CHAPTER 3 THE OIL WELL DRILLING CONTRACT
| Jurisdiction | United States |
(May 1983)
THE OIL WELL DRILLING CONTRACT
Calkins, Kramer, Grimshaw & Harring
Denver, Colorado ITS SIGNIFICANT PROVISIONS AND PROBLEMS
The concentrated study of one type of contract apparently so limited in application and in scope might seem unwarranted until it is considered that some 80,500 oil and gas wells were drilled in 1981 and 88,000 in 1982. The figures may be somewhat misleading because for this statistic a well has been classified as "drilled" if it was "completed" in the year even though it was spudded and substantially drilled during a prior year. While the number of wells anticipated to be drilled in 1983 will be somewhat reduced, consider the amount of money involved in drilling an average oil and gas well. It is calculated that the cost of drilling an average oil well completed in 1981 was $453,000. I have not been able to obtain the comparable figure for the year 1982. The per foot cost in 1981 was about $94.30 for each foot drilled.
The drilling of most of these wells was preceded by the preparation of a contract similar to the types which will be discussed in this paper. Such a large number of contracts of such value justifies this discussion.
Fortunately the parties to the contract do not have to call on their lawyers or contract personnel to prepare the contract without reference to or assistance of a generally recognized form of drilling contract.
FORMS OF DRILLING CONTRACTS
The pre-prepared forms most widely used are those prepared by the American Petroleum Institute (API). A second and widely used set of forms are those prepared by the International Association of Drilling Contractors (IADC). While both forms cover the basic elements required to be included in a contract providing for the drilling of an oil well, there are numerous and significant differences between the two sets of forms. These differences may represent in part, at least, the differences in the self-interest of the organizations which sponsored the preparation of the contracts. The American Petroleum Institute is a group which, while including representatives of the drilling industry, is heavily influenced if not dominated by representatives of the large producing oil companies.
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On the other hand, the International Association of Drilling Contractors is an industry group, the members of which are all primarily well drilling contractors, their representatives, subcontractors and suppliers. While both contracts are detailed and when properly completed and fully understood are fair, the Contractor most often perfers to use the contract prepared by his association and the Operator the API form.
I believe the IADC Contract covers more detail, is somewhat clearer and is easier for me to understand and follow. The IADC forms were revised last year and are dated January 1982. The API forms currently in use and those first used in the preparation of this paper are labeled Second Edition and are dated May, 1979.
The American Petroleum Institute has just revised its forms. The new form just hot off the press is a two part form, the first of which is captioned "Drilling Contract" and the second "Exhibit A, Bid Sheet and Drilling Order," these forms are identified as Model Form 4C1 and 4C2, First Edition, February 1983. Because it is anticipated that these 1983 forms will probably become more commonly used than the older API forms, these are the forms that will be examined later in some detail. While differences still exist between the new API forms and the January 1982 IADC forms, the significance of the differences is substantially reduced.
A third category of drilling contract forms include the forms a number of major oil companies have had specially prepared, usually by their legal staff for the purpose of clarifying ambiquities the company felt existed, or for the purpose of providing special protection for the preparing company which hopes thereby to avoid problems that company had encountered in wells previously drilled under an API or IADC form of contract. Most, but not all of these special forms, are modeled after or include significant portions of the old API forms. Only part of the wheel is reinvented.
TYPES OF DRILLING CONTRACTS
Footage Contract.
A footage contract is one which provides for the payment to the Contractor of a stipulated price per foot of hole drilled, which payment is earned on obtaining the contract depth or other specified objective described in the contract. The contract also necessarily contains provisions for the payment of a portion of the Contractor's services at
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"day work" rates when certain specified circumstances arise, such as when drilling below the contract depth, during testing of the well; or in the event impenetrable substances, abnormal pressures are encountered, or lost circulation occurs. The latter are unanticipated conditions, the risks of which or extra costs attributable thereto, if such condition is encountered by the drilling Contractor, are sought to be placed on the Operator. The parties to this contract generally view it as placing most of the risk of accomplishing the drilling of the well to the contract depth or objective formation on the Contractor. Because of the current economic conditions in the oil well drilling industry, more and more footage contracts are being neogtiated.
Day Work Contract.
A day work contract is one which provides for the payment to the Contractor of a stipulated sum for work performed per 24-hour day or portion thereof. The charge is prorated according to the portion of days during which work is performed or when the rig is on standby time. The stipulated sum may vary during the performances of the contract, depending on a number of factors such as the size of the crew or whether or not the Contractor's drill pipe is being used. The parties generally, and especially the Contractor, believe this contract puts all but certain identifiable risks on the Operator. Under this form of contract the Operator has the exclusive right to direct the operations. The Contractor generally compares the arrangement under this type of Contract to one where it is renting its rig, related equipment and crew to the Operator.
Turnkey Contract.
A turnkey contract is one which provides for payment to the Contractor of a stipulated sum for the drilling of a well to a specified depth or objective formation. Under this form of contract certain exceptions to the Contractor's obligation to reach the specified depth may be included. These exceptions may include encountering substances nearly impossible to drill through, in which event the Contractor may be relieved of his obligation to reach the specified depth and still be entitled to be compensated. Also the contract may provide for extra charges if extraordinary quantities of water or mud are required in the drilling. Obviously, this type of contract puts substantially all of the risk of reaching the contract depth on the Contractor.
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Other special types of contracts include the following:
Offshore Contract.
The International Association of Drilling Contractors has a pre-prepared form of contract for offshore drilling. While this contract includes a number of provisions necessary because of the transportation to and from the location and because of the application of marine law, many of its provisions are identical or similar to those included in the so-called Land Contracts.
International Contracts.
The International Association of Drilling Contractors also has two pre-prepared forms of drilling contracts one captioned "International Day Work Drilling Contract — Land" and the other "International Day Work Drilling Contract — Offshore." These contracts contain special provisions required because of the fact that the operations are taking place in a foreign jurisdiction. Such provisions relate to expropriation, confiscation, war risk, etc., and to the manner of payment for services and the form of currency to be used.
North Slope Contract
To my knowledge this type of contract, because of the location of the operations, its inaccessibility, and the severity of conditions under which the operations are conducted, are each specially created. I understand that each of these contracts resembles a printed book.
DETAILED ANALYSIS OF A DRILLING CONTRACT
Rather than describing what ought to be in a drilling contract, because of the existence of acceptable forms in wide use, the following discussion is of what is in a pre-prepared and readly available drilling contract. Because it is likely to be used to cover more of the wells to be drilled on land in the lower 48 states than any other single form of contract, the new form of API drilling contract earlier referred to will be studied in some detail. Additional copies of the forms may be purchased from the Production Department, American Petroleum Institute, 211 North Ervay, Suite 1700, Dallas, Texas 75201. The IADC forms
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may be obtained from the International Association of Drilling Contractors, P.O. Box 37414, Houston, Texas 77036.
This form which consists of two separate parts, the "Drilling Contract," and "Exhibit A, Bid Sheet and Drilling Order" ("Drilling Order"), has been cleverly designed to be used in situations which under the older API forms, circa 1979, required two sets of forms, one for a single well contract and another for a well which was part of a multiple well situation. Occasional confusion resulted in using the old forms, when the separate parts were not properly matched.
The new API form merely requires the designation as a Master or a Single/Multiply Well(s) Contract. This designation must be accurately made on both the Contract and the Drilling Order.
The form also may be used whether the work is to be performed on a "footage" basis or on a "day work" basis. The designation of the applicable...
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