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This paper was.written as part of a yearts study at the
Depar+!!ntof ManagementStudies$ The Polytmdmic, Regent
$tred, Lcmclon,for the Diplona in ManagementStudies.


Tutor: Dr, E.W. Talbot,B.S%(Eeon),;DrJ7m (I?reiburg).




, $J’mml












Crude Oil Production



The Recent History of Coqxmy Drilling


(c) FinancialConsideration - The Allocation
of Overheads



The Advantage of the Contractor



The ‘Newn Type Operation



(f) The Oil Companies!Experienceof the



(~) The Balance between Company and Contractor






(a) Administrationand Mmagenmt


(b) Personnel


(c) Field Relationswith the Operator


(d) Equipnent and Carq



VI $

(a) Trends


(b) Thu Supply House


(a) The Form


(b) Types of.contract
(c) Turnkey Contracts


(d] Length of Contract


(e) Depreciation



(f) The Tender

i) cost
[ii) Evaluation
PART 111



Defining $



. . .. .

-. --

The Operators ,
l%e Contractorra
The Manufacturertsand

(b) ~iSCUSSiOlt
(e) Rwmmmdwk%tma













1, Questionnaireto Major Oil .Conpanies
2. Dispositionof DrillingContractor
3* Cost hmakdowns of typicalMiddle East

4. Estimted Profit per Barrel of Crude
5. Contractors Cost Element Related to
Profit per Barrel





During +Ihela6t f!iv~years significantchanges have been
taking place in the drilling organizationsof oil companiesproducing
crude oil outside the United States, Canada and South America.
Company drillingdepnrtmontsare being augmented,in SOEM cases
superseded,by drilling contractors. The degree of change alreecly
reached apnears to be related to the “aget’of the operation: Likya,
an~.hbu Dhabi for instance,the newest producingcountries,
have had anfiare having a very high proportionof their exploratory
and developmenttdrillingdone by contractor. Areas which have longer
histories such as Iran, Muwait and iatar still retain their
drillingdepartmentsbut there is ev’~,dence
that equipnen’t
and psrsonnel
are l.min~run down and that in future the contractorwill be given an
increasinglygreater share of the work available.
There are good reasons for the swing fron co~pany to contract
drilling, Oil comyiniesare increasinglyreluctantto invest large
sums in the capital equi~ment,housin~, stores and stores inventories
requiredto run a permanentdrillinS operation. The level of drilling
activiiqyin most areas is highly variable and difficultto forecestl
as explorationGives wtiy%0 dsvelop:~ent,
with clmn~es in
politicalpressure,with physicalchanges in the rcservctir,
changi~~patterns in the su:~pl.yof
and cknan~ for petroleum. The
employmentof the contractoris an ei’fective
‘wayof ensuring that wells
can be drilledwhen required without invokingkeayy capital @atlay
anclthe high running expensesof a resources
are not nt all times fully utilized, The efficientcontractoris
able, by optizm.ndeployncmt”ofequipmentand personnel,to drill oil.bctwaen
wells for the operatorat a ninimm price. ~<eencoap.ctition
ccntractorasets and maintains the price at a low level.
There has been a natural resistancefrou established
drillingdepartmentsto tbe introductionG$ contractor. In many
cases they have been able t~ provide tlieirsmnaGementswith fi~ares
to shaw that tineycan cmwpte with the contractorin drilling times
and in direct drilling costs. And in some cases they have bean able
to support their claius by direct comparisonwhen conymy and contract
rigs drill side by side in the same field.


Zowever, the contractor%nrice is ‘anall-in one and inc?.udes
all his expenses,his dcpreciatioti
‘&d his profit. Company direct
drilling’costsalso conprisedrilling expensisand depreciation
involvedin drill$nga particularwell or series of wells but in
ad~iti.onthere is, submer~edin the total oporating costs of a company
a large overheadburden which can be indirectlyattributedto the
drillingfraction of the tottil”pro~?uction
effurt, Workshops,hcasing,
stores, social facilitiesand transportform a inajorpart of the
indirectoverhead. But in some companiesthe accountingsysten has
not teen able accuratelyto separatecostswkicb should be allocated

Xt is thereforeWe indirectcoats of a permanentdrilling
organizationwhich oil oompanymanagementsare intent on rdxoing.
Those companieswhich have recently started t%eir exploratdoik
drillingprogrammedfrom scratch in ~newl areas, such os Libya and
the Trucial Coast have contrived,%J using contractors,to winimigo
their invedment in ca~ital ecfJiJ,mlent,
and personnelusing only q immericallysmall nucleus oi ctin~any
supervisionto oversee tho 02cratioa. Comparisonbetween this metiaod
and ttieolder one shows clearly that
savin~s can be made.
But what of the areas wher~ the investmentin eupgortingservices
has alreadybeen made? gave they been able to re?.ucothem quickly in
proportionto the reCuctionin conpany drilling departments? l’he
arisworwould ap2ear to be in the ne~ativc. Understandablereluctance
on behalf of the companiesto dissip~tetheir considerableiwvcstmeut
in trained and experiencedpersonnelbefore they are convincedof the
ef:icacy of contract drillinghas been a retardingfactor. Resistance
from host Governmentswho look to the oil comi~anies
to provide
employmentand to train nationals .to replace expatriateshas been
another. And, although the contractorusually drills the well with
his own e~uipment,certain items such as casing, cement,mud materials
@ad wellheads and cert~in services such as communicationsand aviation
still have to be providedby the company. So the limit of do~.mward
reductionis cleorlydefined under the existing system of contracts.



‘Jhathas been the effect of the change on the drilling
contractor? Comparedwitinthe numbers engaged in drilling in the
U,$. doxestic industrythose ~ttractedto overseaswork are rel~tively
few but competitionis fierce for the work available. Ccassquently,
contractor~are experiencingthe sane pobleus as their domestic~J.6.
counterparts,with others thrown in. They conplain of dangerously
low profit nargins which do not allow them to enploy the best personnel
and to provide the best equipment. They find increasin~difficulty
in findingand keaping the right tyy of men for the demandingconditions
(@rating companiesme naturally interestedin minir.uising
costs and ia ~oinacases have been attractedby the lowest bids,
Howevert they are concernedthat the standard of drilling engineering
and techni~aesbe kept at least as kigh as that maintainedby their
own departmentsand are beginsin~ to be salectivein t!k?irchoice of
They are demanding!~ighcrstandardsof.equipmentand
personnel, Vhether the contractorwill be able to meet these demands
at cw.rmntrates of return is debatable, It wculd seem thct a compromisemvst be rer,ched
betwe~n the two parties. Very large savings
in overheadshoulilhave bwan made by the operator,particularlyin
new area5, by the euplo~ent of contractors The fraction of the
cost of drillinga well which is negotiatedwitiithe contractoris
not go large that a modest variation in rates would.greatly affect
the,total cost of the well, Vhen the capable of protucing
tens of thousmds of $arrelQ of crude per $ay and the payback pe+ricd
is ”uiiia-sired”oxily
nudi “as”-IO@~
contractor’selementwould not seem to have much overall signii!icance.
Even less when most of the well cost is expensedand tax is considered.
It is stronglyrecomucnded,therefore,that when assessinga bid,for
overseashigh productio~wells the cost parameterbe of secondary
considerationand that major stress is laid on quality of managemmt,
~ersonneland equipment. Having sti~alatedthe standardrequired the

operatormust then incorporatethese standardsin his invitationto ~
tender-by Iayin% down niniraumscales and rates-of depreciaticw T&us - ;

.titive remain. A oonpe..contractorswill not be competingin”this wea of the bid. . In ?dditi~ll~ tenders should be in pro forma style and in the foru of a stafmai?nt of costsshowing clearly the breakdownof cost and the gross profit margin. The contractor.on his Oidcp will be a~~xred of a fair return on capital. In %hz long tern the aflvantage to tk industmywill be considerable. * . ‘I%isnetlaodwill enable the o~arator to enforce the standard elementwill reqitiired and wi~l simg}.ifyev~luation..’ .

Drilling operationscan be broa~ly divided into expler3tion enddevelopment. .. in the fade of a world oil surplns.-. ovcrcomin~the difi!erencea in detail of costing systems by cmparing end figures such as t~tal annual operetingcosts for a field cr area and applyii. to investi~ate the individualcompaniesapjjroachto this problem..~ percentagebreakdownsrelating to Iabom costs to each section of overhead for final absorptionby the drilling cost centre. perhaps _. social amenities.L)-and. .are doing their best to diuinish them. ‘and plant inventoriesand their relations’witii each other. when making a c@iq)ari~on of cost between company and contractdrillin~ it is essentialthat the overheadburden is taken into account and an estimatemade. -–circulatd to several com2anics.-was.Eowiwer. Explorationfor oil is expensiveand wildcat drilling in reamte areas a very costly part of it. So numericalsupport for the arguments put forward are. Companies operatingthe older producingetieassuch as ‘Iran.ydefined in the costing system of the production companies. It WM hoped. it soon became obvious that to extract the figureswould take”a good deal ssoretine than was availableto completethe paper. — The purpose of this study was to exanine current patterns of oilwell drilling in overseasareas out~ideNorth ond South Jwmricaf *O delxxrmine the reasons behind any chan~eswhich have occurredand to attempt a predictionof future trends.xaotortrams~ort. such as housing..tendnd.. In the past the back up organizationto supportwildcat and devslcqmentdrillin~has aada up a large proportionof the annual operatingexpenditureand capital investmentof the pro&actionoperation.when t!~isstudy was begun...rising costs and reducingprofit margins the major oil companiesha’ieenbarked on a stringentpolicy of ~ost retiucticn at all stages in the chain cf yetroleumproduction.refiningand marketing.A...ofthi~ expenditure which can be directlyapportionedlm the dril.questiomair~.. * In recent years.workshops and transport.INIX?DUC’IION . It was intended. not yet available. In particular. Iraq and Kuwait already havinE extensivecapital instdkations and a large investmentin inventories.~mepqred -(A~ncmdix .—. But in spite of the gootiwill and desire to help displayedby all the firms.. in afklitionf to couparQ ovevall figures over recent years for such items ~s total inventorief3. unfmtunatwly. . The part .1.iilg of the well is usually cIearl. ● ..—. offices.transportation. But the ccst cf the backing organizationin the field &ld in head officeswhich should be absorbedby drillingas overhead is scmetimesvery diffivaJ.$ablishing~.t to apporticri. . Tke reduction of overheads is the prime target and to effect this companieshave endeavored to reduce their investmentin sxch capital plant and installationsas are not essentialto the actual production of oil. drillin~ increasing use of contract drillingxias to be investigated..Drilling ia necessary to crude oil prochctionand this sector of the industry hm b~en the subject of hard re-appraisaland dra~tic re-organization.

