DRILLING SERVICES AND CONTRACTS

Drilling contract is usually drawn following allocation of costs to the various drilling procedures. Controlling costs, including estimating future drilling costs is a large part of the Drilling Engineers responsibility. After estimating the cost of a well, approval for that money is requested from management. The application is supported by a very detailed cost estimate, hence an understanding of cost allocation is necessary.

COST SPECIFICATIONS

Drilling costs can be broken down into three groups:

Fixed

Daily

Unit

Fixed costs

Fixed costs are those which are determined mainly by the nature of the well and include

the following:

Wellheads

Site preparation

Casing, cement, tubing and packers

Drilling contract is usually drawn following allocation of costs to the various drilling procedures. Controlling costs, including estimating future drilling costs is a large part of the Drilling Engineers responsibility. After estimating the cost of a well, approval for that money is requested from management. The application is supported by a very detailed cost estimate, hence an understanding of cost allocation is necessary.

COST SPECIFICATIONS

Drilling costs can be broken down into three groups:

Fixed

Daily

Unit

Fixed costs

Fixed costs are those which are determined mainly by the nature of the well and include

the following:

Wellheads

Site preparation

Casing, cement, tubing and packers

Daily costs

Daily costs are related to the time spent on the operation which is usually dependent on depth versus day/time plot

On offshore rigs, they are usually the largest items of expenses and are listed below:

Payments to drilling contractors (rig time)

Tool rental

Payment to specialist services

Salaries, wages etc

Fuel

Lubricating oil, grease

Drilling consumables (rope, soap and dope)

Transport of materials

The Drilling Supervisor on site, the Drilling Manager and Drilling Engineers can all have an effect on daily costs.

Unit costs

This is the price of a unit or a commodity such as the price per tonne of barite or bentonite. This can usually be optimized in the tendering process, which is usually the responsibility of the Drilling Manager. Furthermore, good site supervision can ensure that consumption is not excessive.

COST BREAKDOWN OF DRILLING OPERATIONS

At present, as the oil industry is coming out of recession, the costs for individual types of rig is varying considerably. The table below illustrates the average cost comparisons between rig types at time of writing:

Rig type	Total daily drilling costs ($/day)
Land rig (shallow)	15000
Land rig (deep)	25000
Platform rig	50 000
Jack-up rig	95 000
Semisubmersible	75 000

AUTHORISATION FOR EXPENDITURE (AFE)

After estimating the cost of a well, approval for that money is requested from Management.The application is supported by a very detailed cost.“Approval For Expenditure” or “Authorization For Expenditure” (AFE) is therefore a detailed cost estimate which is submitted for management approval to allocate money. The AFE is the tool that is used for predicting the cost of a proposed well. The accuracy of the AFE depends on the amount of available information used to construct it. As operators, we need to know how much a well is going to cost if it is dry, tested or completed. Consequently, AFEs should be broken down into sections to allow us to see at a glance how the various well options compare financially. Component parts of AFEs for onshore and offshore wells are shown below.

AFE components

Both the onshore and offshore AFEs are broken down into the following sections:

-Preparation

-drilling and abandonment

-testing

-completion

Preparation

This part of the AFE covers the costs incurred to the point at which the rig is brought on to location. For onshore wells this would include site building and well engineering as the main cost centres. For offshore wells, the main cost centres are site surveying and well engineering. Included in this section should also be all the costs required to bring the location back to its original condition.

Drilling and abandonment

This is the ‘dry hole’ drilling component of the well. It assumes drilling to TD, logging and finding nothing of interest. The well is, therefore, proposed for abandonment and costed accordingly.

Testing

This is the additional cost incurred by a testing programme. It is not only merely the testing cost charged by the testing company but must also include all the ongoing daily costs associated with the rig such as:

• rig day rate
• fuel oil
• site personnel
• office personnel
• office overheads

 

Completion

This is the further additional cost incurred following testing once the decision to complete the well has been made. As with testing, the cost centres are not only the cost of completion equipment and services but also the costs of:

• rig day rate
• fuel oil
• extra casing string if run
• perforation
• site personnel
• office personnel
• office overheads.

