What is 'Spud'

A spud is the process of beginning to drill a well in the oil and gas industry. Initially a larger drill bit is used to drill a surface hole, which is lined with casing and cement to protect groundwater. After the surface hole is completed, the main drill bit is inserted, which performs the task of drilling to the total depth; this act can also be referred to as "spudding in."

BREAKING DOWN 'Spud'

Drilling for oil and gas is a highly complex task involving sophisticated techniques and machinery. It often costs hundreds of thousands of dollars to drill even a simple well. More difficult wells can cost millions of dollars. The most expensive wells are often found offshore, where high-end drilling platforms can cost over $500,000 per day in times of peak demand.

Initially, when a new oil well is going to be drilled, a larger drill bit is used than what is going to be used to get to the final depth. This first drill creates a hole in the surface that is then lined with concrete, forming a barrier to avoid any contaminants from bleeding into the ground water.

Once the initial hole is complete, the main drill bit is attached. The day the main drill bit begins drilling into the ground, a process called spudding in, is referred to as the spud date. In cases of offshore oil rigs, the spud date occurs when the drill begins working on the sea floor, not when it first breaches the water.

Spud Dates and Investment in Drilling Operations

Many investors find value in the spud dates as this helps determine how effective a particular drilling operation has become. This can help differentiate one company from another, providing a point of analysis when determining how to invest funds.

Comparing the spud date to the date the total depth is reached, also referred to as spud to TD, can help compare operations of one drilling company to another, as well as improvements in a company’s performance from the completion of one well to the next.

Additionally, the phrase "spud to completion" refers to the time between the spud date and the well being completed, and the phrase "spud to sales," or "spud to rig release," involves the time from spud to the point the well comes online.

Cycle Times

The time required to move from spud to TD, spud to completion and spud to sales can all be included as cycle times. The shorter the cycle time, the faster the particular well was drilled, completed or capable of producing, respectively.

Production and Investing in Oil

The rate at which oil can be extracted directly affects oil pricing, generally sold as futures by the barrel on the open market. Increased efficiency generally lowers cost, allowing the same quantities of crude to be made available in less time.

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