T&eir viewsl comments. I . —-— . . . . . the specificdetails of a Iimitedstudy cm.— 1_ . . The conclusionsand recorxmndationsat the ond arc the authar?s oun.-— -- . .ete study of the subject on a worldwidebasis. .edby others in the course of the investi~ation. . . . . . . Inatemlattentionma centred upon the Midille Eastern and North kfriean areas and upon a few of the larger coupanies operatingthere. This area producesmre than a qumlmr of the iree worldls crude oil supply. -. although similarviews have been express. najor oil companie5. will stimulotmdiecuasicnof a subject of great importancein the industry.. Because of limited time and resourcesavailable to the author it was not possible to tia!~e a cmnpj. . .contractorsand equipmentmanufacturers.—.. . .uot be treated as representativeof the entire industrybut the aatbor is of the opinion that the conclusionsare widely relevant and hopes that the Equnenta put forward..complaintsand su~gestionscombinedform the ~04y of this paper. . obvimsly.!.9?0obtain an unbiased overall picture of the ovwrs’eas drilling industrythree sec%ionsof the induakrywere interviewed.

both large and small.. . . In such a capital intmsive iridustry such a policy is..—..inyes. the state of the drillingbusiness there has a very strong influenceon foreign operations. _. In.“. notoriouslyunstable financially. contractdrilling. raainlyin Texas.E!eDOIMW?lC INMHW ._._. . A financialsurvey publishedin 1961...S*/*.proving disastrous for contractors.they I>referto nut what canital thev have ~ef tinto~largpro~it~ble.. ..... In 3962 contractorsowned over 947 of the Y074 drillingrigs in the U. it has been suggested.ccwuse they are forced into liquidationby lack cf working capital“orbecause. m These figures compare closelywith the building industry.. many of whom are leaving the industryeiiher be.5fi f .~~a$as.fact. A f“urthersignificantfeaturewas tha insufficiencyof net cash flow which in many ccise awasbarely able to cover depreciation._.~ “..1 ...— —.TEN U.short-sightedtendency by the oper&tor to accept the lowest bid irrespectiveof other oonsiderati one._. @i~d . The nain points brought out were:- (b) Thevery lowmmmenet profit to net worth (7. Of these about 2020 wexe ‘active@.< (sfterimx) (c) The high debt tenet worth ratio (118X). . Much has been writti”nin the American technicalpress of the current instabilityof the majority of drilling contractors. brought on partly by fierce competitionfor the availablework and partly by a natural but. In extreme cases contractshave been negoti~iedwhich have not even covered cmpens... no discussionof the industrycould neglect the domesiiicsituation within the United States.. covering companieswhose sole businesswas. Canadw..___.. The experienceof the United states doaestic industryshould be keFt in uind while consideringthe trends of overseascon$ract drilling.. ● The study concerned lcmd rig~ in the Southern States ‘of America. Although our subject concerns drilling outside the U. _..before been an unconnectedseries of complaintsand warnings fron the parties concerned. of newly one hundred contractorsby a Texas Bank and the &edit departmento~ a najor supply company providedsupport to what had.. _ .K.eslet alone deprociaticn....

particularlyet all levels of manageznent...-— was begti an”ambit-ibtiii wi”ldcattin~ affort-tiovering ‘wi”d&in’eas””of=the Middle East. The companiesowning the concessionswere internationalmajors who. Ccuqmnies differ in the way they aro structuredto pmforrc this task but generallythey can be broken down into four prime functions:- ● (i) Exploration. The opsratingcompaniescomuittedat that tiae to this tremendousexpansionwere not geared to cope with it.. (iii) Production.. faced ?everal problemsto which low cost Middle East crude provided the answer.the wildcat drilling operationrepresentsthe first major investmentin the developmentof an oil productionsysten. ● .. .to exwnino the ways in which these conditions have been dealt with in the >ast in order to throw light on the ~ignificantchangeswhich have been taking~placein thtilast five years or so in the pattern of drillin~for oil. the lack of facilities and the teckniml hazards of drillin~ in unexploredfornntion~. (b) Tb. After geologicaland g~ophysicalpartieshave iudicatcdfavorable locations. Trainsd personnelwsre desperatelyshort..YrExmL. .Europe w~s rising but dollarswere skort. wildcattingcan be extremely ex~>ensive. due to increased domesticdemandwas insufficient. It can be broacllydivided into Explorationand Developmentdrillin~. ikmnil for oil in Vest~rn. Because of the difficultiesof supply. First pricmities”wereto inwease the output of fields already producinge. Eoweverj the main-objectwas to get the wells drilled and the productionplant .. Tkre was awcrld shortage of tankersand refining capacity in the U.. ..andprocess.dwtion The function of a producingcompany is to find truck oil.ndttodevelop fields discoveredbefore the War and subsequentlyplugged. ~ .Tm . after the war. (iv) Pipeline and Terminal.. to produce it and to transport it to the point of sale.— .ecentHistory cf Company hilling . rasuIting in additionalovcrlxxvd burden.The expense is magnified if supporting?xme wgcmiizationsarc alltied to build up. “simultan~ouaY__ ___ _.(WW.\?m2 the Middle East was at the beginning of an explosiveexpansionperiod for crude oil production.-—.eZ.lit the end of ‘Jorld.. It would be useful. (ii) Drilling and development.dangeralso applies to the developmentdrilling phase when a greater number of rigs is employedrequirin~still more personneland s’u~plies.S. and consequentlyorganizationsuffered. This..W” f. Drilling features in the first two of these functions.A.s (a) Crude Oi12’r.

etc. Complete towns had to be built in the dosex% and then maintained. using cranes and bulldoz.expense.ion and conwquexrtlywm wasteful of nen and naterials~ Trained drillers. .gant. irrespective coat.bulldozersand cranes used for buildingvilikat locationsalso requireduaintenanca workshops and the nen t~ run the~ Apart fro:>the very large capital investmentin rmchinery. Wildcat drilling requireda. Like the rest of the operationit grew too quickly for the availableorgani%at. togetherwith their families.offices and workshopswere built at the locations. nen were hard to atiixact.-.aetivihy settleddown to a more gentle pace altiough the search for new ’fieldsand the expansionof existing ones.— ------------”------deve~opedi--. eommisaariat.It should be reuecibered that.tair condit~oning.personnel and apertating c%oets.r..andhad to be housed and fed.nore used to the fixed michineryoonoeptithan to that of drillingrig nobility.disco~redand_. usually took months. and as there was a drillingboom in progress there as well. The ozga~izationand expense required to locate and naintain a drilling rig for a year or nore in the deaer% was considerable.main?.yBritish and &ericnn~ were reawuited.S..inly at the spearhead of the total effort and was responsiblefor a high” proportionof the total expenditureon capital equipnent.still proceeded. Consequently.era.emh mm concernedclirectly with oil productionrequiring severalmore men to serve and administerhim. * The transporta-ilable then was ill-suitedfor de~ert oil‘ field operationand had to be maintaineda+ base worlcshops.--.tha wrong type were recruitedresulting iua high labour turnover. Semi-permanentroads were built at enomoux.large proportionof th~ drilling de. set up extensiveworkshops for aaiwtenanceand repair of drilling facilitic+s: personnelservices.the quantitiesordered took into account those uncertaintiesand by modern inventorycontrol 8t@ndardswere extrave. forei~ exchangeregulationsstipulatedthat British companies should obtain their naterials fron ~on-dollnrsources if possible. These in turn requiredwore ~enl and so OXR* of Inikmse eazly dbys the drilling functionws+scerta.oocumnioatims.toolpusheraand drilling superintendentsinsufficient quantityand cifthe right quality were available only fron the!stotal effort. The administrationhad nore time to clear up the disorganizationcreated in the period of hec%ie expanaiorh . Heavy road-makiw equipuent.A. Delivery tines fron these souzraes were. With each expatriatehouse was requireda badqgrouud organization‘toprovide power and Iight.ineer%fronother industries. Seni--pernanent Staff and lahou. During this period so~@ of the lar&%ei3* oilfieldsin the WOrl_&W@rQ. Inrxiny cases.Base canps were expandingrapidly to supply the &ervice5requiredby the field workers./ I installedas quickly as possible and. at that tine. But the fundamentalrequire~entof drillingwellti and installingsurface plunt in orclorto get the fields producinp I in the shortestpossibl..etimewas aohieved. ‘1 Gradually. one might say. But while the high level of~rilling and explorationsctivityhad !-----1 . accommodation.plant and buildingsnecessary for initiatingproductioaa heavy investneatin inventorieswas also essexrtial. Thousands of expatriates. land and air transport.--. The drilling rig itselfwas set on extensivecmcrete cxztsand foundationsand the rig-up. The build-npwns cumulative. Kug..lonE and unreliable.

