What an AFE is and what it isn't

An AFE is an estimate of the expenditure for a particular well or project that has received the requisite approvals at that stage under the relevant agreement and internal process. It sets out the planned work and expected costs so the operator and others can assess the proposed expenditure before work begins. The AFE amount is a budget and not a record of the actual cost of the work.

An incurred cost is one which relates to work done or goods received (regardless of whether it's ultimately recorded as an expense or a capital cost). The actual amount will of course vary from the AFE as the invoices come in and the costs get coded to the project. A JIB invoice is a completely different proposition. It's an invoice to a partner for its share of the chargeable costs under the relevant agreement. A $1m AFE in no way implies that the operator has spent $1m or that a partner owes $1m.

The governing agreement will specify who has to approve the AFE and when the operator is required to seek a revision, a supplemental authorization or a partner notification. In the case of a jointly operated well, this will be the Joint Operating Agreement. You'll need to refer to the relevant agreement and the approved AFE prior to treating a variance as an authorization issue. There is no one dollar or one percentage threshold that applies to all projects.

Why AFE-to-actual reconciliation matters for accounting leaders

Unreconciled AFE costs can lead to inaccurate partner billing. If accounting posts a vendor invoice to the wrong well, the operator may bill partners for the wrong cost. An invoice that arrives after the billing cutoff may require an adjustment in a later JIB cycle. Either error can prompt partner questions and additional work for accounting.

Cost differences can also affect cash calls and the financial close. A cash call prepared from an outdated estimate may request more or less funding than the current plan requires, subject to the governing agreement. At close, accounting needs to distinguish incurred costs from open commitments and coding errors before treating a variance as an overrun. Resolving those differences gives you a supportable cost record for billing and financial reporting.

Step 1: Code costs by well, project, phase, and cost category

Code each cost against the same well/project/phase and cost category as used in the AFE. So a drilling invoice for Well 12 would be coded to Well 12, the drilling phase and the appropriate drilling cost category. The point is that you can then compare the invoice to the relevant budget line rather than just the well's total estimate.

Check the coding when field tickets and accounts payable invoices enter the accounting records. A rig charge posted to the completion phase can make completion appear over budget while understating drilling costs. If one invoice covers multiple wells or phases, split the charge according to the supporting detail instead of assigning the full amount to one AFE line.

If your Providence configuration connects field, accounting, and AFE records by well and project, review their codes before comparing budget with incurred costs. Correcting inconsistent codes at entry limits the reclassification needed during reconciliation.

Step 2: Compare AFE budget to actual costs

Compare each AFE budget line against the actuals posted to the same well, project, phase and cost category. Use the approved AFE and a cut-off date to ensure you're comparing the same period on both sides. Deduct the incurred costs from each budget line and then sum the line variances to give you the total variance. A positive balance means the budget is still in play; a negative balance means the actuals have exceeded the AFE. You should still go through the individual lines even if the overall variance is small, as an overrun in one line could be exactly offset by an underspend in another.

Show open purchase orders and other commitments separately from incurred costs. A commitment is a signal of expected spend, but an open PO in itself doesn't mean you've incurred the cost. As the invoices come in, remove the relevant commitment from the open balance to avoid double counting.

You can run an interim comparison as the work proceeds and a final comparison after the costs have been recorded. The cutoff date must be clearly stated on each report. A variance calculated before the late invoices arrive will reflect the position at that date rather than the final cost of the work.

Step 3: Investigate timing and allocation differences

Compare variances against the same reporting cutoff before treating them as an overrun. Compare the service date and field ticket with the invoice receipt date and the ledger posting period. A contractor may have completed the work in March, and the invoice may not get to AP until April. Check whether March has an accrual in it before you conclude that the March actual is understated. Keep open purchase orders separate from incurred costs.

Next, trace unusual charges to the source document and confirm the well or project, phase, and cost category. A drilling invoice coded to completion can make one phase appear over budget and the other under budget without changing total project cost. Correct the coding through your normal accounting controls, then rerun the comparison.

If the period and coding are correct, then compare the incurred amount against the relevant

AFE estimate and identify the cost behind the remaining variance. Record the cause and amount for review under the governing agreement. The AFE is still an estimate, and the incurred amount is the amount of work that has actually been performed. A joint interest billing invoice is a separate charge to the partners, so look at its allocation and billing period rather than treating it as proof of when the cost was incurred.

Step 4: Document variances and support revisions

Record each variance you investigate against the approved AFE line so another reviewer can reproduce the calculation. Include the budget, incurred amount, difference, well, phase, and cost category. Attach the relevant invoices or field tickets, and state whether the cause was a late posting, a coding error, or work that exceeded the estimate. A corrected posting may resolve a false variance without changing the AFE.

