The oil and gas industry faces a lack of compact drilling devices capable of performing horizontal drilling maneuvers in depleted or abandoned wells in order to enhance oil recovery. The purpose of this project was to design and develop a smart sensing system that can be later implemented in compact drilling devices used to perform horizontal drilling to enhance oil recovery in wells. A smart sensor is the combination of a sensing element (sensor) and a microprocessor. Hence, a smart sensing system is an arrangement that consists of different sensors, where one or more have smart capabilities. The sensing system was built and tested in a laboratory setting. For this, a test bench was used as a case study to simulate the operation from a micro-drilling device. The smart sensing system integrated the sensors essential for the direct operational measurements required for the robot. The focus was on selecting reliable and sturdy components that can handle the operation Down the Hole (DTH) on the final lateral micro-drilling robot. The sensing system's recorded data was sent to a microcontroller, where it was processed and then presented visually to the operator through a User Interface (UI) developed in a cloud-based framework. The information was filtered, processed, and sent to a controller that executed commands and sent signals to the test bench’s actuators. The smart sensing system included novel modules and sensors suitable for the operation in a harsh environment such as the one faced in the drilling process. Furthermore, it was designed as an independent, flexible module that can be implemented in test benches with different settings and early robotic prototypes. The outcome of this project was a sensing system able to provide robotic drilling devices with flexibility while providing accurate and reliable measurements during their operation.