Understanding Drilling Contracts
Estimated reading time: 4 minutes
Understanding Drilling Contracts
The Exploration and Production (E&P) segment of the international Oil and Gas Industry, is in all probability, the riskiest in terms of capital intensity, long payback periods; technological dependence and a host of legal/environmental compliance requirements. The drilling contract is one of the most important contracts for an operator.
A drilling contract will allocate certain risks on a reciprocal basis (including personal injury, damage to property, certain pollution risks and consequential damages), regardless of fault. Other risks, such as well control, downhole pollution, loss or damage to the hole or downhole tools and reservoir damage, are often assumed by the operator, at least to some degree. Other related contracts, such as vessel charters and service agreements will often be based upon the risk allocation scheme in the primary drilling contract.
Some of the key elements of a drilling contract include:
- Governing Law
- Establishing the rights; duties and obligations of the parties to the contract
- Understanding the ramifications of Indemnity; insurance and liability provisions
- Provisions relating to risk and performance
- Warranties and guarantees
- Termination clauses
- Damages – LDC’s
- Payment terms
- Dealing with breach of contract
- Assignment and novation of contract
- Force Majeure provisions
The different types of drilling contracts are:
- Daywork
- Footage
- Turnkey
Daywork Contract
Daywork contract historically has been the most commonly used form. A daywork contract provides that the drilling contractor be paid a stipulated rate for work performed over a twenty-four-hour period. The amount of the daywork rate depends on a number of factors, including the type of rig, the size of the crew, et cetera. A daywork contract may provide for lump-sum payments for specialized work.
Footage Contract
A "footage" contract provides that the drilling contractor be paid a stipulated price per foot of hole drilled from the surface to a total depth or some other specified depth. The IADC footage contract specifies that the operator is an independent contractor. The contractor more clearly assumes the risk associated with drilling under a footage contract rather than under a daywork contract. A footage contract may call for daywork compensation. Example, under a typical "standby" or "shutdown time" provision, daywork compensation is due with cessation of drilling operations. Because the contractor assumes more risk, the footage contract is more advantageous to the operator than the daywork contract.
Turnkey Contract
A "turnkey" contract provides for the drilling contractor to be paid a stipulated price for drilling a well to a specified depth or a targeted formation. A drilling contractor assumes more risk under the turnkey contract than under the other types of contracts Because the contractor has general control of all operations. Turnkey contracts are often tailor-made to particular drilling conditions which may be encountered.
Also read: Guide to Understanding Drilling Contracts: What Is A Day Work Contract?
Masterclass On Understanding Drilling Contracts is a 4-days training course held via VILT methodology, designed to provide the delegate with a holistic understanding not only of drilling contracts, but to understand them within the wider context of the larger governing framework of which they are a part in terms of hydrocarbon discovery and extraction. The course is an immersive experience and the focus is on open dialogue throughout and class exercises/problem solving and knowledge sharing.
<Understanding Drilling Contracts, 4-7 Jul 2022>