11/23/2023

Part 5
Contracting Drilling Operations
By
Prof. Dr. Abdel-Alim Hashem

Contents
• Contract definition
• Types pf contracts
• Conventional: normal, incentive
• Integrated service (IS)
• Integrated Project Management (IPM)
• Turn key
• Current and future trends in drilling contracts
• Bidding plan
• Contract outlines
• Contracts exhibits

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Drilling Contracts
A Contract:

•Is a set of rules

•Governs drilling relationships between business
partners.

Drilling Contracting Strategies

• There are basically four types of contracts which are currently used in the oil
industry:
1. Conventional: daily or footage; normal or incentive
2. Integrated Services (IS)
3. Integrated Project Management (IPM)
4. Turn Key
• The type of drilling contract used can mean the difference between an
efficient and a less efficient operation.
• The operator must weigh all the relevant factors before opting to one of the
above strategies.
• Indeed, going for one type, say turn key, can mean that the operator has no
control over the operation whatsoever and has no means of building
knowledge for future operations. 4

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Conventional Contract
• In this type of contract, the E&P company does every
thing using its own staff or contractors.
• This is the most involved type of contract and can mean
handling up to 100 contracts per well.
• In this contract, the operator has total control over the
operation and carries full risk.
• The contractor has no risk and it could be argued that the
contractor has no incentive in speeding up the operation.
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Conventional Contract
• It has the advantage that lessons learnt during drilling operations
are kept within the company and used to improve future
operations.
• Nowadays, only large operators opt for this type of contract.
• A variation of the above contract is to include an incentive clause
for completing operations early or if a certain depth is reached
within an agreed time scale.
• The contractor will be paid a certain percentage of the savings
made if operations are completed ahead of the planned agreed
drilling time.
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Incentive (Motivation) Contracts

•Encourage drilling quality wells quicker, safer and in an
environmentally friendly manner.
•Incentive day rate
•incentive footage contract
•In incentive contracts, the money saved is shared
between the operator and contractors

Control Exercised by The Operator

Over Implementation
• Is high in day rate
• Is relatively low in turnkey
• Operators have full control over logging and
perforating
• In cases, contract changes to daily rate.

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Contract Risk

• Contractor’s risk is high in turnkey and footage

rates

• Operator’s risk is high in day rate.

Day Rate Contracts

• Fixed daily sum against rental and services.
• Includes (or does not include) incentive.
• Supervision is required

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Rates
• Operating rate
• Reduced rate, Special rates
• Move rate
• Standby rate
• Break-down rate
• Wait-on-weather rate
• Workover rates
• Zero rate
• Hull inspection and dry docking rates.
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Footage Contracts
• The contractor is paid a scheduled amount
based on depth.
• In special operations, the contractor is paid on
daily-rate basis.
• Footage contract represents a higher risk to the
contractor than the daily-rate type.

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Integrated Services (IS)

• In this type of contract, major services are integrated under
two or three main contracts.
• These contracts given to lead contractors who subcontract all
or parts of the contract to other subcontractor.
• The lead contractor hold total responsibility for his contract
and is free to choose its subcontractors.
• The operator still holds major contracts such as rig, wellheads
and casing.
• Also the operator appoints one of its staff to act as a
coordinator for the drilling operation.
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Integrated Services (IS)

• Evolving roles of operating and service companies.

• Traditional operator-contractor relations required the oil company to supervise and coordinate
many specialist services 14

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Integrated Services (IS)

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Integrated Services (IS)

• Three kinds of operator-contractor relationships. In a traditional
relationship, a service company supplies a product or service to the oil
company (left).
• An alliance is a long-term relationship between oil company and service
company (center).
• There is close cooperation between the two to develop long term shared
objectives. An integrated services contract combines expertise from several
product lines (PL) and third parties (TP) to work as a team on one project
(right).
• Overseeing the team is a project manager who reports to the oil company.
Success in any of these relationships means keeping a strong link between
the oil and service companies and ensuring access to optimal technology 16

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Integrated Services (IS)

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Integrated Services (IS)

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Integrated Well Construction

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Integrated Well Management

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Reducing administration. With integrated services, logistics

are simplified for offshore material loading

With Integration
Traditional 21

Integrated Project Management (IPM)

• In this type of contract, a main contractor is chosen.
• This contractor is the Integrated Project Management
(IPM) contractor.
• The contractor is responsible for 20-30 service
companies.
• Service companies may be responsible for other service
companies.
• The drilling operation will be controlled by a
representative from the IPM contractor.
• The operator may hold one or two major contracts.

