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Sh il G iffith

i k

d i

Sheila

 

Griffith,

 

PEng, CIP

Risks

 

Assumed

 

in

 

Drilling

 

Contracts

 

Global

 

Comparisons

S

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l

l

SPE

 

International

 

Development

 

(2)

Ri k A

d i D illi

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Ri k A

How

How

d i D illi

 

 

certain

certain

 

 

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risks

risks

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Gl b l

Gl b l

Risks

 

Assumed

 

in

 

Drilling

 

Contracts

 

Risks

 

Assumed

 

in

 

Drilling

 

Contracts

 

–– Global

Global

 

 

Comparisons

Comparisons

shift

shift

 

 

in

in different drilling contracts

different drilling contracts

in

 

(3)

BACKGROUND

ƒ Past Decade ‐ Insurance claims involving drilling rigs

ƒ Noted US‐Canada differences in contract wording

ƒ 2003 SPE Paper

ƒ 2003 SPE Paper

(4)

RISK TRANSFER

ƒ What do companies do with risk?

ƒ What do companies do with risk?

ƒ Absorb // self‐insure

ƒ Contract out of risk by transferring to another party

ƒ Transfer to insurance company

(5)

DRILLING CONTRACT PARTIES

ƒ Operator or “Operator Group”

ƒ Operator or  Operator Group

ƒ Contractor or “Contractor Group”p

ƒ Parties outside of the contract are often referred to as 

(6)

RISKS

ƒ The “Liability and Indemnity” section in most drilling contracts

ƒ The  Liability and Indemnity  section in most drilling contracts 

allocates responsibility for loss of equipment, personnel injury, 

and pollution

ƒ Each party responsible for their own losses subject to a 

(7)

STANDARD OF CARE

ƒ Standards of Care include

ƒ CANADACANADA (CAODC/CAPP) (CAODC/CAPP) ‐ regardless of faultregardless of fault, or howsoever causedor howsoever caused

ƒ If not specifically dealt with in the contract, each party is 

responsible for loss or damage resulting from their own negligent 

or wilful acts or negligent or wilful omissions

KNOCK 

FOR

or wilful acts or negligent or wilful omissions

ƒ US (IADC) ‐ regardless of when or how such damage or destruction occurs; 

and without limit and without regard to the cause or causes thereof or the  negligence or any party or parties whether such negligence be sole joint or

FOR 

KNOCK” 

AGREEMENTS

negligence or any party or parties, whether such negligence be sole, joint or 

concurrent, active or passive.

ƒ MANUSCRIPT  CONTRACTS – some manuscript contracts we have seen will 

allocate responsibility for what is normally an Operator’s risk to a

AGREEMENTS

allocate responsibility for what is normally an Operator s risk to a 

Contractor if the cause was due to the Contractor’s negligent or willful  actions.

(8)

STANDARD OF CARE – CASE HISTORY

ƒ YEAR: 1990    PLACE: UNITED STATES

d d

ƒ Operator retained mud engineer as 

subcontractor

ƒ Contract specified Operator responsibleContract specified Operator responsible 

for rig if damage caused by Operator 

gross negligence

ƒ Mud Engineer fell asleep and missed 

pressure increase

ƒ Blowout ensued Operator responsibleBlowout ensued. Operator responsible 

(9)

STANDARD OF CARE

ƒ Some contracts do not provide definitions, while others do.

ƒ CANADA (CAODC/CAPP) does not define what it means byCANADA (CAODC/CAPP) does not define what it means by 

“negligent or wilful” in provisions 10.10 and 10.11.

ƒ OFFSHORE MANUSCRIPT 

ƒ Contractor responsible for “the first US $5,000,000 per occurrence or 

series of occurrences arising out of or relating to any single event of 

pollution or contamination resulting from the Gross Negligence or Wilful Misconduct of Contractor Group during the conduct of the Work.”

ƒ “Gross Negligence” or “Wilful Misconduct” means either intentional,  conscious or reckless behaviour that constitutes in effect a wilful and  wanton disregard for harmful, avoidable and foreseeable 

(10)

SPECIAL RISKS

ƒ Unsound Location

ƒ Down‐hole Equipment

ƒ Deliberate Well Firing

ƒ Damage Caused by Corrosive Fluids

ƒ Damage Caused by Corrosive Fluids

ƒ Well Control (Blowout)

ƒ Operator TakeoverOperator Takeover

ƒ Loss of Hole

ƒ Underground or reservoir damage

(11)

UNSOUND LOCATION  ‐

CASE HISTORY

“10. In the event subsurface conditions cause a cratering … of the location surface … and loss or damage to the rig or 

its associated equipment results therefrom, Operator shall, without regard to other provisions of this contract, 

including Paragraph 14.1, reimburse Contractor to the extent not covered by Contractor’s insurance, for all such loss or 

damage including paying force majeure rate during repair…”   IADC US Daywork Land (1994)

• YEAR: 1998  PLACE: UNITED STATES

(12)

UNSOUND LOCATION  ‐

CANADA

(‐) In contrast, Canada’s standard contract requires the Operator 

pay all rig damages, not just the uninsured portion.

