Contract Types

Drilling contracts generally fall under four main headings:

  1. Day rate contracts
  2. Modified day rate (footage bonus) contracts
  3. Footage contracts
  4. Turnkey contracts
  5. I Day rate contracts

This is the most common type of contract used worldwide. The drilling contractor is paid a specified sum by the operator for each day that he spends on the well. There is no performance bonus on this type of contract but the contractor can be penalised for negligence.

Most drilling contractors like this type of contract as there is little downside for them. They supply the equipment and personnel and, providing that they do not make too many mistakes, they can enjoy a regular income for as long as the well takes. There is no financial incentive for the contractor to drill more quickly or handle BOPs more efficiently; in fact the converse is true.

When operating this type of contract, the operator's Drilling Supervisor on site must be especially vigilant to detect delaying tactics on the part of the contractor. In large areas, one company rig working alongside several contractor rigs can act as a lateral form of control on drilling performance. The company rig is operated by staff who get paid by the month and not by the contract. They have no incentive to slow things down. They drill ahead as best they can and usually set the standards that the contractors must endeavour to match. This does not happen in every case, but usually the company rig is a useful yardstick by which to check contractor's performance. Day rates are usually broken down into four groups:

  1. Operating
  2. Reduced
  3. Special

4. Zero

Operating rate is normally applied to rig utilisation. It implies that the contractor's equipment and personnel are fully utilised. This rate covers activities such as drilling, tripping and casing runs.

Reduced rate is used when the contractor's equipment and personnel are not being fully utilised. During electric logging, for example, most of the contractor's equipment is shut down therefore the reduced rate will apply. Other operations which can fall in this category include WOW rig moves and ballasting operations. This rate is usually a few per cent cheaper than the operating rate.

Special rate comes into force in many circumstances. A typical example would be when the allowable repairs downtime allowance was just exceeded in a given month.

Zero rate is when no payment is made to the drilling contractor. The usual reason behind this is negligence by the contractor causing operational delays.

1.2 Modified day rate (footage bonus) contracts

The purpose of this contract type is to encourage the drilling contractor to reach TD more quickly than he might on a conventional day rate. The operator will retain conventional control over this type of contract, however there will be a bonus for the contractor if he reaches a certain depth within an agreed time scale. This type of contract can be attractive to both the operator and drilling contractor but is not applied very often in practice.

1.3 Footage contracts

These contracts usually are given in reasonably well-known areas. A specified rate per metre or per foot drilled is negotiated for a well of a certain depth. With this contract style the drilling contractor has a direct incentive to drill the well faster.

When offering a drilling contractor a footage contract the operator should clearly list any special terms with which the contractor must to comply for the specific well. An example would be the stipulating of a maximum tripping speed to prevent pressure surges, were it known that this was detrimental to the likely productivity of the reservoir.

It is usual to keep a company drilling supervisor on the rig at all times during footage contracts, although many of the traditionally operator decisions such as bit selection and drilling parameters will be made by the drilling contractor.

1.4 Turnkey contracts

With this kind of contract the operator pays the drilling contractor a lump sum to drill a well of a certain depth in a given area. It is incumbent upon the drilling contractor to procure all the well head and casing requirements, organise the third party services and generally fulfil all the normal operator's roles on the well.

It is probable that the operator will insist on rights of inspection at any time on the well. However, the operator will have no input into the day-to-day operations unless he has clearly stated in the turnkey contract that he wishes to retain that right. Since, in most areas of the world the operator can never give away the responsibility for oil spills in his license block, turnkey drilling has had a limited impact on the market. Notable exceptions to this are USA and China where local legislation makes turnkey drilling attractive.

The usual criticism of turnkey drilling by operators is their lost of control over operations. This is true with most existing turnkey contracts, but as mentioned earlier in this section, it is the operator who writes the contract. If you want control, write it into the contract. Most oil companies have very definite standard procedures covering BOP, stack testing and drilling practices. It is possible to write a turnkey contract insisting on these and ensuring that they are monitored. If the contractor did not like the contract then he would not sign it so nothing would be lost.

The usual criticism of turnkey drilling by contractors is their exposure to the risks of downtime or well problems. Consequently, they might insist on 'hole problem' or 'fishing' escape clauses from the turnkey contract during which they go on to a more conventional day rate. Also most contractors do not actively collate data bases on drilling information and are not involved in drilling optimisation on a regular basis. It is therefore difficult for them to adopt the conventional operator's role immediately, which is required for turnkey drilling.

As the technical competence of drilling contractors improves, turnkey drilling in some form will probably increase in popularity but with more detailed specific contracts than those of today.

1.5 Summary

The operator should select the contract style which suits his purpose best. The design of the drilling contract should be under continuous review to take advantage of changing conditions. In a large development with several strings running on a long term basis it is desirable to apply different contract styles in order to determine which is most effective for prevailing conditions.

When a drilling contractor is put on a footage contract, he invariably goes faster. This is an interesting situation since with the operator having less input into the drilling parameters, work progresses more quickly. Since the operator's own rigs probably out-perform the contractor's rigs, this in turn implies that the conventional drilling contract promotes inefficiency. By allowing the drilling contractor to perform periodically on an incentive or footage basis, a comparison between this performance and normal performance can be made.

If BOP handling takes 50 per cent less time on an incentive contract then one wonders why it took so long on the conventional contract. Allowing the contractor to drill occasional incentive contract wells gives the operator leverage when negotiating subsequent conventional contract wells.

The safety implications of incentive drilling must always be considered. Does the contractor speed up due to increased efficiency or by taking short cuts? Not all short cuts are bad but some do endanger personnel.

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  • verdiana
    What are the three key types of drilling contracts?
    3 years ago
  • Hagosa
    What is the detail about drilling contract.?
    3 years ago
  • semhar
    Who pays for the rig fuel in a typical offshore drilling contract?
    1 year ago
  • ruggero
    10 months ago
    How long are drilling contracts?
    10 months ago
  • Tommy
    Who pays for MODUE SPEC INSPECTION Operator or contractor oil and gas drill rig?
    6 months ago

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