.--..—.The reductionwas effccteii in wveral ways.tewheu the proporticaof expatriatesto n%itianalstaff would be mall. wers ‘charged.. Xn tkse countrieswhere trainednationalswere &va!. orderinglevels were nit adjusted to suit future drilling&nd other progmumes. for. etc. TO cwxpmsakc for this staff allowanceswere iacreascd. . . when political instabilityin SOEM Kidi. to r~ly upon the technicaldepartnentsfcr advice a~ to the disywal of the enormcus inventories. (0) FinancialConsiderations. in the nain.the eftect being to obvicteany ol)ligatioil by the coupaniesto prcvide these aucnitiesat SOUQ future r:i.‘Kwchsurplus to rcqwireuentsand a good deal ~baoltiteg which they held in custody. In ad?. organizationin most couponieswas the stores.. . At the saw tiue the compaxiesbegan to look at drilling contractingas a possibl~mza. such as recrentionol transport. . la~~dry..the Allocationof Cverheads . after Suez. --.slackened. This ii not surprising. Simultaneously. A departmentwhich.air conilitionin~. coupledwith natiaral waatage. .. The result was that a very high inventoryinvestmentremained high for longsr “thanwas necessaryand was aggravatedby the fact that due to faulty and oulmxied stores administration.leEastern countriescaused *kernto reconsiderthe extent of their investmentin those countries. A gradual but drastic redundancyschema was startedwhich. At abcut the same tirleb. — — .ostgovernmentswsre increasingtheir dennnd that expatriatesbe replacedby nationnlsas soon as ~osnible. Unfortwatcly few were availableand so the stores had.lable. ● X%was this aikimiionthat faced aocm of the prcducingoil Cwnpanieoabout six which had been au~~lied free to staff. The first and most imp~rtanttask was ts cut down on that administratio:l not directly reqmi. some companiesfcund difficultyin decidingwhat proportionof the overheadburden was attributableto the drilling effort and whet to the other. . technicaldepartmentshad neither the time nor tho personn~lto deal with stores problans ond the help was rarely mubcrship. .— Vkile it wtisa relativelysinple matter to dorivc from the cost-accountingsystems the cost which oould be directlyallocated to drilling.the cwcrbmden of aikiinistration nnd sarvic%sremained and even tended to increase.. . A large part of Vlis consistedof the servicesrequired for staf2 and th~ir fauilies eitlwr clircctly or inilirectly.was aimed at rwh!cin~ st~ff by stages.costaentros of poduction and process.required Grastia for the productionof oil. . The cmobinktiouof these circumstancesacceleratedrencdie~ (which had Imm alrea+~ begun by some companies)for reducing the administrativeoverburden.uaof (a) reducing capital investment in drilling equipncntand tools and invontcryand (b) reducing the administrationwhic?zhad grown up behind explorationand dev~lcpmentdrilling. In D highly technicalimlastry the requirementfor tednically kuowledgable purchasennd storas officors is a basic one.. pipeline and terminal.On the other hand.. Rccruituentwas cut back to a mininun and bachelor status offord k? new recruits. in particular. expatriateswere replaced.. . .itiona t!uwmtonedworld surflus of petroleumnecessitated cuttin~ costs to maintain Frofit unrgins.

* 9$ ..a year) were deducted co~ts direcily allocable to drilline. .the company. .. Production& Process ..6$ 1. Of the x=ainder which cculd be called overhead 36j%wns applied as applicableto drillinga.indicatesthe relative importance.piijal in%ensiveindustry)wnB ia applY the proportionateshare of Iabc}urand supervisioncosts of the four prime functionsto the total opcratin~costs for the area. .adexprew?d as a pro~ortic~of total costs..he attributedto drilling in this particular company.. Pipeline& Ter~~inalt.yclctseh~to each divieiwh!sshare of the total effort in producingcrude and in one company the resultwas roughly as follGws:Lakour and SuvervisiouCosts Exploration . Drilling . totalling49$ or nearlyhalf Total hnnutilOperating Costa in a arudc oil productionarea. 36$ of al?. ~.— -.❑ ✍✍✍ ✍ manqyment} atiiniskcationand services serve all the functions.. ~irect PrillingEx??ense$ accounted for some 29$ of Total OperatingEx~enditurelIndirect Overheads20$. This did relate fair?.taking into account the hem-y overheadburden.costwisclof the drilling organizationin the ~lold{t type ~otoilfield operation. 307 .ncering exyxmes Stores handling expenses Servicesand general overhead I&id Office expenses 0.. 2?} Frou the operatinEcost total(of sone 620 million in.* ● W ● . .ac%ors difficultfor them to argue that overall. At”-the” ’t~me”w$i&n” ”e&@iies wcire””wc$ghing -u:> ”the-~dvantages &nd disadvantagesof contractdrillingmany financialexercise~of this type were done and it is certain that some drillingdepartments co@d grove on paper that on direct drilling costs they could bid..overhead in one yem (1959) could. . .. But itwaa Eor@ compete and perhaps beat the contr. . they were cheaper to. There is no doubt-in the writerls mind that some cf these oosts should . 36X .4$ 13$ 5$ Drilling Other priue functions 20$ Gj Sl$ * This calculation. . . One metkod which had much to reconnendit (althoughit could be criticized in such a spite of its weaknesses. Various methods of appnrtionrcent have been used. Proportiono~ totnl costs Direct expenses ~irect drilling costs Drilling canp o]?arations Drilling departmentex~ensea 23j$ 4$ of 29$ Petroleumcm&j.

.xnd and for the drillingrig.w’lType Oimration * In recent years importantd scovoriesof.w._. . ..sndthe well.4 100$ .___________ . ... .... Zis total opor%tionis administerthe has only to provide a ~lc~dcst base that the contractorscores heavily. . !’l!!en all that is left behind as o.. . Rent.a storekeeFzrnnd a transpcrt/p3. In this type of operationthe operator. . . blow-out prevontorsand other equip~ent. ._-. .I drilling..oil ~ave been made in severalnew areas. cetient. (e) The ‘N.32$ . There is nc divisicn Gf p. ..~esil.. includingrig noving..__-. is ‘ virtuallyan integralyart of the rig @ can be xscd for every ?. It is in the kind of situationjust describ. ..per@ancnt installationis the apjroach road.never have been charged to drillinz~as the DrillingDe&’tmen*J s~sm as a cost centre and respf?neibility centxe. is under the control of drilling personnel.although a large proportionof notor transportand xmlxiloplant fleet was necassaryfor drilling oporationsjdrilling dcpartuentshad little aay in ve%icle specificationor ....ihgassignmentand moves away.!!is rig is designedand built for quick Moving.... k breakdown of expenses of a typical oparationin Libya to develop a tield by contractwould be as follows:Contractortspayments--drillingand transport ..had no control over much of the expenditurewhich waa charged *O it. Consequently. Depreciation ● * 4s ● * ** ● a 0p9rator~ssala& .. PersonMelservices . rates and mndries .. More iqxxtmt still is thak the contractor’splant..wbseqacnt deployment. (d) The Advantqze of the Contractor e..413$ .... ..comprising project. . ..cmuissariat cervices md passenger trnnsportare usually sub-contractedto local firm. .. transporting pipe.... Subsidiaryservices SUC2 as water-we?. . The contractoris thus able to keep his cverhead to an absolute h~ finisheshis dril?..ginecrin. .s. . . The ap~roach to the exploitationof ~hes~ new fields has been noticably di~ferentf’rGL?I the-’’old” system describedabove. ..arl. . 5$ *. Sinilar situationsexistedwith en. A relatively small stock of spare parts a“ndreplacementsis carriecl.. ... minimum.42fi .. ?&at is also iaportant is that his transport.xq?osc. . that sinflIeneas of pur~~se in “keepingthe bit on botton and turning to the right” so vital in &he drillin~ o~era6ioa tended to be dis~ipated.. Concessionpayments.. Living and ofiice acconmxhationis adequatelycom~cwtablennd highly nabiie. The operators 58$ consists ~f 32$ materialsand 26$ other expenses. thus ninissising stores overheads. $@ ● . Naterials suppliedby cperatar . For a two~Iovarben-dll staff c9nsSstS Only Of a field n~nager? ‘ r’igoperatitin an accountant.&nt supmviaor. 1.. .particul. the site . notably in Libya and tinePersian Gulf.____---. . . 5$ .~ service and workshops. traneportand workshop. . For instance.y his herwy trans~39rt..sind of oilfieldopc?rztion.. ..._ Itwill be noted that the k2$ of the total cost is to tke trans~ort and drillingcontractors.. V..

