Legal Definitions - drilling contract

A drilling contract is a specialized agreement in the oil and gas industry made between a company that owns or leases mineral rights (the "operator") and a drilling contractor. The drilling contractor owns and operates the drilling rigs and associated equipment needed to extract oil or natural gas. This contract outlines the specific terms, conditions, and responsibilities for drilling a well, including payment structures, operational control, and liability for any damages or incidents that may occur during the drilling process.

• Example 1: A small independent energy company has acquired a lease for a promising natural gas field but does not own its own drilling rigs. They enter into a drilling contract with a specialized drilling company to drill a series of production wells. The contract specifies the number of wells, the general depths, safety protocols, and the payment schedule, ensuring both parties understand their roles and obligations.
• Example 2: A large multinational oil company plans to explore a new deepwater prospect in the Gulf of Mexico. They sign a comprehensive drilling contract with a major offshore drilling contractor. This contract is highly detailed, covering the use of advanced deepwater drilling technology, strict environmental compliance measures, emergency response plans, and the qualifications of the personnel involved, reflecting the high risks and complexities of the operation.

A daywork drilling contract is a type of drilling contract where the operator hires a drilling rig and its crew, paying a set amount based on the time spent drilling (e.g., per day or per hour). Under this arrangement, the operator retains significant control over the drilling operations, directing the contractor's activities. Because the operator has broad control, they also assume a greater degree of liability for any damages or issues that arise from the drilling.

• Example 1: An oil company is drilling an exploratory well in an geologically complex area where conditions are highly unpredictable. They opt for a daywork contract so their own team of geologists and engineers can be on-site, constantly monitoring data and making real-time decisions about drilling direction, depth, and fluid composition. They pay the drilling contractor a daily rate, and if a problem occurs due to their specific instructions, the oil company is primarily responsible.
• Example 2: A research and development division of an energy company is testing a novel drilling technology. They engage a drilling contractor under a daywork agreement. This allows the R&D team to experiment with different parameters, pause operations for extensive data collection, and directly instruct the drilling crew on experimental procedures, knowing that the company bears the primary risk associated with the innovative, unproven techniques.

A footage drilling contract is a drilling contract where the drilling contractor is paid a predetermined amount for each foot drilled to a specified depth or geological formation. In this arrangement, the contractor typically has broad control over how the work is performed, including selecting drilling methods and equipment. The risk of unexpected delays or operational inefficiencies, as well as most liabilities, generally falls on the contractor rather than the operator, as the contractor's payment is tied directly to the footage completed.

• Example 1: A natural gas producer needs to drill several standard vertical wells in a well-understood conventional gas field. They enter into a footage contract, agreeing to pay the drilling contractor a fixed price per foot until a specific gas-bearing shale layer is reached. The contractor is incentivized to drill efficiently and quickly, as their profit depends on completing the footage within their cost estimates, and they bear the risk if they encounter unexpected hard rock that slows them down.
• Example 2: An energy company plans to drill a horizontal well that requires reaching a target depth of 8,000 feet vertically and then extending horizontally for another 6,000 feet within a specific oil-producing formation. They sign a footage contract where the contractor is paid per foot for both the vertical and horizontal sections. The contractor has the autonomy to choose the most effective drilling bits and techniques to achieve the required footage, and if they experience equipment failures or minor geological issues that cause delays, the financial impact is primarily theirs.

A turnkey drilling contract is a drilling contract where the drilling contractor agrees to perform specific functions or deliver a completed well for a single, agreed-upon fixed price. Under this type of contract, the operator has very little or no discretion to control the day-to-day drilling operations. Consequently, the operator assumes little or no liability for damages or problems that may arise during the drilling process, as the contractor is responsible for delivering the final product as specified.

• Example 1: A private equity firm has invested in an oil and gas project and wants to minimize their operational involvement and risk. They engage a drilling company under a turnkey contract to drill and complete three production wells, ready for connection to a pipeline, for a fixed lump sum. The private equity firm has minimal input on the drilling methods, and the drilling contractor is responsible for all aspects, from site preparation to well completion, bearing most of the operational risks and liabilities.
• Example 2: A small exploration company with limited technical staff wants to drill a single exploratory well to a specific depth to gather geological data. They sign a turnkey contract with a drilling company. The contractor is responsible for everything, including obtaining permits, drilling the well, collecting core samples, and even abandoning the well if it proves to be dry, all for a predetermined price. The exploration company simply awaits the final report and samples, with the contractor managing all the operational details and associated risks.