In the complex world of oil and gas transactions, one document often sparks confusion yet carries significant weight in investment decisions—the Authorization for Expenditure, or AFE. Whether you’re a seasoned operator, a mineral rights owner, or a prospective buyer of working interests, understanding what an AFE entails is crucial to navigating deal structures and managing risk.

This guide breaks down what an AFE is, how it affects buyers and sellers in U.S. oil and gas markets, and why it’s an essential piece of due diligence in every transaction.

What Is an AFE?

An Authorization for Expenditure (AFE) is a detailed cost estimate and approval form that outlines the expected capital costs of a proposed drilling, completion, workover, or other oilfield operation. It is typically initiated by the operator of a well and sent to all non-operating interest owners (also called “partners” or “working interest owners”) for approval.

The AFE serves as a forecast and budget for a specific operation and gives non-operators a chance to agree to or decline participation in the proposed activity.

Key Components of an AFE

• Well details – Name, location, and legal description of the well

• Scope of work – Drilling, recompletion, plugging and abandonment, etc.

• Estimated costs – Broken down into categories (drilling, casing, fracking, site prep, etc.)

• Approval lines – For each working interest owner to sign and indicate consent

• Deadline for election – The date by which parties must elect to participate or risk penalties or forfeiture

Why Sellers Should Care

If you’re looking to sell working interests in a property, AFEs are a key part of your buyer’s due diligence. Buyers want to know:

• Are there any active or pending AFEs?

• What is the capital exposure for upcoming projects?

• Have previous AFEs been accurately estimated?

• Are there non-consent penalties that could impact returns?

Being transparent and organized with your AFE records builds trust and can accelerate closing timelines.

Why Buyers Must Pay Attention

For buyers and investors, AFEs offer insight into upcoming capital requirements and operational risks. Before closing a deal, reviewing recent and outstanding AFEs helps answer:

• What will this asset cost beyond the purchase price?

• Is the operator investing prudently?

• Will I have to make a non-consent election immediately after closing?

• Are any cash calls imminent?

Sophisticated buyers often negotiate escrow terms or purchase price adjustments based on pending AFEs, especially in joint venture or syndicated deals.

Common Mistakes to Avoid

• Ignoring old AFEs: Even expired AFEs can signal operational intent or recurring expenses.

• Missing deadlines: Failing to elect in time can result in forced non-consent, loss of revenue interest, or penalties.

• Underestimating soft costs: Legal, regulatory, and overhead expenses are often excluded or understated in initial AFEs.

• Not verifying cost overruns: Compare actual spend vs. AFE budgets on past projects.

How Eagle River Advisors Adds Value

At Eagle River Advisors, we specialize in bridging the information gap between asset owners and investors. Our team provides:

• AFE analysis and forecasting

• Deal structuring with AFE contingencies

• Asset vetting and cost-recovery modeling

• Transaction support for buyers and sellers

We help clients navigate AFE risks and opportunities as part of a broader investment strategy. Whether you’re divesting non-core assets or acquiring new production, our advisory approach ensures you are well-positioned to make informed, profitable decisions.

Final Thoughts

AFEs are not just technical forms—they are financial roadmaps that directly influence returns, capital planning, and operational alignment. Understanding how to read, interpret, and negotiate around AFEs is essential for anyone involved in the U.S. oil and gas market.

If you’re considering a transaction and want help reviewing or structuring around AFEs, contact our team today.