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Integrated Project Management (IPM)

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Integrated Project Management (IPM)

• There is also a built-in incentive in the contract between the IPM
contractor and the operator.
• This is either based on the time-depth curve, safety or other
criteria.
• An incentive contract based on beating the time curve is the most
common one.
• In this type, an agreed time-depth curve is first established.
• If the IPM contractor beats this time curve, then he is eligible for all
or a percentage of the savings.
• This type is one of the worst kind of contracts for the operator
because:
• There is virtually no learning for the operator.
• Lessons learnt are lost as the IPM contractor traditionally has a large staff
turnover. 24

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Model Incentive Function

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Incentive Principles

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Integrated Project Management (IPM)

• Electronic means of gathering information and building knowledge bases are
alleviating this problem.
• There is no substitute for hands on experience of drilling problems and
passing this knowledge to new staff and trainees.
• The incentive contract is built on a time-depth curve developed and based on
the contractor’s experience.
• Use of better equipment and personnel may beat the IPM contractor’s time-
curve.
• Experience in drilling HPHT wells in the North Sea has shown that an
operator can beat the P10 curve developed by any contractor.
• Incentives are usually given to contractors when beating the P50 time -depth
curve, which has a less stringent time estimate.
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Turnkey Contracts
• Drilling the well or a part of the well against an agreed
lumpsum.
• Contractor procures materials
• Minimum control from operator

• Turnkey contracts involve higher risk than any of the other types
of contracts.

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Turn Key Contract

• This is the easiest of all the above contracts.
• The operator chooses a contractor.
• The contractors submits a lump sum for drilling a well: from spud to
finish with operator virtually not involved.
• The contractor carries all risks if the well comes behind time and also
gains all benefits if he should drill the well faster.
• Contractors only opt for this type of contract if they know the area
extremely well or during times of reduced activities.
• The operator opts for this type of contract if he has a limited budget or
has no knowledge of drilling in the area.
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Current and Future Trends in Drilling

Contracts
• There are two new development in drilling and
production contracts:
• Production Sharing Agreement
• Capital Return Agreement Plus Agreed Production
• These new types of contracts were initially initiated in
some Middle Eastern countries attempting to draw
western investment.
• These contracts are still developing in nature and have
now been used by a number of third world countries.
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Current and Future Trends in Drilling

Contracts
A Production Sharing Agreement
• stipulates that the contractor will be paid a certain percentage of the produced fluids (oil or
gas) in return for the services of the contractor in drilling and producing the wells.
• The agreement may be time-dependent running for a fixed number of years or may include
an initial payment for the contractor in addition to a percentage of the production.
A Capital Return Agreement Plus Agreed Production
• stipulates that the contractor will develop a field using his own finance.
• In return, the operator (or national oil company) will pay the contractor all his capital
expenditure plus an agreed percentage of the production.
• In Iran where this type of contract is used, the agreed production is limited to a fixed number
of years.
• The ownership of the field and its facilities always remain with the operator.

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The Bidding (Request) Procedures

Operator should do the following:
• Defines requirements.
• Selects the list of qualified bidders.
• Tenders requirements in a document.
• Designates a bid committee (BC).
• Receives quotations in sealed envelopes.
• Examines rate, costs.
• (BC) Defines the best offer.
• Supervises negotiates adjustments.

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Contract Outlines
Contract has terms and clauses (‫)ﺷروط واﺣﻛﺎم‬
• Introduction definitions, addresses, objective (scope of work),
location, depth; defines procedures for material supply,
personnel, equipment, and services, supply of casing, mud
• Compensation for mobilization, demobilization, modes of
payment, control, control of performance
• Liabilities (‫ )ﻣﺳﺋوﻟﯾﺎت‬of the operator, the contractor, third parties.
• Insurance
• Blowout and other hazards

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Contract Outlines
• Underground damage
• Taxes, payment of claims (‫)ﻣطﺎﻟﺑﺎت‬
• Unsatisfactory performance
• Termination of services
• Confidentiality and infringement (Breach)
• Force majeure
• Preference (Favorites) to local companies
• Waivers, and Amendment ( Alteration) to the Contract
• Farming out
• Settlement of dispute (Quarrel) ‫ﻓض اﻟﻣﻧﺎزﻋﺎت‬

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Contract Outlines
• Exhibit A: Lists basic equipment of the rig for implementing all
major and the less major operations needed for drilling and
workover.

• Exhibit B: Lists the necessary personnel on board for the

drilling and workover operations

• Exhibit C: Shows schedules of responsibilities supplying of

material, equipment and services on for the contracted
operations.

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Exhibit "A"
Equipment, Materials and Supplies to Be
Furnished by Contractor Drilling Rig

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Specs and Quantities of All Equipment

Mast and Substructure
• 142' x 21' base mast
• Static hook load 1,000,000 lb., 12 lines.
• setback load : 400,000 lb.
• Casing load : 700,000 lb.
• Lee C. Moore 18' substructure.
• 14’ clearance below rotary beams.
• Mast complete …

Exhibit “B”
Personnel to Be Furnished by Contractor

Function Total On duty

When
Rig Superintendent 1
required
Tool Pusher 2 1
Tour Pusher 2 1
Driller 4 2
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Exhibit “C”
Equipment, Materials and Supplies
Furnished by Contractor, paid by Contractor 1
Furnished by Contractor, paid by Company at cost
plus ten percent (10%)to cover all associated 2
costs.
Furnished by Contractor, paid by Company no
handling charge 3
Furnished by Company, paid by Company 4
Not applicable NA
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End

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