbon pay zone thickness, well spacing,
completion costs. vertical communication, formation damage and post drilling
clean-up ability, geological control, multi-well prospect, and
Economic Considerations for Horizontal Wells cooperation in geological, reservoir, drilling, and completion
The first factor that must be considered prior to drilling is departments. Fracture intensity involves drilling the horizontal
whether the company views the project as research and wells perpendicularly so as to intersect many natural fractures as
development or as the basis for immediate economic gain. The possible. Horizontal wells drilled perpendicular to the fracture
effect of this reasoning is to apply a learning curve to predict the will not only show higher rates, but also higher ultimate reserves
cost of the first horizontal well and subsequent wells for a given as compared to a vertical well.
area. Secondly, a horizontal well data base should be compiled Horizontal wells drilled in thin reservoirs are more effective
before undertaking the drilling program. This should include than those drilled in thick reservoirs. However, a low limit of
the production data base for horizontal wells for a given area about 10 feet exists for reservoirs without a gas cap or bottom
along with reservoir models and vertical well production water. For reservoirs with gas cap or bottom water, present
history. This would assist in the development schemes for the drilling technology allows a lower limit of about 12 feet for
field by establishing a production schedule and to determine the elevation difference between oil - water contact and the
ultimate recovery from which the economics are structured. horizontal wellbore. The lower limits are required to obtain
Thirdly, certain tax credits are given for horizontal well projects acceptable economics for incremental drilling costs of a
that are considered for enhance oil recovery projects. It is horizontal well. Well spacing shows that incremental reserves
essential to determine during the planning phase whether the for a horizontal well should be at least proportional to
well might be useful for an EOR application upon completion of incremental costs. Since horizontal wells require larger well
primary recovery. This would yield significant cost savings in spacing than vertical wells, it will drain a larger area or volume
the long run. Fourthly, consider the production technology in of reservoir, which would yield a higher recovery. However,
terms of water separation, treating, and disposal facilities. If with a larger drainage area, there is always a possibility of well
facilities are not required for these operations ,and if they are interference from adjoining leases and thus affecting the overall
necessary, smaller ones may be used leading to reduced size recovery of incremental reserves. Usually, the local economics
and cost of the production platform in the offshore environment. would dictate the well spacing for a given size horizontal well.
Finally, for wells located offshore, in rugged remote areas, or in Good vertical communication in the reservoir is essential for the
environmentally sensitive areas, the cost of the logistics required economic success of a horizontal well. Vertical permeability is
to prepare a slot or location to drill can be significantly high. In one of the key parameters which determines the productivity of
such cases, horizontal wells are a means by which an entire field a horizontal well. A horizontal well can only drain the layer in
which it is drilled. If a horizontal well must be drilled in a low
SP£37495 SAMUEL 0. OSISANY A 3
vertical permeability reservoir, fracture stimulation must be The horizontal section cost depends more on time, and
considered and taken into account for economics of the project. includes all the parameters listed for the vertical section plus the
Formation damage in horizontal wells in low permeability following: directional drilling and surveying equipment, mud
reservoirs can be significant due to longer period of exposure to logging services, more rental equipment and more supervision.
drilling fluids. Methods used to minimize damage may include Tpe variable cost associated with a single horizontal well Chs is
drilling underbalanced or using special drilling fluids containing given as 5:
little or no solids. This would imply using a special completion
scheme, and thus results in high planning and completion costs Chs = Cc + Cd X t. ............................. - ............................ (2)
for the horizontal project. A multi-horizontal well program has a
better chance for economic success. This is because as drilling where,
experience is gained in a certain area, the overall horizontal well Cc = cost associated for drilling the curve
costs decrease. The first well usually costs two to three times Cd = daily operating rate cost, and
more than a vertical well. The second well usually costs much t = time required to drill the horizontal interval.
less than the first one. After drilling a few wells, the The time t is estimated by performing a least-square regression
horizontal/vertical well cost ratio is about 1.5. The concept of analysis of the straight line relationship between the horizontal
multi-horizontal wells program is now synonymous with the length (plotted along the x-axis) and the inverse of the daily
conceptofmultilateralsfrom the same wellbore.12 progress, 1/ROP (hr/ft- plotted along they-axis).