Of course.cranes and other equipmentwhen the office and a stores yard. that they were bei~ used as supply houses.(thel?rcnchcontractorswere the Qos$ible exception). It is patently impossibleto guard against every eventualityby holding every possiblereplacementpart. It is possible that. J3wezyfield is different. due to inexperience.______ _____ Another com~laintwas that drillersand toolpusherswere of such poor quality that company toolpuaherswere virtuallyrunning the rig. the base nersonnelare hmuaed in rented accommodation. Contract trans~?ort would be used as required on a ton/mi?.the oil companiescomplained.working away fron suppliesand services. The operator should have renainingonly nominal stocks of drillingmaterials.the operator c!ccse the v:roag contractorsfor the job. They assumed that such things as cu~toms clearance..personnelor fixed capital. the installation of productionplant.nimum. is kept to a . They underestimatedthe time rtiquiredto set Up an.“.lytubalars. it is not possible to publish the “absolute’t cost of the “new” ty~e of operationand to attenpt a comparison with the ‘told’J.. . Eowcwer.. ‘Unfortunately.mj.organization. . keeping total inventoryat any one time at a low l~vel.took no steps to deteraine~the probl~~s that tkey would face in the field. having to lend bulldozers.brG lse._’__ _______________ .. Ewt the drilling yocess itself should leave no large residue of naterials. leaving only the wells.. Canital investnont * Material requirements. Supply is p“ossiblythe biggest headache in running a drilling rig in the desert.cage lxwis to traaaporkcoupany suppliedmaterial to th~ well Bites. _.railw~y service. contracttransgort would be as efficientas they were used to in Vestcrn countries. in practicethis would be a simultaneousprocess.. Tkywere.rlai. the advantages are obviouswithout resort to striat nunericalconparisonc * (i’) The”Oil Ccmaniesl exucrienceof the Contractor At the beginning of the period tider discussionoperators had little experienceof tiealingwith drillingcontractors. in an orientalcountry. They consideredthat this was not conducive to good field operation. in addition. howevermodest. Company drilling personnelsupervising the contractorlive in the contractor’scmp. agd’. h nodest office and stores organizationsremaiu5 to deal with the next phase.the productionwork proceedingat the sme tine as the’wellsme drilling. Anyone who has worked in the Middle East will know of the frustratingdelays which can occur over the simplestHatter. few of the relativelysmall number of contz%ctorsin the overseasmarket had nuch practicalexperienceof o~eretingwckside the hericas . It was not surprisingthat spudding-indates were r~rely net.rightly.. Vhen all wells hnwe been drilled the ccnln%ctormoves on. But some of the early contractorswere not even able to keep themselvesin buch consumableitem as slush pump parts and tong dies! Consequently.:___ . cenent and special tools are phased and supylie~as required. Equally. . dom. Clearly sone contractorshad very little idea of. mud.. Sone operatorswere Dlso concernedat the high turnover . m For a period the assvciatioti was not an easy one. of contractors$&actox_’s_. .. One or two of the Iargestwere Certainlyorganized-forthe job but nest of the otherswere companiesformed to meet the denand. .

altho-ugh they are good hole-maketis they are not as efficientaa they should be at functionsli?~eceuenting. his return was unspecified. e — But this increasein efficiencyhas brought other troubles to the companies..kl-seerns...hawe. are not ptieprarea to suhhit to ~ family separationon a long-twinbasis.. and would like to see at leas+ part of any savings in drilling costs passed to them by the.agement both in the field and at head offices Their view is’that the success or failure of the operationhin~e~ to & very large degree on the contractors field rcanager.the ~. To do this.prefa=i% to divide the wor!<about ~0/~0 between the contractorand the company. This is a serious matter in areas where specialist companiesare not aveilable to provide the services (g) The Balanoe Between Company and Contractor Companies differ very widely in their attitude to contract drilling for the fu’ture..leave them more or less at the mercy of the contractor.Theirown drilling organizations have benefited considerablyin efficiencyby. operatingin one area. A further criticisrl Ievelledat contractorsis that.:. could.. _ . for the first tiue. Generally speaking. . .anuen?n?. –.This company favours foolage controctafor all drilling in this area~ includingwildcats.eii~iency..t.. .leaves. having to face competition...:..!Iepartments may dissipateto a dang~rous degree the considerableexpertiseand skill built up over many rigs axe all-purposerigs and are perhap8better’suitedto wildcatting .coring and drill stem testing. particularlythe yoiin~erones.u~”.$. they feel.Nowadays. perhaps two or three. In fact the benefits are mutual when cowpany and contractorwork side by lower rates for new contracts.iswell suited to dcveZopizent drilling. They me finding it increasinglydifficultto attract and to keep long service drillingand patroleum engineeringpersonnel..nest operatorswill cs~rcmthat the servicehas improvedbut they are still concernedat the poor etnndardof. contractnan. m Other companiesrirecautious in their ap~roach.At least one majcr co~pany in Libya has said that it is going +0 IGO$ contractingas fast as it can and would like to sell it~ own rifg%irzaediately. –. The cowens~tov . Companiesshow awareness of the possibilitythat further reductionof their own . they are now obliged to work under bachelor conditionsin contractor’sCSLWS. The cmtr~ctor in this case vw reported to be ‘[making noneyitand ‘tsatisfied~l althoug. .._ where they have the extra power and equipmentto cope with difficultdrilling conditions. Ydereas before these men lived with their families in companyhouses.They say that they get t!w best service from the nodiun size con%r~ctor who has all his rigs.while the highly unitizedancl quick snovingcontractors rig . Their plan is to use the conpany drillingdepartmentas a nucleus with the ccntrnctortaking u? the slack in constantly changing drillingrequirements. made.extra. A larger contractorwith his rigs spread over several different countriesdoes not have his organizationsufficiently decentralizedfor local efficiency..

in a sense. t!:areforsP SGCCCSF will hinge mainly on the performancein the i’i~ld- Vhilo all persmnel in a cmtractorfs r~thcr sparae field efficientrig-men are absolutely force are. It is not surprisingthat this type of man is difficult to find and even more difficultto retain.loc~ticn.rntors and controctio~s agrw that the field manager is the key man in the organization.cey. Base managementis. Dri?.purclmsing. l!mng r~enme no longerattrtictedto the heavy workwhm they can get only -------–sl ight-lyinferior pay-workin:-i n-a.S.if he has rigs running in more tho.uumgeuent.gcd more in gaining contracts.------:.en~a~i~ personhel.the toolpusher and the rig mechanic mst be of first-classc~libre if the rig is to keep running. 13 particular.A. On his efficiencyrests the reputationof the contractorand the success or otherwiseof the drillin~ operation. of course.toolsand techniques.sedupon the state of the domestic industry in the used to be swell-paid industryin the !J. and of great importance. and one at the field. ~erhqm in Europe. Ope. Lzstly. stores and personnelwork and mat be able to administerthese departmentsand co-ordinatetheir ef?crts to~iardsackieving the objectiveof drillingwells. U. But rightly cr wrongly.transport.his characterand personalityshould be such that he is completelyacceptableto the operator’sstaff. 3ut it is also true that the Iabour turnover of hnericans in foreignwork is very high.S. enga. And the reparationhe gains for his cosqyanyis not alway~ strictlygeared to footagemade. Their role is essentialbut their corLymy’s reputationand. vital. 3e must be a man of many parts.will usually hrmw two layers of r.none country. It could be said that one of his major functionsis to display diplomacyin his relationswith the operatingcompany.supermarketi--Those-who--do ----–-----j.staff. Most operatorsagreethat for kole-makin~Ambrican drillersare difficultto beat.● The contractor. .A. Ee should have an extensiveknowledge of drilling techniquesand practice.ling but in recent years the differentialbetween it and other more sedentaryoccupationshas narrowed considerably. It is vitsl that he should bo able to inana~eas well as administerand ideallyhe should have a knowledgeof modem ~anagenmnt. !. They are also exymsive to attrcbctoverseas. lieshould have a workin~ backgroundin accounting. one in a head office. start and subse:y~ently marry soon lkave os the itinerantnature c .“ There ap~wm to be several rewons for this state of affairo and ttieyare be. the ccntroctor’sperformancewill be measured mainly by the success of their field manager in co-operatingwith the operators field personnel.

.-!l!hia highlights.who may be a field superintendent.+at.whilst matters concerningthe running of the rig would be dele~atedto the toolpushers.truefor the rig nec!mnicj a most. This is certuinly .S.and crop up regularly.. as it is he wlm will be directly responsiblefor the drilling of the well.y well suited to foreign contract conditions and who can be retained for lower salaries. of good cxmagcnent in the field operation. perhapswanting a change in providinga frameworkwithin which he can works But drillingrarely conformsto schedulesand good communication . testinz.kave Ieval.. Sone of then change their jobs frequently. at the least. .impOrOt.field kmager the ~ocd ovcrsenstoolpwher is hard to find. He uust also be able to plan ahead to economisein the use of materialsand to improviseand uakeshift when required.. drilling superintendentor senior ‘itwere. A iyge particularlysuited for this work is the ex-naval ~nginoer. corin~.A.Moat companiesprovide contractorswith com~rehensivedrilling j.(. He should be a gocd well man. are the ones who stay in the industryand who are willing to work overseas. who know no other ‘ trade. There are no su@y houses for him tz turn to. Vithout this agreementand a strict adherenceto i% there is dangerof)nisundersytandingwhich could result in. ~fficientat fishing.ess ential~. are teuperamentall._-between both pgmt’ies--is. on the circuit of cverseas contrfietora.. Most of all he uust.and the lower between the contract toolpueherand the coqpany toolpuslmr. e A really good contracttoolpusheris of vital inportnrace. who is’used to running similarnachineryunder difficult to t+skehole. friction and perhaps in extreme cases disaster. Foreign conditionsdemand a good deal more of a toolpusher khan would be expected.__ .) ~ie~d Wlations with the oParator ● Formal contact between oper~torand contractoris nmaally the higher between the cwuirac$nanager and the . Under normal conditionsmatters of policy regar6ing the operationwould be a&eed at the higher level.vitalnember of the team.___ . who is responsiblefor keeping the drilling equipmentrunnin~. For tho reasons outlinedshove many contractorsprefer to ---enploy a high proportionof Europeanswho. .s.anCnQ_____ . It is of the ubuost importancethat there is agreementbetween the parties-asto the structureof authorityand communication between them. Like the contractors. generallyspea?ii:ng.say. “Europeanacccuntan+s‘andstorekeepersare also well suited for the overseascontractorand are fairly easily found.of the industry is not suited to family life~ The result of this is that older men. Ml this is not conduciveto stable Iaboiarrelations and ihe . in t&e U. “companyrepresentative. as his rig is usually situatedwell away fX’Oilcivilisation.uaintencume of technicalcoqwtence and the situatiomis not helped by the fqch that some contractors’payscales are well below oil company standards..running and cementingcasing and many other jobs which at home would be done by service coqmnies.te...

