PNG 301
Introduction to Petroleum and Natural Gas Engineering

8.2: Drilling Contracts


Many people are surprised to learn that the large oil and gas companies that they see in the news or purchase their gasoline from do not drill their own wells. The actual drilling of wells is typically performed by a Drilling Company or Drilling Contractor that specializes in drilling operations. These drilling companies have the expensive equipment (drilling rigs), personnel, and expertise for performing the complex activities associated with oil or gas well drilling. In almost all cases, a Field Operator or Field Operating Company (the oil or gas company operating the field and requiring the services of a drilling company) will develop a contract with a drilling contractor to drill wells in the field. To minimize rig transport time (and cost) and to develop reasonable terms for a good long-term contract, field operators will normally develop a one- to two-year queue of desired work to guarantee to the drilling company. Therefore, the contracting process is performed after the field operator has a mature, robust plan for the field or lease development and a viable rig schedule.

There are many contract types used in the oil and gas industry, but two of the more common contract types are the Day-Rate Contract and the Turnkey Contract. Of these two contract types, the day-rate contract is the more common contract.

In a day-rate contract, the drilling engineers for the operating company design the well, and the operating company leases the drilling rig, its personnel, and routine supplies at a fixed daily rate (Day Rate) from the drilling contractor. This day rate may or may not include fuel (depending on the terms of the contract) and does not include the costs of Capital Goods or special services (such as well logging, cementing, or stimulation). Capital Goods or Tangible Drilling Supplies are tangible items required for the well, such as Casing, Tubing, Completion Equipment, Down-Hole Pumps, etc. (the term “tangible items” refers to items that can literally be touched). Typically, the day rate accounts for approximately one half of the costs required to drill the well. The Total Daily Cost required to drill a well is referred to as the Spread Rate.

To summarize, in a day-rate contract, drilling engineers working for the operating company design the well and plan all of the equipment specifications. In addition, the operating company leases the rig and its rig crew at a specified daily rate (day rate) which accounts for approximately one half of the daily expenditures. The actual daily rate to drill the well is the spread rate.

In a turnkey contract the operating company pays the drilling contractor to design and drill the well for a fixed cost. Thus, the operating company provides the objectives of the well, the desired data acquisition program for the well, the surface location of the well, the bottom-hole location of the well, and the target depth(s) of the well. Drilling engineers working for the drilling company then design and execute the well and coordinate all service work with the Service Companies.