( ) C d ’ t t t t th C t t i h

(‐) Canada’s contract protects the Contractor in cases where 

there is third party damage. 

(‐) No cross reference to other provisions in the contract.

(+) Canada’s contract does not, however, require the Operator 

pay day rates during repair.

“10.5 …Operator shall be responsible for preparing a sound location fully capable of supporting the Contractor's 

Equipment, … Operator has superior knowledge of the Drilling Site and shall advise Contractor of any subsurface 

conditions including, but not limited to, mines, caverns, streams or springs that could result in the cratering or the 

shifting of the location surface during the course of drilling or completing the Well. If any such conditions are 

encountered and result in the cratering or shifting of the location surface, Operator shall be liable for and shall defend 

e cou te ed a d esu t t e c ate g o s t g o t e ocat o su ace, Ope ato s a be ab e o a d s a de e d and indemnify Contractor's Group for all actions, claims, losses, costs, damages and expenses resulting from such 

conditions, including, without limitation, any loss of, damage to, or destruction of Contractor's Equipment and 

payment of any costs necessarily incurred to protect Contractor's Equipment and Contractor's personnel, regardless of 

(13)

UNSOUND LOCATION  ‐

OFFSHORE MANUSCRIPT

ƒ “605 (b) Operator will be responsible for the furnishing of any 

information relating to seabed, soil or subsurface conditions that information relating to seabed, soil or subsurface conditions that 

Operator possesses. However, in the event Operator possesses 

such information and makes it available to Contractor, Contractor 

nderstands and agrees that Operator ass mes no liabilit for and

understands and agrees that Operator assumes no liability for, and 

does not warrant, the accuracy or currency of any information 

provided to Contractor.”

(14)

UNSOUND LOCATION – CASE HISTORY 

(15)

UNSOUND LOCATION – CASE HISTORIES

ƒ Leduc, Alberta – 1948 ‐ Atlantic Oil Company – lost circulation and 

high flow rates caused the ground under the surface casing to high flow rates caused the ground under the surface casing to 

rupture and the rig collapsed into a crater shooting up sparks and 

igniting the oil flames were 150 m high. 

ƒ Cessford, Alberta – 1977 ‐ Gamma Resources – rig completely 

disappeared down a crater after high pressure gas broke the 

formation at the shallow surface casingg shoe

ƒ Lake Peigneur, Louisiana – 1980 ‐ Texaco ‐ drilled into an arm of 

the Diamond Crystal salt mine 1,228 feet below Lake Peigneur; the 

l k i l tf l b th D l b C l d

lake, rig, platform, eleven barges, the Delcambre Canal, and 

(16)

DOWN‐HOLE EQUIPMENT – CASE HISTORY

ƒ United States 1997

ƒ United States, 1997

ƒ Duringg drillingg p operations Contractor’s drill pipep p  and in‐hole 

equipment valued at USD 1.5 million was lost in the hole due to 

Contractor’s sole negligence.

ƒ Contract provisions differ with respect to which party would pay 

for this damage. for this damage. 

(17)

DOWN‐HOLE EQUIPMENT

ƒ Two different contract wordings change the outcome of 

responsibility:

1.    “Operator shall be responsible for and hold harmless and indemnify 

Contractor for loss or destruction of or damage to Contractor's drill 

pipe, drill collars, subs, reamers, bumper subs, stabilizers and other 

in‐hole equipment….” (no Standard of Care) IADC Offshore US 1997

2.    “Operator shall be responsible for and hold harmless and indemnify” 

Contractor for Claims (normal wear excepted) for Contractor's drill Contractor for Claims (normal wear excepted) for Contractor s drill 

pipe, drill collars,… and other in‐hole equipment when such 

equipment is being used in the hole below the rotary table … and 

only in the event such damage loss or expense is not caused by the only in the event such damage, loss or expense is not caused by the 

sole or gross negligence or willful misconduct of Contractor or 

(18)

DELIBERATE WELL FIRING – CASE HISTORY

ƒ YEAR: 1999

PLACE:

(19)
(20)

DELIBERATE WELL FIRING

ƒ “Operator shall at all times assume all of the risk of and be solely 

liable for any loss of, damage to or destruction of Contractor's

liable for any loss of, damage to or destruction of Contractor s 

Surface Equipment …:

(c) caused by Operator intentionally firing a Well in order to gain control of any 

blowout or wild well except in circumstances where Operator has intentionally blowout or wild well, except in circumstances where Operator has intentionally 

fired the Well:

(i) in good faith and acting reasonably to assure the safety of on‐site 

personnel or other persons or to prevent the occurrence of environmental personnel or other persons or to prevent the occurrence of environmental 

damage; or,

(ii) when required to do so by a regulatory authority of competent 

authority; authority;

regardless of the negligence or other fault of Contractor's Group …”.