This was ac?zieved by buyin~ rigs and cwaps already unitized by the manufacturerand by using speciallyde~i~n~dheavy transport. I%e gap has narrowed now. than its. Secondly. he offers equi.There is no room for econonyhere and high standards have to be maintained. Several years ago the contrnct rig and cpupwcs considerably faster in c]ovingthan the average company rig.he offers a highly mobile and impermanentnems of oilfielddevelop~ent.good living quarters and firot-classfood must be provicled. and at least one company clains. hsi ocntractc)rs have realised‘&at.they are able to uove as fast.pnent and expertisefor drillingwells.infi these services he must have nodern ri~s and transportand be able to move nachineryand caup between locationsin a minizim of time. To be ccrqmtitivein sel?. however. in order to retain staff in what are usually unpleasantworking conditions.The contractor providesa service in two nain directions.coa%ractors. that by using criticalpath techniques. . if not faster. Firstly. .

..~buying lloffthe shelf” frox U. Due to the intermittentnature ofdrilling and the difficultyof obtaininginformationfrom ~any sources.%hat the contractornow tends to buy his equipuentfron the U.—— (a) Trends The purpose of this section is to exmine changes in the pattern of supply ant demand of drillingnaterialswhich could ho attributedto the previouslyreported changes in cilfield development.— the long run lead to higher prices for equipmentandzmterials produced in Europe.. it would seeci.. European manufacturers were in a particularlyfavourahlepositiondue to clo?.lar restrictionwhich ~reventedcorlpanies. * m The fast post-warexpansiondescribedin Section IV could be.A.—.X . Long deliverydates made it necessaryfor the oil coqxmies to hold large stocks. i’1“ . .future --——-. But he is expectedtoba able to supply at call and in very snail quantitiessome hundreds of different parts. in turn~ has passed it to the manufacturer. In a highly competitivefield the manufacturerhas little option but to cooperate.hy the na+we “ ofhis intent on keeping his’stocks of spares and consumablesat the lowest.S. fro.therefore. .~ECTIONV. the parent corpanics have credit facilitiesthrough the sup~liers. With regard to ir.nnd European manufacturersof Arwrican designed e~~faip~~ent f$und thetnsclves in competitionwith *heir Iicensms in the U.levelpconuensuratewith safe operation. ‘l%istiituation should. Firstly.. .most overbeascontracting’conpanieb are part-ownedby lmericm donestic contractors. sources.S.. to customersof first-classcredit-worthinesswho were prepared to keep their inventoriosat a high level..which have indirectState backing. passed fron the najcr conpaniesto the contractorwho now. expert facilitiesfor rig-up and unitizationprior to shiwmt.-.. Thirdly.A.financiallyby equipuentmnufacturersa It is natural... This neans that the onus of keeping stocks has. The slightly lower price obtainable:knEurope is awe than ofi%et by these cotisiderations.S.. the contractor.A. able to attain a high voluue ‘ofsales. At about khe sane time foreign exchangeregulationswere relaxed.he is experiencingexkreae difficultyin forecastingand scheduling —.ifhe wishes to retain the business and keep a reputation for quick delivery. Apart frou *?w French conpaaies.due to an active domestic industryhe can buy any eqizipment at short notice. They were. in a s~llerlscwrket.he has at his disposal in the U.ventories. Eowever.. :. when later the companiesbegan runnin~ down their inventoriesand eclploying contractors the situationgraduallyreversed. Secondly.S.i$~scribed in retrospectas ~lthegood old days~ffor the equipmnt rmnufactiarers and supply companies. where he can obtain definiteadvantages. Sons are backed._—.

even’thosebelonging to the some contrectorlrarely confo~ to anystaudardand a large variety of spares would have tobe handled.A. particularlyon th~ heavy equipmentside. drilling rigs. . Thirdly. skylo supply house woiildbe the answer to both the contractors canal the manuf’acturir’s problems.1 The first proble~~is ttiatof would be difficultto extract a Suaranteefrom the operatorsor con+.whichMake it difficultfor foreignersto set up business. Fourthly.for exmplc Libya.S..S. productionruns.even if a supply store were sitwted in the right place and stockedwittithe right inaterial. ~RQ total ~an~~r of active m::rscm rigs is snail and they are widzly scntterm?. tibcondly.thus bypassing the supply store.ractors that they would not p~chase at a discount direct fron the manufacturersthrough their own purchaainfl departncnts.. chasing too few orders. (b) The Sutmlyl{cuse It has been sug~estedexmy tines that the U.. have a large donesticnerket in NcrtA and South America to enable then “hoincreasetheir. . ‘SOEMcountries. have laws.k!?nui’acturers in the U. E&t cn closa exaninaticmthe pitfalls are formidablefor any individualor coinpanyintcmdingto enter the field.. . . Already in L%rope there are too many licensees.

I?ecessarily. It was not surprising.that sone contractssiGned at that time were complicatedlegal/%echnicaldocumantawhich tried unsuccessfullyto allow for every contingencywhich could occur. The legs+ phraseologyof the documents. presentinginvitationsto tender and evaluatingbids.. this has perhaps detractedfrorathe legal “tightness’tof the contractbut as it is never possibleto nake it watertight the result has been to accentuatethe partnership. sone years ago.when drilling”wildcats in renote areas. Opinions “cLifter between.:In the highly complex drilling situa-bion it is iupomible to foresee every eventuality. e. footage rates:arepreferredwhore drilling conditionsare .-groducedstandard forms for the domestic industryin order to siuplifyand standardizethe task for both operatorsand contractors.g’.. .ldbe true to say that. It wov. R6sGcL&Ji9q of Oilwell DrillingContractors The American ~ had.therefore.perhaps embracing foreign laws and certainlyinvolvinggreater risks for both parties to the coatriict. sanctioningor rewardingthe contractoraccording to circumstance.+hArnericat they themselveshad very little experiencein negotiatin~contracts.egotiate-. Recognisin&these shortcomingsthe parties are now attempting to make contracts as siqlc as possibleand are trying to usc clear everyday phraseologywhich can be understoodand acted on by drilling crews reuote from lecal advice.SE CT IO NVII (a) Abowt five years ago the major companiesout~ide the United Statea started to look to cmrtraotorsto supplemnrt‘theirdrillin~ effort. But these have not satisfiedthe pecul%ar requirementof an overseascontractwhich necessarily has to cover a more coriIpIsx set “ofcircumstances. of the operatorand the contractorin the task of drilling the well.oompaniesas towhich ty~?eof contract they prefer it were.--BuEenerallylyspeqkinfl--day-werk -is-favouredby-. The increase of the discretionaryelement in the fram~workof the contract”requiresa good deal Qf give and take by both porties and fairly liberal interpretationsof controversialclauses we possible without recrimination.--– hcl% partieswhere risks are greater. (b) Types of Contract It is not n&cesBaryhere to give details of the main types OP contractwhich are well known and universallyused. . and in the time considerednecessary to eliminateambiguity. although so~e of these conpanieshad American affiliateswhich had been employing contractorsfor many yaars in ovcaweasareas such as Sou.only served to mako their interpretationdifficultto i?i~ldpersonn@lwho hod to work to the terms therein. At the other e~~ of the @&e.

filthese extra obligationswould themselvescreate a requirementfor accommodation. Contractors hnve had the benefit of these well-establishedaviationand commnicatioz systams and have in additionused company-runship~in~ servicesand b~ach-lmadst They have been able to take advantage of?company know-how in local matters and contacts in local Governmentadministration. but he !ms to set up and maintain an organizationin the iicld to administer such service~as purchasing.the oper~tor~.whoovcr runs theiii.serving not only drilZing operationsbut other parts of their exploration and productionnetwork. that all wildcattingis contractedon day-work or tlmt all developmentdrilling is on a foo~age rate.have run their oh servicesas departmentsof their organizations.n-a-----&Veloping far. with acconhodationfor his own and company staff.cmclperhaps increasehis transport fleet. Not on?~~~MM he to provide the equipmentand parsonnolto drill the wel~! tWe*ber. industrialrelations.if he were asked to provide aviation facilities he would pres-umably :wbacontractto an air charter company but the lplanes.provide and maintain road ma!cin~plmt.g.includedin overseascmtracts bit it would be true to say that if”items lik~ casin& C@ tenant had to k suppliedby the contractorin.e. developmentdrilling in proven fieldst In between are an infinitenumber of.shippingfaviation. stores. Turnkey drilling contractsin remote foreign lsc~tionacoxld premm% even greater problems to the contractor. Turnkey Contracts The so-calledtwnkey contract. etc. not be assumed.-Wheret he-or ganization--is=al-r~ady established.-. modified day-work.transportand staff requir~d’tofu?.uniform over wide . -. .g.. But where there cm no a$isting servicesshould the contractor be. domestic indu5trylhas not a!?gcarcd on any scale in overseas operations. :!. however. It must.the services still have to be provided.footage bonuse~ and fcotage rates to choose from to suit the sgecial cwaditionsof the contract. for instnnce.comuunicatims$ personnel.a reaote Persian Gulf locatioa.none developmentcontraotsare nearer ho a daywork than a footagebasis. Company YW’ operatingin Libya ia contr~otingits wildcat as well as itw dmwlopment wells on a fcok~e rate.—.e.see then through my )m. Some of these functionsare already. Nevertheless.asked to provi&@nd rvd themT . the major companies. it is probably cheaperfor the company io allow *? contractorto use existing sources so 10DE as they can carry +&e extra work without needing expansion. . workshops and storas increasingthe size and complexity”’ of the contractor’soperation. Similarly.which is causing so much controversyin the U.well-known. . Conversely.accounts.conbinationsof day-work.he would lxm to “setup som sort of shipping bnd offloaGin~facility St the beach-head. They have had *ho securityof knowing that in the last resort the co pany wouId. if only from self-interest. The ccace~sionsin Libya where tLem wells ara drilled presentsroletivelyeasy drilling and MM rock formationsme flnt and fairly.

