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Offshore drilling agreements
Operators contract a mobile offshore drilling unit (MODU) for a specific well or drilling program, or for a specific period of time (a "term" contract). The relationship between the operator and the drilling contractor that operates the MODU is specified in a contract.
Offshore drilling contracts
The length of the contract usually is determined by the number of wells the operator wants to drill. He must decide whether a term contract or a contract for a specific number of wells is best for his program. The use of a long-term contract is usually driven by market conditions, with a tight rig market usually resulting in term contracts. This is especially true if a new rig build is involved; the drilling contractor’s financial institutions may require a reasonable payback on the loan before the contractor can sign a contract and build the unit.
Although economics is the primary driving force, various factors enter the minds of the drilling contractor and operator when a potential MODU contract is at hand, including:
- MODU capability
- Market conditions
- Operating performance
The operator will seek bids from a number of drilling contractors capable of performing the work. The operator will specify the type of equipment and drilling capability desired, such as:
- The size of mud pumps
- Mud pit volume
- Hoisting load
- Drillpipe size and length
- Water depth capability
- Variable Deck Load (VDL)
- Pressure rating of equipment
- Size of well-control equipment
The operator will also ask for specifics about the drilling contractor’s health, safety, environment, and security (HSE&S) program and request statistics showing past performance. The operator may also request copies of specific policies and procedures the drilling contractor has in place. The operator will also have a preferred drilling contract.
When it is a buyers’ market for rigs, the operator will have a strong position to use his formulated contract with few negotiated changes; however, in a sellers’ market, the drilling contractor will try to use his formulated contract, which of course favors the contractor’s position.
The contract, including the International Association of Drilling Contractors (IADC)-suggested offshore contract model, usually contains:
- Equipment and capabilities exhibit
- Liability clauses
- Payment terms
- Crew complement
- Description of work to be performed
- A “menu” of who will pay for what services and materials
- Termination provisions
- Day rates and other charge items
- Terms for settlement of contract disputes
- Numerous exhibits on:
- Items required by law (e.g., equal opportunity)
- Policies of both companies, etc.
Sometimes a “bridging document” is required between the operator’s and drilling contractor’s policy and procedures manuals to eliminate confusion if the two do not agree on every item. Bridging documents are very important from a practical and legal standpoint.
A characteristic of the upstream oil and gas industry is the strong and unique cultures developed by operators and contract drilling companies. Although less so these days than in years gone by, egos and individualism often enter into the relationship between operators and drilling contractors, especially at the higher management levels. Some operators are very conservative and are willing to pay more for less trouble and rig downtime, greater safety, and higher-end rig capabilities. Of course, conservative drilling contractors usually work best with conservative operators. On the other hand, some operators are more freewheeling, “cut closer to the bone” so to speak, and work, for example, on a front-end cost basis, and they work best with drilling contractors who work the same way.
Generally, the most productive operations are done with good, workable, and cooperative arrangements laced with goodwill between the operator and drilling contractor. Driving the hardest bargain possible to the point of picking at every contract clause, every possible charge-back item, strongest possible indemnities, mobilization items, etc., usually results in hard feelings and a less productive operation. In other words, if the relationship is very adversarial and convoluted, it will result in a difficult working relationship. Another common problem occurs when an operator decides to coordinate the drilling contractor’s equipment and personnel down through the driller’s position rather than communicate through the Offshore Installation Manager (OIM). This can be detrimental to the whole operation if the drilling contractor’s personnel suffer from loss of initiative, cooperation and a sense of responsibility or ownership.
If the operator has a defined drilling program for a long period (e.g., a 2- or 3-year period), the operator will generally obtain a “fit-for-purpose” MODU at a competitive price that molds itself into the operator’s culture and routine during the term of the contract. This usually results in:
- Higher efficiency
- A safer operation
- Less trouble time
- Less downtime for the operator and the drilling contractor
- A more team-oriented effort between the parties
- A more cost-effective, trouble-free operation—a truly “win/win” situation
Unfortunately, not all operators can put together a drilling program of this duration, eliminating the potential for this type of relationship to develop.