Technical Aspects of Economic Analysis Optimization of Horizontal Well Length
These include the following considerations: lease line Optimization involves discounting of revenues from the
boundaries, reservoir quality, surface location and decrease in horizontal well over time to time zero, which is the time at the
daily drilling progress due to horizontal length. The first three initiation of job execution. Thus, in order to optimize the length
considerations can assist in the development of the type of of the lateral section of the well, it is necessary to determine the
horizontal well, i.e. short radius, medium radius, long radius, maximum net-present-value. The net-present-value is defined
etc. The last factor, the daily drilling progress in the lateral as:
affects the overall cost of the well. For instance, as the length of
the horizontal well increases, the average daily drilling progress
(feet/day), decreases. The daily drilling progress decreases
because of the following: increase in the lateral section; longer
NPV = L[;::i~:]- C,. .............................. - ............. (3)
tripping time due to greater depth; increased difficulty in
dNP = the incremental oil production
transmitting weight to the bit as a result of higher drag;
Co = the cost per barrel of oil
difficulty in orienting downhole motor due to longer drill string;
Cw =drilling and completion cost of the well
and pump and horsepower limitations of the rig.
= discount rate,
n = numberofyears
Total Cost of Drilling a Horizontal Well
The total cost associated with a horizontal well can be
The incremental gain of oil production from a horizontal well is
divided into the vertical and horizontal cost. The total cost can
given as:
be considered to be the sum of the two costs:
/lNp = Qh!l.t ······························-····························-···(4)
C1 = Cv + C1t ······························-····························-········(1)
Qh = steady state horizontal production rate
Cv = vertical interval drilling cost at = incremental time
Ch = horizontal section drilling cost, $
The steady-stateproduction rate~ can be determined using any
Vertical well section cost includes tangible (or non- of the available equations13 "17 assuming homogeneous reservoir.
recurring) costs and daily operating costs. Non-recurring costs For example, Elgagah et al. 17 equation which
include those that are incurred only one during the drilling of
the vertical section. These may include moving, casing/wellhead
Q _ 0.001018hKhM/(Jl 0 B0 ) •••••••••••••••••••••••• (5)
and cementing, drill bits, drilling mud and chemicals), and cased
hole logging costs. Daily operating costs include those charges h- [R.n(h/2rw) + (o.25 + c)(-1 _~)]
the total of which varies almost directly with the number of days (L/h) L rw h
required to drill the well. These consists of daily rig cost,
overhead, supplies, living quarters, communications and This equation is independent of the drainage radius reh of the
transportation. horizontal well that occurs in many of the earlier equations. This
4 ECONOMIC ANALYSIS OF HORIZONTAL WELLS SPE 37495
equation thus eliminates several calculation steps. Finally, = horizontal well production rate, stb/day
assume several values of horizontal well length and production = incremental time, days
rates, the various net present values are calculated. By plotting = net present value, $
the horizontal well lengths against NPV values the maximum =horizontal permeability,md
NPV is determined for given time and discount rate values. = reservoir net pay thickness, ft
Other economic criteria such as the discounted cash flow rate of = pressure drawdown, psia
return (DCFROR) and growth rate of return (GROR) can also = oil viscosity, cp
be used in place of NPV. All the three criteria have their = oil formation volume factor, res. bbl!STB
advantages and disadvantages. = well bore radius, ft
= horizontal well drainage radius, ft
Conclusions
1. Horizontal wells have proven to be a cost effective means References
in optimizing hydrocarbon recovery. Although majority of 1. Joshi, S.D.: Horizontal Well Technology, PennWell Publishing
the wells were drilled because of expected productivity Company, Tulsa, Oklahoma, ( 1991 );
increases, they have not always been a solution to the 2. Osisanya, S. 0.: Horizontal Well Technology, Halliburton Short
Course.Manual, Duncan, 1995.
economic success of the project.
3. Pocovi, A.S., Gustavino, L., Pozzo, A., Musmarra, J.A.:
2. Horizontal well technology is costly. It is essential to have
"Comparing Cost and Perfonnance of Horizontal Wells," World
a multi-disciplinary team effort for an economically Oil (March 1991 ), 39-44.
successful horizontal well project in all phases of planning. 4. Kossack, C.A., Kleppe, L., Assen, T.: "A Comparison of
3. Drilling and completing horizontal wells with properly Horizontal and Vertical Wells," SPEPaper 16869,1987.
identified candidates improves the overall economic 5. Ruddy, K.E. and Hills, F. D.: "Economic Analysis of Dual
recovery and reduces fmances. Pertinent information must Horizontal Wells," Paper # HWC94:..J7 presented at the
be gathered before the well is actually drilled and a post SPE/CIM/CANMET International Conference on Recent
review of the drilling and completion program must be Advances in Horizontal Well Applications, held in Calgary,
Alberta, Canada March 20-23, 1994.
performed after production has been established.