(21)

DELIBERATE WELL FIRING

ƒ No known occasion where a safety or regulatory condition 

was not met

Th l th ibilit f th i ld hift f th

ƒ The only way the responsibility for the rig would shift from the 

Contractor to the Operator is if the well was lit without a good 

reason

ƒ Nevertheless, the presence of this provision in the contract 

ld id fi i i d h i l f li i i

(22)

LITIGATION – CASE HISTORY

Litigation (Canada – CAODC 

CAPP Contract)

ƒ YEAR: 2000      PLACE: Alberta

ƒ Previous version of CAODC 

contract in place

ƒ Well kicked when tripping out

ƒ Well kicked when tripping out 

of the Mannville; crew 

initially kept tripping

ƒ Kick to surface in 20 minutes

ƒ Well could not be shut in

i d 1 h l

ƒ Deteriorated; 15 hours later, 

(23)

LITIGATION – CASE HISTORY

ƒ Contractor sued Operator for loss of rig and economic loss $4.5M

ƒ Details of the cause and the contract wording were the focus of 

the Contractor’s allegations the Contractor s allegations

ƒ Contract “Knock‐for‐Knock” – Operatorp  responsiblep  for well 

control costs, Contractor responsible for loss of rig

(24)

LITIGATION – CASE HISTORY

ƒ Contractor focused on provision 14.1 “Contractor and operator 

respectively agree to comply with all laws, rules and regulations, 

federal provincial municipal and territorial which are now or may federal, provincial, municipal and territorial, which are now or may 

become applicable to the drilling and completion of the Well 

referred to in this Agreement arising out of the performance of 

such work.”

ƒ An ERCB Interim Directive for the area requiredq  operatorsp  

maintain a minimum overbalance of 1400 kPa before tripping out 

of the hole after penetrating the Mannville formation.

ƒ The Operator’s defense team submitted that 1400 kPa would have 

(25)

LITIGATION – CASE HISTORY

Contractor Allegations Operator Allegations (Counter Claim) Contractor Allegations Operator Allegations (Counter Claim)

Operator failed to comply with ERCB 

directive, having inadequate mud 

weight for tripping

Contractor failed to detect kick early 

and once detected, failed to stop 

tripping and run back to bottom

weight for tripping. tripping and run back to bottom.

Contractor’s counsel submitted that 

Provision 12.1 (Contractor responsible 

for rig regardless of fault) could not be

The well control process was 

compromised by the drill bit being for rig regardless of fault) could not be 

read in isolation of Provision 14.1 

(Operator to comply with all rules and 

regulations).

compromised by the drill bit being 

significantly off‐bottom.

(26)

LITIGATION – CASE HISTORY

Di ti f A ti d th d b f t i l

ƒ Discontinuance of Actions were agreed the day before trial, 

preserving the “Knock‐for‐Knock” agreement.

ƒ While the strength of the agreement was not tested in Court, 

a new provision was introduced into the Canadian contract    

i 2001 d ill h l i il di

(27)

LITIGATION – CASE HISTORY

ƒ This clause was introduced in the 2001 CAODC/CAPP Standard 

Contract shortly after the blowout:

ƒ “10.13 For greater clarity, Contractor and Operator acknowledge and agree 

that: 

(a) the purpose of this Article X is to allocate contractually between Contractor 

and Operator certain of the risks, responsibilities, and potential losses or 

liabilities associated with the operations and activities involved in drilling a 

Well under a Drilling Program; and, 

(b) such allocation shall prevail in the place and stead of any other allocation of 

risks, responsibilities, or potential losses or liabilities that might be made on 

the basis of the negligence or other fault of either party or howsoever arising 

th th f l l li bilit d t ith t di th b h ll d

or any other theory of legal liability and notwithstanding the breach or alleged  breach by either party of any provision of the Drilling Program not included in  this Article X.” 

(28)

CONCLUSIONS

ƒ Contracts contain the key to risk assumption and the 

circumstances that can shift responsibility from one party to 

h another.

ƒ Contract variations across the globe have differences in risk 

allocation and these can lead to surprises – avoid by awareness.

ƒ Clarity,y, definitions,, cross‐references… all helpp to avoid disputes.p

ƒ Operational and engineering decisions can result in         

circumstances that shift responsibility (notably ‐ the special circumstances that shift responsibility (notably ‐ the special      

(29)

Thank You

Thank

 

You

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