Rule of Thumb

The Rule of Thumb in Oil & Gas: Navigating Uncertainty with Practical Estimations

In the dynamic and often unpredictable world of oil and gas, accurate cost estimation is crucial for project success. While meticulous calculations and detailed analyses are essential, industry veterans often rely on a time-tested tool: the Rule of Thumb. This article explores the concept of Rule of Thumb in oil and gas, examining its application and limitations.

What is a Rule of Thumb?

A Rule of Thumb is a pragmatic ratio or percentage used to quickly estimate a cost component, such as contingency, overhead, or engineering effort. It simplifies complex calculations by providing a starting point for initial cost assessments.

Common Examples in Oil & Gas:

• Contingency: A common rule of thumb for contingency is 10-20% of the total project cost. This accounts for unforeseen circumstances, changes in scope, and market fluctuations.
• Overhead: Overhead costs, like administrative expenses, can be estimated using a percentage of direct labor costs. A typical rule of thumb might be 20-30%.
• Engineering Effort: The engineering effort required for a project can be roughly estimated based on the project size and complexity. For example, a rule of thumb might be 5% of the total project cost for detailed engineering.
• Drilling Cost: A rule of thumb for drilling cost might be $100 per foot for shallow wells and $200 per foot for deeper wells.

Benefits of Using Rules of Thumb:

• Speed and Efficiency: Rules of thumb provide quick estimations, allowing for rapid project evaluation and preliminary budgeting.
• Simplicity: They eliminate the need for complex calculations, making them accessible to a broader audience.
• Industry Experience: Rules of thumb are often based on historical data and industry best practices, offering a solid foundation for initial estimations.

Limitations of Rules of Thumb:

• Lack of Specificity: They provide general guidelines, not precise calculations. Project-specific factors can significantly impact actual costs.
• Oversimplification: They disregard intricate project details, potentially leading to under- or overestimation.
• Limited Accuracy: Rules of thumb can be outdated or inaccurate in rapidly evolving market conditions.

Best Practices for Utilizing Rules of Thumb:

• Contextualize: Always consider the project's unique characteristics and market conditions when applying a rule of thumb.
• Refine and Adjust: Use rules of thumb as a starting point, then refine estimates with more detailed data and calculations.
• Transparency: Be transparent about the rules of thumb used and their limitations.

Conclusion:

Rules of thumb are a valuable tool in the oil and gas industry, offering a rapid and practical approach to cost estimation. They provide a starting point for initial assessments, facilitating informed decision-making. However, it's crucial to remember their limitations and supplement them with detailed analysis and project-specific considerations. By using rules of thumb judiciously and incorporating critical thinking, oil and gas professionals can navigate uncertainty and achieve successful project execution.