they have had many years experiencethemselves.that the prospects-” of.if it ie decided to drill fewer wells than planned or to change the locationof the operationthe contractorwould not normalhy lose. It claius tb.d have to satisfyhimself from the bcg’innin~.oil.keepinghis rig employedwith these companiesfor a rew-vmable pariodwere good. even in the largest fields.. ● Eow nuch more would the najor companies Iike tlm contrtmtor ho taka over? Oparatorlso~inionsdiffer sharply on tbia point. nnd that ii the availabledrilli~ was ce+ited.let-out clause and either retain a new contractoror operate the rig itselfF --- Xoweverl at least. Some oversens contractsspecify a inaxicxua period (which is usually eighteenaonths to two years but is sometimeszw low as one year).He would continue to run tho ancillary serviceshimself. Lebout clausesara inchdedwhich provide equitablerecompense for either yarty if the original conditionsare not met.afiniehed one he is able to send ‘hisrig and camp dircckly ho the next one. and eupply of’. Presuinblyin this case the contractor w-J.?any WOUIC1prefer to hire the rig and personnelon a pure day-work basis.The operntorrequires the contract to cover only the period required to drill. .hiswells. For instanc~. If tho contractorfails to comply wii% the s%andcmvls agreed the operator can invo!cathe. A secondwould like the contractorto grovide all natcrialsp transport. .Companies“A’fand “C”? *Lonet 8~-ecif”y a period-”i”ntheir co”ti”trfititi”.prefer to keep the agreement flexible to enable ohanges of plm ~d be easily resolved.field profluction is rela%ivaly small. he would prefer to have the grzater control afforded by a day-rate centractwith perhfipsa. the number of extra wells required considerably*O increase.twomajor opqrntors.drillingengineering and mud control.and . 1 in less khan a year he would still cover his overhca~s.The risks and dif~icultiesare fully appreciatedby the oil companiesoperatingin rernot~areas.etc~ but would wish to retain coinpletely oontrol over drilling techniques. A third cow.communications. Rut he carries the expense of importingthei rig to the Ioc@tionand rctarningit to its place of origin and t ‘ i% is to his advaniage to spread this cost over as mmy wel. The contractorwo>ld prefer loncer contracts. (d) ~ongth of Contract I>&relyis the overseas contractor in the fortunateposition of being able to arrmge the continuityof his chilling c%ntrncts so that when h. On the other hand it is clif$icul+ for the operatorto guaranteework for a con$raotorfor long periods.aviation.smal?. In the 14iddleEast. in the long run~ they will benefit by not having to lnaildup their own service organizationand will undoubtedlybe prepared %0 pay the oontrcctor a fair price with a fair profit to take over the reapm5ibilitif. Om corqxmywould like to see cmuplotelyturnkey contracts. In which c=el the operator say~. ’elementof incentiveincludecl. .” “rti5tioning ”tih-at=they”””2’ ‘-‘----’.laas possible. o From these’conflictinginterestshas evolved a conpronise.atis has found from experiencethat contractorsoporating footage contracta ‘lxncl to settle do~m to a uoderate pace at which they are earning & fair bonus but not overtraining their machinery. plus the number of wells to be drilled in the period. They are fully aware that. Ris drillin~and productionprogramneaare constantlyclxmginfldue to fluctimtionsin world demand for.

But it is.othex. A had estimatemay price him out of a contract leavinghinwith ’a stacked.. -. (e) D~meciation By the nature of the operation. he would be satisfiedto ~przad the depreciation over longer well as the contrzctorl as it present him with exactly comparablevalues to evaluate when assessing severalbids.rgvqd.. . This is pcm+.ell. domestic industryopt invariablyfor the lowest bid. has broken the elements of the tendcx down in such a way th’atit has ‘beenyossiblc to send it out as a pro forma. Even if he does obtain a new contract quickly.and. hnve the problem of finding a new contract to employ his rig. Yut this is rarely the case and consequently he >as to pitch his depreciationrate at somewherebetween ‘{hat1:. Some operators when tmndoringask for details of the contractors depreciation calculations.icularly ‘truein the ovorseas industrywhere in reiimteareas running .~fir~ly the c~se that all other considerationsare equal and it is I&se which are the most difficultto see clearlyand the hardest to evaluate in terns of advantageor disadvantfige to the operator in the short or lonE term. ii?t?lecontractorcould ho sure of continuityof work for his rig.depreciationand make a profit. Clearly. is the only policy to pursue.rig.a?? .. (ii) Evaluation . therefore~ dep~eciationforms an i.i4@?e$i?n?.r&teof mechanicaldepreciationof his machinery. It has been estimatedthat in the ten yeare 1950-1960 there was an 80$ increase in th~ cost of drilling rigs and aquipment.nearly doubling t~e rate of depreciationwhich shoald have been applied during”theperiod..!!+is _. (f) The ‘lender (i) cost — It has been cs%imatedthat the cost to a contractor of formulatingand preaen+inga hid in respons~ to an invitationto tender for an overseascontractrepresents an expenditureof several thousanddol?. .arein travell accommodationand administreativ e.S. He would.._if.plant and transport. k?ecm rmke the bid easy to calculate.e estimatesthe competitivemarket will bear and t!letrue . Gthers”allow the cmtrcctor +0 i?c~raciate 8s he 1i?cw.or diffimlt and expensive. the rigs ho owns UCY not be of the right specificationfor the new Job... the essentialfigures to be filled in by the contractor. At least one major recognizingthis..expenses. . upder these conditions.thata . -.mportmrt part of his bid. And it can be p._cqe!.the contractorhas a large investmentin equipncnt. This rietbodwould seen to offer advantageto the operator.The operator can affect this outlay considerablyby the way he frames his invitationto tender. e In addition to these uncertaintiesthe contractorshould take into account the replacementvalue of his equipmentat the end of its life.ww~~.’-.- How are bids evaluated? It would a~~ear fron current Junericanwriting that many operatorsin the U.

There is no doubt that o few of the larger coinpanies with many years proven ovcrseaa success could.other than cost. are likely to have pfitchy records. the financialsoundness of the contractor.: . more than the other two conld be lISM to be a Lood indication of possible futuro performance.overseascontractingindustry.000 feet. _ . perhaps. R should dso be in good nec.contractortells b. For an operfatorto gain ailinsight into the contractors financialpositionhe would have to dmuand and be given accee~ to the”fimu~s financialbooks. uust the operator look at when assesain& competitivebids? Basically. —. 1 considerations. ● a Some operatorshave attemptedto impose minimum standards on contractor’spersonnelby asking for personal details of the emplcyeesto be engaged on th~ir operation. -.__ -.imand is obliGed to assume that a rig which has drilled 20$000 i?ectis in better conditionthan one which has drilled say 100. It is difficult to see the value of the second condition as it is well known that wor!crecords and referencesin this indastry ~are in many cases a riostunreliableguarantee of parforwrice or character.where it is possible.* retain good men who will be able to maintain o consistent level of achievencnt. One company inposed a condition(since rescinded)that at least 503iof the men must have a niniinumof 2 yearls servicewith the contractor.-. a 6srvice ?aistorygiving details of footage drilled is normally.baaical condition. — —. In some cases. they are +hree. This is not surprisingwhen one rwnembersthe high labour turnover in the industry._. It is the soundly based contractor who can . In addition they requir~d for approval a cwricalurxvitae of eaph man t~get!sqr with his references~ That t!iesc ’st%adardshnve had to be withdrawn’isan indication that it is not possible to impose these condit$ona in the present day. however.a drilling rig is a coic~lex and expensiveoperation? cwtainly-dem~nding more fron personneland ecyipnentthan would be-expected in a domestic industry. Equipment.with pcrhaFs a femth. What / The operatorwill require the drilling rig and its associatedequipmentto be of the correct specificationto drill the well. Wt the rmainder. Generally spea!ling. If the rig is new there is no difficdty ?wt? ii!used. This is.particularlythe clauseswhich Rllow then to . ——:___._.—-. a visual inspectionis nade.not usually. 3oth the cmrlzmctorand the operatoragree th~t it is the stanclardof personnelwhich will make or break a contractors reputation. althoughbac!<edin some cases by reputableAmerican firma. the operator relies for his informationabout the rig on what the .-— — — .demanded..personneland reputation. ‘ The thir~ factor onwhick the operatormight %asz his judgment is the contractor’sreputationand this..berelied upon to live up to reputationand provide a good”technicclservice aud management in WY part of the world.. done and inmost cases operatorsare satisfiedthat the terns of the contract.

