Sometimes a “transition document” between the policy and procedure manuals of the operator and the drilling company is needed to avoid confusion when the two do not agree on all points. Transition documents are very important from a practical and legal point of view. With an oil price of over $100 in recent years, this is a favorable market for drilling companies: high platform rates and favorable contract terms for drilling companies; However, with oil prices falling below $50 and, as a result, reducing oil companies` spending budgets, oil companies will strive to reduce the cost of their existing drilling contacts and secure better terms (including lower drilling rates) for their new drilling contracts. This will likely have two main implications: while a drilling contract may contain breach and termination provisions comparable to other service and related agreements, there may be a number of situations that can only occur during drilling. Unique situations that may seem obvious must be explicitly addressed in the agreement if the parties are to have certainty about contractual rights and obligations in the event that such a situation occurs. For example, if the drill rig classification expires during the term of the agreement, does that constitute a violation of the agreement? Does a violation occur after a certain number of days when the rig is not operational and, if so, are those days cumulative during the contract period or for a certain period of time? Should the foregoing give rise to termination rights or is damages an acceptable remedy? The contract must be specific with regard to the violations that may result in termination. The operator will solicit bids from a number of drilling companies that are able to perform the work. The operator specifies the type of equipment and the desired drilling capacity, for example: A “turnkey” contract provides that the drilling contractor receives a fixed price for drilling a well to a certain depth or formation. A drilling contractor assumes a higher risk under the turnkey contract than under other types of contracts because they have general control over all operations. Turnkey contracts are often tailored to the specific drilling conditions that may arise. Drilling contracts are at the heart of upstream operating agreements.
They come in many forms and are traded to varying degrees, depending on the value of the contract, the level of risk, and the existence of regional forms that can dictate conditions. This article mainly focuses on the terms and conditions of a typical long-term, high-paid, daily rate offshore contract; However, many of the terms discussed apply to the entire spectrum of drilling contracts. The terms chosen for discussion do not purport to be exhaustive; They should be considered illustrative and are intended to highlight the care that should be taken under the terms of the contract, which are often unique to a drilling contract. It is in the best interest of the platform owner and operator to ensure that there is a clear and definable time and space for mobilization and demobilization. Under the terms of an agreement, daily rates can begin and end with mobilization and demobilization. This is often achieved by naming a site in specific proximity to the project area. There are often other conditions of mobilization, which may include the place or port of origin (which may affect customs at destination) and other applicable and appropriate conditions and/or agreements that apply to a particular transaction. Another important factor related to mobilization is inspection by the operator before mobilization or before the start of commissioning. Where and when do inspections take place and what are the consequences if the drill rig does not comply with the technical requirements of the contract? Operators engage a mobile offshore drilling unit (MODU) for a specific well or drilling program or for a specific period of time (a “fixed-term contract”). The relationship between the operator and the drilling contractor operating the MODU is defined in a contract.
Safety in the allocation of risk and the assumption of responsibility are crucial when negotiating and documenting the terms of a drilling contract. Each party needs a clear understanding of the risk it assumes in order to be able to assess the feasibility of the contractual relationship from a commercial point of view. If a certain period of time is taken into account in a drilling contract, in the event that drilling is carried out at the end of the specified period, arrangements must be made for the final well. The parties agree on the contractual parameters according to which an ongoing well will be completed or suspended prior to the termination of the contract. Safety prescribes minimum conditions and, from there, the parties agree on certain points in the drilling and completion process that trigger termination and begin the demobilization process. In the past, the daily employment contract was the most frequently used form. A full-day employment contract provides that the drilling contractor receives a fixed rate for work performed over a period of twenty-four hours. The amount of the daily work rate depends on a number of factors, including the type of platform, the size of the crew, etc. A day employment contract may provide for lump sum payments for specialized work. The exploration and production (E&P) segment of the international oil and gas industry is likely the riskiest in terms of capital intensity and long payback periods; Technological dependence and a variety of legal/environmental compliance requirements. The drilling contract is one of the most important contracts for an operator.
The duration of the contract is usually determined by the number of wells the operator wishes to drill. He must decide whether a fixed-term contract or a contract for a certain number of wells is best for his program. The use of a long-term contract is usually determined by market conditions, with a tight platform market generally leading to fixed-term contracts. This is especially true if it is a new platform. The drilling contractor`s financial institutions may require a reasonable repayment of the loan before the contractor can sign a contract and build the unit. These are often points negotiated in a drilling contract and are determined by a variety of factors, including current market conditions, unique conditions surrounding a particular drilling rig or project, factors related to the time of commencement, and the internal requirements of the owner and operator of the rig. In general, the most productive operations are carried out with good, achievable cooperation agreements that involve goodwill between the operator and the drilling contractor. Getting the most difficult bargain, up to selecting every contract clause, every possible chargeback position, the strongest possible compensation, the elements of mobilization, etc., usually leads to harsh feelings and less productive operation. In other words, if the relationship is very hostile and convoluted, it will lead to a difficult working relationship. Another common problem occurs when an operator decides to coordinate the drilling contractor`s equipment and personnel via the driller`s position instead of communicating via the Offshore Facility Manager (OIM).
This can harm the entire operation if the drilling company`s personnel suffer from loss of initiative, cooperation and sense of responsibility or ownership. While many agreements provide for assignment rights, this right is often claimed in long-term drilling contracts. Although the term “assignment” is often used, what is often heard (and what the terms of the contract sometimes reflect) is a novation of the agreement (the legal transfer of all or most of the rights and obligations from one operator to another operator). The contract must contain the terms of the assignment (and preferably a form of assignment contract). The correct drafting of these terms and some form of assignment (or novation) can save the parties a lot of time and frustration when reviewing an assignment. Since assignment agreements often provide for the reallocation of a drilling rig, the assignment agreement contains conditions that may limit certain rights of the assignee, clearly define when the assignment and reallocation take place, establish communication channels during the assignment period that generally affect the assignee, and generally determine the relationship between the parties during an assignment period. The allocation of risk under a drilling agreement is often determined by each party`s insurance profile and risk management objectives, taking into account the appropriate placement of commercial risk associated with the operator and owner of the platform. .