AFEs

An Authorization for Expenditure (AFE) is a formal approval that permits a defined amount of spending on a specific project or activity. AFEs are commonly used in the oil and gas industry and other capital-intensive sectors to control and authorize capital expenditures before cash is committed. They function as a governance tool that separates routine operating costs from large, potentially risk-laden investments, and they are often deployed in joint ventures where multiple parties share costs.

The AFE establishes the project scope, cost estimates, contingency, schedule, and the parties responsible for the expenditure. It provides a documented basis for capitalization and financial reporting and serves as a decision gate to prevent unauthorized spending. When actual costs threaten to exceed the approved amount, the AFE typically requires revision or a new authorization.

Contents commonly include the project description, itemized cost categories (drilling, equipment, services, materials), estimated total cost, contingency, schedule milestones, and cost-sharing terms. Signatures from the project owner, operator, and any partners or approvers finalize the authorization. As work proceeds, actual expenditures are tracked against the AFE; variances may trigger change orders, additional AFEs, or project scope adjustments.

AFEs may be prepared at varying levels of detail and can be firm, contingent, or staged across multiple approvals. In practice, AFEs support governance, cost control, and transparency in capital budgeting, and they are widely used in industries that require formal hurdle-based investment approvals.