New Type of Drilling Contract Minimizes Well Costs by Guaranteeing Performance (includes associated paper 18724 )
Authors: Geffner J.A. 
Published: December 2007

Most current drilling contracts are eitherdaywork, where the operator assumes all risks;turnkey, where the contractor assumes all risks; orfootage, where the operator assumes most risks and the contractor is paid on the basis of the length of hole drilled.

In a new type of contract, "shared risk," each party assumes the risk it is best qualified to accept. The operator assumes the risk of geology, location-dependent factors, and weather, while the contractor assumes the risk of drilling performance.

The shared-risk drilling contract provides a tangible incentive for the contractor to provide better-than-average performance, while the operator is allowed to retain full control over the parameters that result in a well drilled to desired specifications at the lowest possible cost.

Introduction

Historically, most drilling contracts were on a daywork or footage basis. In new areas, for very deep wells, marine operations, and in areas of hazardous drilling conditions, the daywork contracts were prevalent. In those areas where drilling costs could be predicted with reasonable accuracy, footage bids were used in some cases. In recent years, the turnkey drilling contract, where all risks are assumed by the contractor, has grown in popularity with some operators.

In footage and turnkey contracts, the contractor assumes some risk, but adds the cost of potential risk to the bid price. As the operator delegates risk to the contractor, control of the drilling parameters, which lead to the most desirable end product, is lost. Incentives to the contractor vary with the risk assumed.

The shared-risk concept was developed to provide an incentive to the contractor without requiring the operator to relinquish control of the drilling parameters. It provides benefits to both parties because each assumes the risks it is best qualified to handle. The concept is based on the contractor predicting and guaranteeing performance.

Daywork Contract

In the daywork contract, the contractor provides the drilling rig, crews, and sometimes fuel, catering, and other specified services. The operator provides all other items, including mud, casing cement, wellhead, bits, transportation, and a wellsite supervisor to control such drilling parameters as bit selection, weight on bit (WOB), rotary speed, mud properties, and the hydraulics program. The contractor is paid a flat rate for each day the rig is on the well. The only risk to the contractor is the time the rig is unable to perform because of equipment breakdown. (A certain number of hours of downtime are paid for in most contracts.)

The operator assumes all risks on the well, including higher-than-anticipated pressures, lost circulation, stuc pipe, fishing, slower-than-anticipated drilling rates, and weather. The operator has control over all drilling and mud parameters.

There is little tangible incentive for the contractor to provide additional service above the minimum acceptable level.

Turnkey Contract

In the turnkey contract, the operator specifies such items are required logs, minimum hole size at total depth (TD), minimum acceptable mud properties, and certain other items that must meet minimum specifications. Other than conditions specifically listed in the contract, the operator relinquishes well-drilling control and all risks to the contractor. In some turnkey contracts, time lost because of weather, specifically hurricanes, is paid for by the operator.

Because the contractor is assuming all risks, it is necessary to increase the actual anticipated "cost" of the well to offset such potential risks as fishing, lost circulation, slow drilling rates, or problems caused by higher-than-anticipated pore pressures. The possible cost of such risks is added to the estimated actual cost, plus a profit margin, to obtain the turnkey bid price. The operator will pay for these "risks" whether or not they are encountered during drilling of the well. In return for this higher price, however, the operatoris guaranteed a fixed total cost if all the terms of the contract are fulfilled andpays nothing if all the conditions are not fulfilled.

The contractor is often required to plan the well at minimum cost to have an acceptable bid and must then drill the well under conditions to maximize profits. This can lead to possible conflicts with overall well quality if problems are encountered. The operator must include very stringent restrictions in the bid and contract and often will maintain a representative at the wellsite to ensure that hole quality is up to the operator's standards.

Footage Contract

In areas where drilling costs can be reasonably predicted - primarily in onshore areas where numerous well have been drilled - the footage drilling contract has been used. The contractor is paid an incremental price for each foot of usable hole drilled. The contractor usually provides the rig, fuel, water, bits, tools, and labor to run the casing, and allows time for such operations as logging, cementing, running casing, and waiting on cement. The contractor assumes risk in that if the hole has to be abandoned before contract depth is reached, no payment is received for the hole drilled. Several methods are included in the standard footage contract by which the contractor is relieved of this risk assumption. These include mud weight requirement higher than the contract limit (often 12.5 lbm/gal [1498 kg/m3]), encountering pore pressures that require raising the mud weight by an increment exceeding contract limits (often 1 lbm/gal [119.8 kg/m3]), and lost circulation that requires drilling to be stopped for longer than the contract limit (often 24 hours). Upon encountering one of these limiting conditions, the contractor is paid for the footage drilled up to that point, and all further work is done at daywork rates. Another clause contained in many footage contracts states that if the contractor would make less money per day by drilling on a footage basis than on a daywork-rate basis- usually as a result of slow penetration rates (ROP's) - daywork rates will apply.