In order to estimate payback period”anassumptionwas first made that the oilwellsunder discussionwere ca~ital plant and. This is not an outrageous .. .i+ is necessaryfor MEI%O f10 so~e calculationsbased on simple financialco ceptsg An attempt has been made at this in AppendiJ ~ where payback “periodsare-calculated-f d~-some typical-liiddle-East . He may appreciatethat his other yardsticksare dubiousand could be forgiven if. with the remaindergrouped around the mean.the contractormay have a rig and crew available nearby which is just finishinganother job. in the interests. is reportedadequate.. I How then is the evaluatorable to validate his performance in evaluating.. . . therefore. cost of productionwill certainlybe affectedby the cost of the well but to what degree? Of course. although prepared to pass the saving in rig LlGviXU3 expenses on to fhe operiator. Ttieoperwtorapgmars ho have m interest in the profit being note by the contractorunless . usualJ.using the ~rocecds to cover his fixed overheads.ythe cost of tubing and wellhead but sometinesincludingcasing). From experience. is reasonableand whose rig.take overthe contractors eqiiipment and personnelin case of default.unless he is told by the contractor~ The low price may be due to a variety of reasons. . * So itwoald semn that fciurcf the five parancters used by t4e ogerakar in attel@inE to forecaat the contractors future performanceare questionableyardsticka~ I The fifth considerationis the qmted’pr ice.the pattern of bids tn!:esthe fmxa. .. But normally the evaluator has no means of knowing the full circumstancesbehind the figure he accepts. batch of ten bids. ‘heuay have all his rigs stacked and be bidding ‘lowin order to obtain the operator stmida %0 gain in the short tern by acceptinG low bids. of his company. It is not intended in this paper to enter the complex world of oilfieldeconouics.. Ee may. Gf one or +WO very high figures. in a.ranging from the highest to the lowest bid. The riostexpensivebid will he perhnps 100$ higher than the low bid.” Ctintractsgenerally ccxrhin clau5e5 re~airing the contractorto insure himself against third party and other coamrcial risks.On the other hand.bids?What differenceto his coupny in terms of cost of productionwillhis judgment of the contractorta price make? @ . . Obviously. Whatever the reason.- As long as tha wcli is drilled and ccx.the contrc+ctmis prepared to divulGz it.not eipensed itens (actuallyonly part of the well cost is capita~izecl. For instance. one or two very low. are sufficipnkprotectionof their intevesta..q?leted to apecific~tionpoduction should not be affected.wellsm ----.. +his will depend on the spread of the coat over the volmle of crude oil prcduced from the well.the lowest contractoron the list whose reputation.crude ‘oil.. The evaluatorwill usually find hinself confrontedwithl BnY) ten figures..he selects. But for the evaluatorto estimate the effect of the oontractbit?on the cost cf =the end product.the less productivethe well the more criticalthe drilling cost.

These are usually bid for at a fixed rate per mile or per foot. 100$’hiSherthan the Iowbid$ is shown in Colunn (k). 3.assunedto be 497 and is ap. 0’ . The costs’ofdrillinga well by contractorcan be divided into three parts~ 1. That a develop-. R<ferencc to Appendix 5 will Live the evaluator of wells in this range m A3icntion of t~c effQct of the cofitractor’s eler.g. !&is fi~ure is. Xt can be seen fron this table that the effect of takin~ the high bid instead of the low one is quite small ip relation to the COB+ and the-profitmeach barrel of crude.rig moving char~es etc. e. The cotitof items normally suppIiedby the operator e. This cos’twould be fixed irrespectiveGf whether the well was drilled by the cor@any or contrac-hor. the lower prcrtacticr. the rest being accountedfor by fixed cost items..~ Nos. r. tax considerationsaside. the shorter the well life and the higher the well cost the &reater will be the importanceof ‘thecontrcctortselement. -.ent. The payixmt for the contrnctcrlsequipment cnd services in drilling the we~l~ Reference to Appendix ‘Jw. a sepam. 2 and 3 above. aa~ing% tubing. . nent oilwell is cdlowcd for expense agzinst tax is perhaps partly traditionalanclpartly for incentivepurposes. a proiiucir.e. gwellis efi?evtively just as much.assumptionto moke as. the cost per barrel of the low bid.a piece csf capita:. acesg roads. rate.plant as.of the well cost on the profit from the urude. . COIWKUI(h) reduced this fur’therby ap:~lyingthe contractor’seIement of the totnl well”ccwts (estimatedas follows and inkppendix ‘15n). say. In Colunn (i) the tax shield on an axpense~w~ll is . . Of coarse. will lzi@lightthe fact that the ‘contractor’sclementt i. The very short payback geriod of a ‘typical” Middle East well is also clearly shown. Colamn (g) indicatesthe cost per bmre~ represent by the well costs.tor m 9 tds or a pipe or any other @art of the productionSysieu.water wells and pipeline. the sharper the pressuredecline. .. The cost per barrel of the high bid.-diet? to the contractor’s element in Column (j). . e 2.g. 4 . account for no nore than 50-60j4of the total well cost. !lhccost of services indirectto the drilling of the well. . cerwnt and nud chemicals.?hicslly. inwhick sone typicalwell ccsts in Middle East fields are shows &rw. say.

“-‘“isrG%~tfy”a-+T16blei-” ’-”‘“”””‘“-”-”-----‘x-’‘---- . supplier.e. (b) In view of (a) are concernedthat they will not be able to meet the increasingoperatorprc%sure for improvedtechnicalserviceand equipment. a series of pr~bleusto the parties the contractorand the directly conoernod. (b) Eur. They can be summarisedas follows#(i) The Operator’s (a) Are i%ceclwithdecidingthe level to which they are preparedto run down drilling clepartments in favour of contractors.pean manufact~zrers. (ii) The Contractor’s (a) Would like to achieve a gross margin of 10-15j$on sales but in the face of intense coupetiticncwe not always able to do so. are gacing heavy competitionfrom the U*SJL.i.~ where quick delivery and excelkenttechnicalservice . nothaving alargedouestic market.) Are finding difficultyin finding and keeping good staff.< . ● (c.SE CT IONWU (a) Defining the Problems From the foregoing i+ will be seen that the present state of the overseasdrilling industry is now presenting. particularlymana~ernent and toolpashers.or will : present in the future. (iii) The I%nufacturersand Su?mliers (a) Because of improvedinventorycontrol and’bhe use of airfreightby their customers (operwtorsand contractors)they have had to increasetheir own etockholdingain order that they can supply small orders “off the shelf”. ● (b) Am concirnedwiththe problem of retainingtheir own long-servicedrilling and petroleumengineering staff who may not tcleratehard living and family separationin the new drilling pattern..tor.operati.on. the oper-. (c) Ewe onposingopinionsas to the degree they would like to-go towards the turnkey.

.Naturally) companiesare uainly concernedwith cutting drilling costs and a great deal has alrmdy been achicweidin tha.. thro~h competition.topay nore. previouslythe najority of overseasdrillihgwas done byuajor ccnpanieswho provideda high standardof aaenities . The wutlmr prefers the second reason.-. Although some would like to .&longthe cQn~ymiesthemselvesthere are dianetricnllyoflposed views.. The reasons are not hard to departmmts hove inprovei! their own efficiency by xmxting ‘thecompBtitiont 1s1 the short term there would seen to be no reason why companies should not take advantngeof low prices and be content to allow free rein to competitiveforces.findingti$zi~~lt~ $W . The operatwraare now clenanding better technical sm?vice and staff from the contractor. _.ity or less? .but not as an all-rounddxilling se”rvice~Via equipmentis good but his staff doubtful.becom nore efficientthmselves and by virtue of havinG the resources of a lcqje coqyany behind tkxu have been able to cvertoke the contractorin fielclsin whick he has been pre-eminent.e. the patternhas now’chnngedandnen are now asked to live for long . Others have already rcmched the conclusionthat they have nore control in the dnywork contract which.!?hereas._. ratainingtheir field personnel. . Cor@ccnyclrill. The first rlaybe that a buycw(s mqrket in drilling Xabour nay exist stenming flxm oil company reduncllmci ast The second may be that contractorscannot affcrd . ‘This particularlyapplies to non-dimerican companieswho would find Great difficultyin rebuildingtheir drilli~ or~onizations from European labour sowces if they decided against contractors at som~ time in the future.S.-’--~cith-optmutor and-contr%ton-=e.. himself as a hole+naker. Be has established. Future staff requirementsof both contractorand operator will be largely dependent on the oil companiespolicywith regard to the type of contract they negotiate.%ss Gn rmre responsi~ilitythey are suvswlxit douhtfkzl as to the contractors ability to run the operat’ionl boae~ on pst their reluctanceto burn their bridges completelythat they are unconvincedthat in the lons term they will be able to buy the standard of service they have set within their own dopnrtments. But company drilling departrmntshave. Why is this so? There could be two reasons. ri~-moving.ucesthe contractorto littlenore than a plant hire company and staff agency. For instance..g.that of taking up slack in fluctuatingdrilling programmed._ . dosmstic industrye Althoughop@ra*ors are broadly aware of the problem.’... and mhr’riedaccorqodationfor their drillin~ personnel.uost contractsnow specify that the contractormust provide a drilling eufiineer.. What standardtho contractorwill be able *O furnish ia very uuch .aew ailfielils by tha employmentof contractors. there is scant appreciation within some company drilling departmcn$sM? the internal ~ finnncialnnd economicworkings of contractors. experiencedin the U.V3h lower than the oil . ● ● After a b%:lsffirtthe contractoris now fulfillin~a need for th@ aperator. they should be higher.._:.dcpendenton the salarieshe is preparedto pay and it is a surprisinfl fact that his rates m-c currentlyER. consideringtho “lackof amenitiesand sporadicnatir~ of the work. incidentally. Will they reqair~ the contractorto trikeon more respcnsihiJ. But they are showin~.. ..

