Osmundson_subbed.qxp 27/3/09 04:06 Page 74
Incentives for Drilling Contractors
satisfactory operational efficiency. Consequently, contractors are bound influence the progress of a drilling operation. Second, the oil
to be innovative over time. However, not everyone agrees that the company normally reserves the right to adjust the drilling
short-term reward for offering particularly high quality is adequate. programme by changing wells, drilling depths and so forth. This calls
for a flexible compensation format. Remuneration per metre drilled
Information that must be provided by bidders includes: would be complex here, since conditions would have to be
renegotiated each time the oil company made changes.
• percentage downtime;
• drilling efficiency for the past six wells: Conclusion
• water depth; Combined with a substantial increase in contract length, the scarcity of
• mooring time; rigs has prompted a number of discussions over possible changes in
• loss of time; and contractual and organisational patterns for drilling on the NCS. New
• repair time. incentive elements have been incorporated in oil service contracts, but rig
contracts mostly remain unchanged. Paradoxically, a trend towards
The challenge for procurement personnel is that different wells are not reduced pressure in the rig industry could lead to the new design of rig
readily comparable, and contractors cannot automatically be contracts being tested, since rig contractors could then feel under pressure
compared on the basis of efficiency parameters. Nor is it the case that to accept more risk. Most genuine incentive systems require a certain
one contractor alone can influence operational efficiency. Penalising amount of risk to be borne by the contractors; however, in conditions
inefficient contractors can often be difficult too, since the number of where lower rates prevail, contractors will be less able to bear this type of
players is so small and since a seller’s market prevails at times. risk. It is thus unfortunate that contractors were not more active in trying
However, technical and qualitative evaluation criteria can be used to out alternative compensation principles during the recent boom.
assess bids; this is the case to a certain extent. Communicating what
weight will be given to such criteria ahead of the bid evaluation Rig contractors must be challenged to design contracts that are suitable
process then becomes important. The terms for awarding contracts for new small companies on the NCS. These will require a different
must be auditable, both in-house and towards the licence. Comparing approach to risk sharing than existing agreements. Today’s contracts
the historical efficiency of contractors presents a challenge in this area reflect the fact that traditionally, players on the NCS have been large
because operations are not directly comparable between fields with international companies with high risk tolerance and great expertise in
differing geological structures and varying water depths and managing drilling operations. This does not apply to many of the new
pressures. Here, buyers must make adjustments to achieve the closest companies on the NCS, who will want to pass more risk over to
possible comparability. However, the significance of this issue is contractors and who are much more dependent on purchasing external
reduced as base data increase, since field-specific conditions are expertise. To satisfy this demand, contractors must expand their
evened out in a portfolio of projects. Expanded base data are acquired expertise base and develop suitable risk management systems.
partly by the contractors providing technical information obtained However, risk exposure must be carefully matched at all times to the
from work for other operators and partly by swapping contractor ability of the contractors to bear it. Research shows that turnkey
performance indicators between operators on the NCS. contracts are primarily utilised for exploration wells drilled from jack-up
rigs in shallow waters, and that the oil companies using such
The compensation format for rig hire used to be based on payment agreements are small enterprises with limited experience and financial
per metre drilled. Today’s industry standard is day rates, which are strength. Exploration wells in the North Sea should fit this description
differentiated in accordance with operating status: for some of the new companies on the NCS. Well intervention is
another possible example. However, establishing such contracts
• drilling rates; requires that drilling companies exist that are willing to bear the
• stand-by rates; and increased risk and to expand the range and scope of their services.
• mobilisation rates. There are few signs that this is the case with today’s contractors, in part
because a clear distinction exists between drilling and oil service
If a contractor cannot provide a rig that meets the technical providers and because none of these appear willing to bear reservoir
requirements at the agreed date, a zero rate applies. This means that and oil price risk.
the contractor stands to lose US$500,000 per day, for example. This
provides a very strong incentive to ensure uptime. Pursuant to the The authorities and the industry have a common interest in reversing
contracts, oil companies normally also have the opportunity to the negative trend in drilling efficiency on the NCS. Should this
cancel if the commencement of work is delayed by a specified reduction result in the loss of resources that might otherwise have
number of days. This represents a major risk in relation to downtime been recovered profitably, it would also be a matter of concern from
in the contractor’s portfolio. On the other hand, the contractor is a socioeconomic perspective. However, rapid drilling is not always
best placed to influence the status of an operation. However, compatible with good reservoir utilisation and efficient information
consequential costs associated with drilling delays – which can be gathering, so a trade-off must be made here. The interests of oil
substantial – are not passed on to the contractor. companies with a fairly long planning horizon will partly coincide with
those of the government where reservoir utilisation is concerned.
The most important reason why rig hire is not tied to the number of However, conditions could clearly arise – through company pressure
metres drilled is because this lies largely outside the contractor’s on liquidity, for instance, or on reaching specific indicators – where
control. First, there are a large number of oil service companies that the authorities ought to keep a close eye on reservoir utilisation.
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