6. Crouse, P.C.: "Technical and Economical Objectives for
4. The total cost for the horizontal well can be broken down
Horizontal Wells," SPE Paper 21734, 1990
into two components which includes the vertical section 7. Giannesini, J.F. and Bosio, J.: "Horizontal Wells Cut Offshore
cost and the horizontal or lateral section cost. The Production Costs," SPE Paper 88127, February 1988.
horizontal or lateral section cost is strongly time-dependent. 8. Evans, R.D.: "Production Forecasting and Economic Evaluation
Of course the total well cost should actually include open- of Horizontal Wells Completed in Natural Fractured Reservoirs;'
hole logging, well completion cost, and stimulation cost if CIM Paper # 96-21, presented at the 4~ Annual Technical
any. Meeting in Calgary, Alberta, Canada, June 10 - 12, 1996.
9. Balen, R.M., Meng, H.Z., and Economides,M.J.: "Applications of
the Net Present Value(NPV) in the Optimization of Hydraulic
Acknowledgments
Fractures," SPE paper 18541, presented at the Eastern Regional
The author would like to express his sincere thanks to the
meeting in Charleston, WV, Nov. 1 - 4, 1988.
School of Petroleum and Geological Engineering, the 10. Lacy, S., Ding, W., and Joshi S.D.: "Horizontal Well Applications
University of Oklahoma for encouragement to publish this and Parameters for Economic Success," SPE paper 23676,
paper. presented at the 2nd Latin American Petroleum Engineering
Conference, II LAPEC held in Caracas, Venezuela, March 8 - II,
Nomenclature 1992.
b = intercept II. Reiss, L. H.: "Horizontal Wells' Production After Five Years,"
cd = drilling cost, $/day SPE Paper 14338, presented at the 6QihAnnual Technical
Conference and Exhibition held in Las Vegas, NV, Sept. 23-25,
Ct = cost of curved interval, $
1985.
Cv = vertical interval cost, $
12. Maurer, W. C.: "Recent Advances in Horizontal Drilling," Paper#
ct = total cost, $ HWC94-18 presented at the SPE/CIM/CANMET International
ch = horizontal interval cost, $ Conference on Recent Advances in Horizontal Well Applications,
Chd = horizontal cost for dual well, $ held in Calgary, Alberta, Canada March 20-23, 1994.
Chs = horizontal cost for single well, $ 13. Borisov, J. P.: "Oil Production Using Horizontal and Multiple
L = horizontal well length, feet Deviation Wells," Nedra, Moscow(l964). Translated· by
Lt,e =break-even length, feet J.Strauss, S. D. Joshi(ed.) Phillips Petroleum Co., the R&D
m =slope library translation, Bartlesville, OK( 1984 ). .
14. Joshi, S.D.: (Augmentation of Well Productivity with Slant and
t =time,days
Horizontal Wells,) Journal of Petroleum Technology, (June
D = incremental oil production from horizontal well, stb
1988) 729-739.
Co = cost per barrel of oil, $/bbl
= discount rate, fraction
SPE37495 SAMUEL 0. OSISANY A 5
15. Giger, F.: "Reduction du nombre de puits par l'tilisation de
forages horizontaus.'' Reveue de L 'institute francais du Petrole,
Vol.38 (May 1983 ).
16. Giger, F.M., Reiss, L.H. and Jourdan, A.P.: (The Reservoir
Engineering Aspects of Horizontal Drilling,) SPE Paper
# 13024, presented at the I 984 meeting SPE Annual Technical
Conference and Exhibition, Houston, Sept.16-19.
17. Shedid, A. E .. , Osisanya, S. 0., Tiab, J.: "A Simple
Productivity Equation for Horizontal Wells Based on
Drainage Area Concept," SPE Paper# 35713 presented at
the SPE Western Regional Meeting held from May 22 -
May 24, 1996 in Anchorage Alaska.
