A drilling agreement is typically entered into between parties for the purposes of drilling an oil well. Such agreements are widely used in the oil and gas industry. Drilling an oil well is a costly and risky affair and hence it is advisable to have a written agreement in place. Detailed clauses pertaining to the type of agreement, financials, technicalities, etc. need to be incorporated. Owing to the complex nature of such agreements, standard forms of drilling contracts have been drawn up by various associations. For example, the American Petroleum Institute has drawn up a standard form of the drilling contract.
What is the Purpose of a Drilling Agreement?
A standard drilling contract is typically used by oil and gas companies for drilling oil wells. It systematizes and standardizes a risky, costly, time-taking activity. Having standard terms and conditions in place assures timely performance, quality check, and cost control. The contractor too is assured that his compensation would be made in accordance with the agreed terms. Moreover, drilling a well is subject to a lot of exigencies including unforeseen natural events. Having a proper contract in place protects both the parties from such events. It also makes dispute resolution between the parties a costly and less chaotic affair. The jurisdictional clause becomes important due to the international nature of the agreement and the work.
Inclusions in a Drilling Agreement
A drilling agreement is a complex agreement by virtue of the risk and financials involved. Apart from the commercial and operational terms, it is pertinent to include certain standard clauses which protect the interests of the parties. Such clauses inter alia include names of the parties, effective date, interpretations, jurisdiction, and severability.
Key Terms of a Drilling Agreement
The following key terms should be included in a standard drilling contract:
- Description of responsibility for furnishing equipment: The party (the contractor or the party awarding the contract) responsible for furnishing the equipment should be mentioned. This should depend upon the negotiations between the parties.
- Third party services: If any third parties are being engaged to provide services, they should be mentioned.
- Drilling contractor’s default: All possible default events should be listed down in order to prevent the occurrence of the same.
- Casing and cementing: A well is typically cased and cemented from outside. This clause ensures that a proper casing and cementing is done.
- Drilling methods and practices: The parties may discuss and negotiate regarding what methods and practices need to be adopted.
- Insurance requirements: Any technical defect in the well may cause heavy monetary damage to the party hiring the drilling contractor. Hence, insurance requirements need to be inbuilt in the contract.
Drafting a Drilling Agreement?
The following guidelines should be kept in mind while drafting a drilling agreement or contract:
- There may be several parties to a drilling contract, hence, caution must be made to define and describe each aptly.
- Timelines should be properly mentioned.
- Provisions should be made for amendment in the contract based on the consent of both the parties. Such amendments should be required to be in writing.
- The specifications of the well should be clearly illustrated in the contract.
- Compliance with applicable law and statements showing that proper permits and licenses for the same have been duly obtained.
Types of Drilling Contracts
The various types of drilling contracts are as follows:
- Day-work contracts: A ‘day-rate’ or daywork contract provides that the drilling contractor be paid a pre-agreed price over a period of twenty-four hours for the work performed. The contractor in this type of contract assumes only limited risks.
- Footage contracts: A footage contract stipulates payment based on the quantity of the work performed. For example, the contractor shall be paid on per foot basis.
- Turnkey contract: this is a standard form of contract where the contractor receives payment in lieu of digging the well. This is typically used for agreements such as a water well drilling agreement.
Drilling contracts and master service drilling agreements
Big oil companies may routinely need to hire services for drilling of wells. If the nature of the task is routine and recurring, then it is preferable to enter into a master services agreement for the same. A master services agreement would outline the broad terms and conditions and hence make the negotiation process easy. The terms of a master services agreement are typically in favor of the oil companies as they have more negotiating power. A master service drilling contract would include all parties such as third-party service providers and sub-contractors in addition to the operator and main contractor.
Benefits of drilling contracts
Drilling contracts have the following benefits:
- Keeps all the parties on the same page.
- As a drilling contract involves multiple parties and stakeholders and is a complex arrangement involving various aspects, having a written down standard form helps in proper and timely execution.
- It reduces the risk.
- It curtails the costs.
- Puts proper procedures and timelines in place.
- Having a master services agreement for drilling also helps in defining the relationship between the parties.
- Makes dispute resolution easier and simpler.
Sample Drilling Agreement
A drilling contract is typically used to drill oil wells. Sometimes such a contract may be entered into for the purposes of drilling other types of wells such as water wells. An oil well is usually required by oil companies. Such companies have an international nature of operations and hence, it becomes difficult to affix jurisdiction and choice of law in the event a dispute arises. Hence, the dispute resolution clause of a drilling contract is the most difficult to draft. Typically, arbitration is suggested as the preferred dispute resolution method in drilling contracts.
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