Before you go and ask for a revision or supplemental AFE, check the governing Joint Operating Agreement (or other applicable agreement). The terms of that agreement will tell you who has to approve the change, when partners need to be notified and what supporting information they need to be provided with. In the variance record, you'll need to reference the relevant agreement provision, state the amount being requested and who the approver is, and you'll need to keep the approval and any partner notices with the revised AFE. There is no one dollar or one percentage threshold that applies to all agreements.

Step 5: Connect approved costs to JIB and financial reporting

Reconcile incurred costs before the joint interest billing (JIB) cycle closes so partner charges reflect corrected records. Check each posted charge against the AFE, its well and cost category, and the governing agreement. Then confirm which costs are billable and apply the ownership interests in effect for the charge. An approved AFE authorizes estimated spending under the applicable terms. It does not, by itself, establish an incurred cost or a partner’s billed share.

Resolve miscoded charges and missing invoices before preparing JIB invoices. A cost posted to the wrong well can charge the wrong partners, while an invoice that has not reached accounts payable cannot appear among posted actuals. If you find an error after billing closes, document the correction and determine whether the next cycle requires an adjustment or a revised bill under the agreement.

Use the same corrected cost coding for the general ledger and financial reporting. The ledger records incurred costs in the appropriate accounts and periods, including whether they are treated as expenses or capital costs. The AFE remains the approved estimate used for comparison, while the JIB invoice reflects each partner’s billable share of recorded charges.

Worked example: AFE budget vs. actual costs

The following figures are illustrative. Well W-17 has a $150,000 AFE budget. Rig services have a $100,000 budget, $80,000 in incurred costs, and a separate $20,000 open commitment. Casing has a $50,000 budget and $58,000 in incurred costs, with no open commitment. Across both categories, incurred costs total $138,000 against the $150,000 budget, leaving a $12,000 favorable variance at the reporting cutoff.

Rig services appear $20,000 under budget because the remaining work sits on an open purchase order and has not been performed yet. The commitment is not an incurred cost. If the vendor completes that work for $20,000 and the cost is recorded, rig services will reach the approved estimate.

Casing shows a different kind of variance. The illustrative invoices total $58,000 against a $50,000 estimate, and the well records attribute the extra $8,000 to additional casing length. If the $20,000 rig commitment becomes an incurred cost and there are no other costs, W-17’s total will be $158,000. The current $12,000 favorable variance therefore masks a projected $8,000 overrun.

A variance note could read, “W-17 casing exceeded its $50,000 AFE estimate by $8,000 because the well required additional casing length. Field records and vendor invoices support the incurred amount. Rig services include a separate $20,000 open commitment for work not yet performed. Review the casing difference under the governing agreement and record any required approval or AFE revision before closing the reconciliation.” The accountant would retain the supporting records and document the reviewer’s decision. Any joint interest bill would use eligible incurred costs and the applicable ownership shares, not the open rig commitment.

Month-end AFE reconciliation checklist

  • Confirm that each cost carries the correct well or project, phase, and cost category.
  • Confirm the approved AFE version and reporting cutoff; pull its budget, incurred costs, and open commitments separately.
  • Compare budget with incurred costs by category and for the AFE as a whole.
  • Check flagged differences for late postings, miscoding, and allocation errors.
  • Record each remaining variance with its cause, amount, and supporting documents.
  • Route revisions or supplemental requests for approval when the governing agreement requires them.
  • Tie billable actual costs to joint interest billing and the general ledger before closing the period.

Where AFE reconciliation fits in an integrated accounting system

Confirm which AFE, field, accounts payable, joint interest billing and general ledger records your Providence configuration connects to before you go any further and start to rely on any cross-record comparison. Where those records do match in terms of phase, cost category, etc you can then go ahead and compare the AFE estimate to the posted costs using those codes. You still need to check whether the variance you see is due to a late invoice, an open commitment or a coding error.

The same coding discipline enables you to trace reconciled costs through partner billing and financial reporting. You can compare the costs underpinning a JIB charge with the recorded actuals prior to closing a billing cycle and investigate any variances. Product details are available on the Avatar Systems AFE page.

FAQs

How does an AFE differ from a JIB invoice? An AFE estimates the cost of proposed work and records its authorization. A joint interest billing (JIB) invoice charges a partner its share of costs incurred under the governing agreement.

Who approves an AFE revision? Check the operator’s internal approval policy and the governing agreement. Together, they determine the required internal approvers and whether nonoperating partners must receive notice or give approval.

How do committed costs differ from incurred costs? A purchase order can commit funds before the vendor does the work. An incurred cost records receipt of the work or goods even if the operator hasn't actually paid the invoice.

Does every overrun necessitate a revised AFE? There's no one-size-fits-all dollar or percentage figure. You'll need to look at the governing agreement and your own internal approval policy to determine when an overrun requires a revised AFE, a supplemental authorization or simply a notice.