Estimating costs

If there are similar, recent wells in the area to be drilled, most costs can be estimated fairly readily. If, on the other hand, you are planning a well in a new area, then the task is much harder. By calling up the following service companies and asking for budgetary figures, the main cost centers can be addressed:

• drilling contractors
• mud loggers
• electric logging companies
• mud companies
• cementing companies
• bit companies
• casing companies
• wellhead companies
• tool rental companies
• coring companies

DRILLING CONTRACT

Contract Procurement

While the drilling contract is not a part of the well plan per se, it is an integral part of the well planning process. Drilling engineers do not usually enter directly into the contract process, but they do provide rig specifications for the bid request.

A bid is a tender, proposal or quotation submitted in response to a solicitation from a contracting authority. By law, government agencies are required to issue bids publicly whenever they are in need of a specific product or service.  The bids will be sent to you based on your business scope and industry type

Bid Request

The bid request is an invitation to bid, usually sent to three or more contractors on the list of acceptable drilling contractors who have rigs within reasonable moving distance.

Bidding process

The bidding process is used to select a vendor for subcontracting a project, or for purchasing products and services that are required for a project.  Companies send the bid to a group of vendors for response. The vendors analyze the bid and calculate the cost at which they can complete the project.

FIVE STEPS OF A BIDDING PROCESS

Apart from drilling contracts, many small businesses seek to expand their market by bidding on larger or more long-term projects. Contracts might include governmental Requests for Proposals (RFPs) or companies seeking to be the primary provider of a particular product or service for a large conglomerate deal. When bidding for a contract, follow five basic steps to improve your chances of being awarded the contract.

• Research and Planning
• Preparing the Bid
• Submit the Bid
• Presentation Platform
• Getting the Contract Award

Bid procedures vary among companies, but most contain the following features:

1. Receipt of at least three valid bids;
2. Closed bidding;
3. Bidders must be chosen from an approved contractor list;
4. Insurance requirements must be clearly stated;
5. Bids must be mailed to the Secretary of the Contract Committee at a specific address and time;
6. Bids must be opened in the presence of the Contract Committee.

TYPE OF CONTRACT

A pre-bid requirement is selection of the type of bid to be requested. The principal types are:

• day-rate;
• footage;
• turnkey;
• footage/day-rate combination;
• day-rate with footage incentive;

1. Day rate contracts

This is the most common type of contract used world-wide. The drilling contractor is paid a specified sum by the operator for each day that he spends on the well. There is no performance bonus on this type of contract but the contractor can be penalized for negligence. Day rates are usually broken down into four groups:

• Operating
• Reduced
• Special
• Zero

• Operating rate is normally applied to rig utilization. It implies that the contractor’s equipment and personnel are fully utilized. This rate covers activities such as drilling, tripping and casing runs.
• Reduced rate is used when the contractor’s equipment and personnel are not being fully utilized. During electric logging, for example, most of the contractor’s equipment is shut down therefore the reduced rate will apply. Other operations which can fall in this category include rig moves and ballasting operations. This rate is usually a few per cent cheaper than the operating rate.
• Special rate comes into force in many circumstances. A typical example would be when the allowable repairs downtime allowance was just exceeded in a given month.
• Zero rate is when no payment is made to the drilling contractor. The usual reason behind this is negligence by the contractor causing operational delays

2. Footage contracts

These contracts usually are given in reasonably well-known areas. A specified rate per metre or per foot drilled is negotiated for a well of a certain depth. With this contract style the drilling contractor has a direct incentive to drill the well faster. When offering a drilling contractor a footage contract the operator should clearly list any special terms with which the contractor must to comply for the specific well. An example would be the stipulating of a maximum tripping speed to prevent pressure surges, where it is known that this was detrimental to the likely productivity of the reservoir. It is usual to keep a company drilling supervisor on the rig at all times during footage contracts, although many of the traditionally operator decisions such as bit selection and drilling parameters will be made by the drilling contractor

3. Turnkey contracts

With this kind of contract the operator pays the drilling contractor a lump sum to drill a well of a certain depth in a given area. It is incumbent upon the drilling contractor to procure all the well head and casing requirements, organize the third party services and generally fulfil all the normal operator’s roles on the well. It is probable that the operator will insist on rights of inspection at any time on the well. However, the operator will have no input into the day-to-day operations unless he has clearly stated in the turnkey contract that he wishes to retain that right. Since, in most areas of the world the operator can never give away the responsibility for oil spills in his license block, turnkey drilling has had a limited impact on the market. Notable exception to this are USA and china where local legislation makes turnkey drilling attractive.