Drilling Contract

What Is a Drilling Contract?

A drilling contract is an agreement wherein a drilling contractor is hired by a company to perform certain drilling services. A contractor is a person (or a group of persons) who owns a drilling rig and provides services for the drilling of wells or any other similar drilling activities. Such drilling may be for the purpose of finding oil or any other purpose that the company desires.

When Do You Need a Drilling Contract?

This contract is required because both parties to the contract need to specify what they are drilling for. There are several ecological and economical implications of drilling that various laws cover. The legal repercussions for illegal activities can be severe. This contract binds the responsibilities of both parties so that they perform within the scope of the work. For that reason, these agreements are also called daywork contract, footage contract or turnkey contract.

Inclusions in the Drilling Contract

A standard oil drilling contract template whether it is an off-shore drilling contract or inland drilling contract, contains the following terms

• Names and details of the parties involved in the contract
• The scope of the work that is to be done
• The expectations of deliverables from the drilling
• The responsibility of meeting targets from such drilling activities
• The dates of commencement and completion
• What activities constitute performance of contract
• The payment that is to be made and how such payment would be made.
• The number of people that would be employed and the limits on the people employed
• The supplies and the equipment that are required for the operations and who would provide/obtain such equipment
• What event constitutes a breach of contract
• Termination of contract
• Method of modification of any terms
• Assignment of contractual duties to sub-contractors
• Partnership between the contractors for executing the task

How to Draft a Drilling Contract?

When drafting this contract, the following things must be considered

• Who will provide the supplies for the contract duties
• What is the expected outcome from the drilling and what is the normal wastage tolerance
• The responsibilities of cost if the expected outcome from such drilling is not met
• The upper limit on the number of people the contractor would employ if payment is made on piece basis
• What form of payment would be beneficial to the company — flat rate or cost plus method
• Risk of loss and liability mitigation must be considered
• Who is responsible for ecology restoration that results from drilling activities
• Responsibility for risk of loss of life during the process
• Taxation and payment to workers

Benefits of a Drilling Contract

The following are the benefits and drawbacks of this agreement:

• It outlines the scope of the work to be done so that there are no disputes later
• It outlines the responsibilities of each party with regard to the actual output and variances, risks to life, use of supplies, caps on the number of people
• It outlines how payment would be done and what event would constitute completion of performance for payments to be made
• It outlines the responsibilities regarding compliance with the laws, ecology restoration and other legal requirements.

Key Terms in the Drilling Contract

The key terms in a contract are

• Governing laws and applicable statutes
• Rights, obligations and responsibilities of each party
• Indemnification, insurance and liability provisions
• Scope of the work
• Provisions for risk and performance
• Damages and other legal recourses available in case of termination
• Termination clauses
• Payment rates
• Scope of work
• Provision of supplies and the responsibility of which party to provide them
• Assignment and novation of contract

What Happens in Case of Violation?

A violation of the terms of the contract can lead to premature termination of the agreement. There may also be clauses with regard to arbitration or settlement of damages in the contract itself which would then become the procedure the parties would follow. A properly drafted contract would provide for novation, compensatory damages and force majeure. The last possibility is legal action which could result in awarding damages or restitution on the performance. But all this depends on what the parties consider a breach of contract and what is a lax in performance

[Also Read: Gas Lease and Oil Lease Agreement]

Sample for Drilling Contract

A sample of the agreement can be downloaded from below.

Download this USA Agreement of Limited Partnership for only $9.99