CHAPTER 6 IDENTIFYING AND MANAGING THE BIG TICKET DRILLING CONTRACT RISKS

• Jurisdiction: United States

Oil and Gas Agreements: The Exploration Phase
(Mar 2010)
CHAPTER 6
IDENTIFYING AND MANAGING THE BIG TICKET DRILLING CONTRACT RISKS
Williams W. Pugh
Liskow & Lewis
Houston, Texas

William W. Pugh is head of the Houston office of Liskow & Lewis, and he has practiced Maritime, Oilfield, and Insurance Law with the firm since 1980. His practice involves a wide variety of matters, including drafting and negotiating numerous energy and offshore related contracts (such as master service agreements, drilling contracts, charters, and construction contracts) and helping companies, both domestically and internationally, develop comprehensive contracts that maximize the company's risk allocation. He participated in drafting the 2002 AIPN International Model Well Services Agreements and is currently co-chair of the AIPN Model Contract Committee that is drafting an international drilling contract and reviewing the Model Well Services Agreements.

Overview

▪ Impact of "regardless of fault" indemnities

▪ Recognizing the role of the drilling contract

▪ Effect of different reciprocal indemnity schemes

▪ Obtaining "pass-through" protection

▪ Analyzing how contracts have to fit together

▪ Enforceability and limitations on indemnity and role of insurance

▪ Drilling contract pitfalls

Drilling Contracts

▪ Include pass through provision

▪ Avoid inappropriate "magic" language

♦ "floating" - IADC contracts

♦ sound location provision

▪ Beware of assuming liability for damage to the drilling rig

▪ Beware of unintended risks

▪ Beware of broad consequential damage provisions

▪ Commercial and other provisions may be dangerous

♦ uncapped exposure for paying day rate during repairs

♦ uncapped exposure for paying standby rate

♦ liability for contractors hired by drilling contractor

Indemnity Structure Issues

Contractor's View

Operator's View

What Happens without a Pass-Through Provision?

▪ For every instance in which Company owes a broad reciprocal indemnity, but the underlying contract has no pass-through provision, Company has no recourse

Foreman v. Exxon - Contractual Situation

Foreman v. Exxon - Result

Options for Obtaining a Pass Through

▪ 1) Include contractual liability within scope of indemnity

▪ 2) Extend indemnity protection to those to whom Company owes contractual indemnity

▪ 3) Extend indemnity protection to other contractors and subcontractors (and others) as indemnified parties

♦ Use a broad defined term (such as "Company Group") to refer to a broadly defined group of indemnitees

▪ Each option has pros and cons

IADC Onshore Drilling Contract

IADC Onshore Drilling Contract - Preamble

▪ Except for such obligations and liabilities specifically assumed by Contractor, Operator shall be solely responsible and assumes liability for all consequences of operations by both parties while on a Daywork Basis, including results and all other risks or liabilities incurred in or incident to such operations

Indemnity Obligations Section 14.13

▪ Except as otherwise expressly limited in this Contract, it is the intent of parties hereto that all releases, indemnity obligations and/or liabilities assumed by such parties under terms of this Contract including, without limitation, Subparagraphs 4.9 and 6.3(c), Paragraphs 10 and 12, and Subparagraphs 14.1 through 14.12 hereof, be without limit and without regard to the cause or causes thereof, including but not limited to . . . the negligence of any degree or character (regardless of whether such negligence is sole, joint or concurrent active, passive or gross) . . . .

▪ The indemnities and releases and assumptions of liability extended by the parties hereto under the provisions of Subparagraphs 4.9 and 6.3 and Paragraphs 10, 12, and 14 shall inure to the benefit of such parties, their co-venturers, co-lessees, joint owners, their parent, holding and affiliated companies and the officers, directors, stockholders, partners, managers, representatives, employees, consultants, agents, servants and insurers of each . . . .

10. Sound Location

Operator shall prepare a sound location adequate in size and capable of properly supporting the rig, and shall be responsible for a casing and cementing program adequate to prevent soil and subsoil wash out. It is recognized that Operator has superior knowledge of the location and access routes to the location, and must advise Contractor of any subsurface conditions, or obstructions (including, but not limited to, mines, caverns, sink holes, streams...