what's an AFE in Oil and Gas? A Guide for Investors

What AFE Stands For

AFE stands for Authorization for Expenditure. It's the detailed cost estimate for drilling and completing a well. Before you invest a dollar in any oil and gas program, you should have an AFE in front of you. If the operator won't provide one, that tells you everything you need to know.

The AFE lists every cost category: drilling (rig rate, fuel, mud, crews), completion (perforating, stimulation, flowback), facilities (tanks, separators, gathering lines), and contingency. Each line item is categorized as IDC or TDC, which directly affects your tax treatment.

Reading the Line Items

Drilling costs typically represent 30-50% of the total AFE. This includes the day rate for the drilling rig, drill bits, drilling mud and chemicals, directional drilling services (for horizontal wells), cementing, and logging. All of these are IDCs, 100% deductible in year one.

Completion costs run 20-40% of the total. Perforating, acidizing or fracturing, flowback testing, and tubing installation. Most completion costs are IDCs, with tubing classified as TDC.

Facilities costs are 10-20%: tanks, separators, pumping units, gathering lines, and surface equipment. These are TDCs, depreciated over 5-7 years via MACRS. With bonus depreciation at 60% in 2026, you deduct 60% of TDC value in year one plus the remainder over the MACRS schedule.

Contingency: 10-15%

A well-prepared AFE includes a contingency line, typically 10-15% of total costs. This covers unexpected expenses: fishing (retrieving stuck drill pipe), lost circulation zones, weather delays, or equipment failures. If the AFE has zero contingency, the operator is either being overly optimistic or hiding the buffer somewhere else.

AFE vs. Actual Costs

Good operators track AFE accuracy. Ask how their actual costs compare to AFE projections across their last 10-20 wells. Consistently coming in within 5-10% of AFE suggests the operator knows their costs and their formations. Consistently running 20%+ over suggests systemic underestimation, and your returns will be lower than projected.

Cost overruns happen. Weather delays, mechanical problems, unexpected geology. The question is whether the operator communicates transparently and manages costs aggressively when surprises occur.

How BassEXP Presents AFEs

Every BassEXP offering includes a line-item AFE with IDC/TDC classifications, comparison data from prior wells in the same area, and geological justification for the target formation. We provide this before you commit capital so you and your CPA can model the tax implications accurately. Our AFEs include contingency, and we report actual costs vs. AFE after each well is completed.