The contractorin his turn can bid secure in the knowledgethat his competitorsare fi~nring on the that each contractorbiddinS must dimalge the cletaileil content of’his in particnl..persome:. book value’and intende~ depreaiatim rate. The operatoruust. How can the contmc$or reconcile the demand for improvefl equipment. Leave peribtis will “requireto be lon~er Dnd rlorefrequent- ● The second vital element in a contractors costs is ~dq?reciation. The advantage of this systeu for both operatorand contractor are obvious. To”be able to provide a high. At the end of the stateuent. Other items could be ’dcdmiledif requiredbut personneland equipnentare the xmst essential.An asswqtion cm be nade that hi~her salaries will attract the best nen anclthat new equipnentis better than old. sane biwis and that~wellpaid staff. It is doubtfulwhether current selectionuetkods could be prcred to be better than random selection.asce~tain. operator seleots the conimactoro The ~~bious rensonin~behind the yardsticksused in selectionare discussed in Section VI.iuiteclearly. . under. to the ultimate detrixaent of the industryas a whole.only by the operators themselves.a~equateto allow for relativelyfast depreciation.personneland servicesand yet be able to uaintaia his position. best.. It must be renlis@d that to attract and to l~ep hi@ calibremen. Zow then cm the . Every bid should be in the form of o financial statewentof costs and should itemise.recognisethat these two considerations are of paramountimportancefor the future of tlw ind=stkyand ho can do this by revising the form of his invitationto tender.-and equipfieat. Must be sone new thinking in this area. new equipuentand a high .confl.adfled. ‘i’ne vital element of the service the contractoris selling is the knowledgeand experienceof his personnel. do all these things and the najor factor preventinghin is the method by which the . are which will be applieflthey will inevitablyresu2t”in higher A1l bids will be set. im pr.t!ae. ● Comlete financialdetail should bc given of each rmjcr item of’equipaentincludingori~inal cost.out on the sane basis so that direct .ictin~ requirenentmof cantrol and competitionbe reconciled? .. whc will be spending their working life in renote and relativelyW’@CaSan* Conditionsl.standcuxlin equipuent his profit must be.who must set. salary scaleswill need drastic upward revision. The operator is able by inspectionof all bids to —-.the stan~ardsthey rcquire$dmand and nest enforce thenaml then be prepared to pay for the~l.: .camp periods in remote areas under relativelyuncomf!:rtable conditions. CompensatoryPay m-xlleave has had little effect and it is clear ~hat if _&&&rds aro to bo maintainedthezc ..after tota~ costs. comparisonscan be made. Wh3tover the remedies a hiskly competitivemxr!~et~ at the same time depreciatinghis equipment costs and providing binselfwith a reaso~ablereturn on his capital? The plain cmswor is that he cannot.ovi:le:.w~ibh contractor. a percentage for profit shoul~ be.the present systen.‘The field for cut4hroat competitionis left wide open. the salary and conditionsof ccntraet of every nember of the contrac%orls staff. The total will be the lxd ~xice.__..

ompetitor whenever a decisionhak to be Made as to whether to eaploy a contractor. ninirrm salaries.- depreciationrate will be to his advantage in the operatorta eycs● Most importantfor him he would be assureflof a reasonable rate of return on oapital if his bid is accepted.dbe well advised to entrust the ‘evaluationof contractsto a departmen’ti qualified in those fields. At least two uajor comprrnies have tilreadydone this. In view of the overlying financialand ccononic importanceof the drillingcontracthe wou?. there would nearJ.. and havins done that ~iustallow the contractor to depreciateat a uininum of 25$ p..on tiii invitationto tenfier. let us. --------------- -. . The contractorwill have to reconcilehimself to having his business affairs.equi@ent. ‘fhisapproachwould not elinin~lte the co~Pe*i*iv@el@rlentof tenderingas there would be EUUP1Oscope for competitionin the areas outside salariesand depreciation. of four years. closely investifjatedbThe operatorwill have to forego the ‘ artificiallylow rates to which he has been accwtoned in exchange for future technicalcoqmtence.particulardetailingsalariesand other ercolunents and financialand servicehistory ‘oi.’ . ‘fhePresidentof the JaerieanAssociationof Oilwell Drilling Contractorsrccetatlyforesaw that “within ten to fifteen years nest of our drillers and rig superintendentswill be operating engineers’lC “e In return for neeting higher short term costs the operator WOU14 be able to entrust a greater part of the responsibilityfor his drilling operationto the contractorhnd ahve further imwagds the turnkey operation.!.based on his own ex~?erience and knowledge. ’”: . All this will require new’thinkingby najor ccmp~nies in their approach to evaluatingbicls.’For exauple. ● ‘1 . say... They must stipulate that major item of equipnentshould be of a naxinun age. Drilling departmentscould be conwaltedon any technicalquestion on behalf of the coupany but should be put in the positionof a e.a.----= 1. By the renoval of coapetiticnin this taipectof the bid the contraatnrwouldhe allowed to meet the Fkxzmds of technical aclvancein drilling on the educationand skill of his personnel. ‘: .yalways be variation~in shippin~co~i% to be Wmn advantag~of by the operator. The contractorin return must allow inspectionof the original purchasedocuuentsand his financialhccks by the ccrnpmy. . The On the personnelside the oparator should indicate.. --”.particularlyhis financialboo!fs.costs.~ (based on ~as$ @~Peri~nce replaceL~ent costswill have increasedsome 30$ in Zour years). would be assureflGf Q fnir return cn capitcl mxl the opportunityto build up his financial strength.1’ I1 -------- “. It is clear that a change to this “open” relationship be+xieen oil conpany and contractorwill require soae romljustrzent on both sides.- -----( c)--lle-conncndations-------..----------. . which he would expe. .. Tenders should be presentedas a’pro forma his turn. Gross pzofit margins should be statedby the contractor. Havin~ cstablishetthat they require higher standardsfrcu contractors’they~lust~dine Whnt t~@s@ standardsshould be in direct numerical terns.tatenen’t of .ctthe contractorto pay his staff.

e. . Overseas contractorsshould foma themselvesinto an associ~tioneo that a code of atmdards can be formulated with the object of raising the quality of tha serviceand obvia%ingcut-throatcoupetition~ 5* Operatorsshould neglectico5t as a major considerationin evaluatingbids and sho$.q units in L’fi.nwpe to make Anerican equipnent althou~h sales organizationsare still essential.Odinstead aet up miniauu salaries and rates of depreciationfor inclusionin invitationsto tender.! . ● ’ 6. Drilling cle~artmcurts bids in competitionwith contractors. 4.$. responsibilitycentres and cost so that drillin8 g departmentsare sirnultnneously.3* The evaluationof bids shouldbe effectedby financially qualifiedpersonnelwho are not members of the. in turn. Sclnll ~ quantities‘off tha shelf” can best be bet from the U. In view of the high staff turnoveron bolh sides cf tlie industrymi the need to attract technicallyqualifieduen. Manufacturersand supply companieswill’.’ seems have to ~ accept the new pattern and endeavourto r~eetit.ityof overseassupply houses and the ef~iciencyof air-frei@t supporis this view. ~pportionmentof overheadburden must be c~~arlY attributableto the drilling function. ~ higher salariesandnore frequent leaves should be offered. The lead should be taken by the oil companieswho can.conform. * . Little canbe said for maintaining large r. i. Coqmy cost accountingsystemsmust be construate. they-areresponsiblefor anflkave control over expendituredirectly conqernedwith the drilling of the well. impose ninimums en the contract industry. Drilling departmentsshould consider themselvesto be in direct competitionwith contractors.3& where there is a domesticdemancl~The iqmactibil. Having set the standwxls. 7.operatorts shculd submit drilli~ department. they should impose sanctionson any contractorwho fails io.

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in..vaila”bility of his wide kmwledge of industrial . Eis constructivecriticismsof the drafta and the a. and~.c~nclus~o~~~ - .—_ee. Shell InternationalPetroleunLtd..~DrJur*~ the author~s tutor on this project.\w. .Conpanies Gulf Eastern Company Inc.oleuu Company Ltd. Kuwait Oil Coqxmy Ltd. lX The author wishes to thank the followingconpanies for their kindness in allowinfi hin facilitiesto conpile information and o$%ain opinions? In particular. EuEhes Tool Company LtdContinent&Ekwco Company Ltd. i. Ei~ltTa?.ere ?. KellogfiOvsrseosCorporationInc.thanks are due to his friends within these companieswho gave him so much willing and unsolicited assistance.omdcB.— .t9:<hg_R~t~gx .bo*. .pie_.:.eac~~% hi?._w.B.——-.SECTION ——.nyg. .ssocia+ed Companies British %troleuiiConpany Ltd...S~. and~ssociated .. Iraq Petr. Special thanks are given to Dr.

x . .go completelyto contractdrilling? 5.if any. . . ..e. exi~ressed in terms of noney... In your oilfiekls.what were and me . .christzmstrees n 11 II n conpletim equipmmt tubing /. itmns for company drilling staff houses etoFrom this can itbe shown that the ~loveto contracting. Has contract drillingbeen successfulin fulfillingthe re~uireuents0$ your con2any? Financially : Technically [) If not. “-”-H .. ‘h yom drilling progrmue in terms of footaGe/wellslar~er than it was five/tenyears ago? Is it likely to increase/decrease in the next fivc[tenyczrs? $tcuws and Inveatmries The object of this secticm is to ascertain the relative of’nll typcw size.policy to ru down you own drilling departucntond equipuentan<. Drillind. 4. has resulteclin reductionin overall ~tores Loldings in the operhtingareas? “ 1. 1. for what reasons? Will ym company drillin~? thereforego back to .’-.. where the opmwtions are Exploration. When did you stark usin~ contractors on any scale? lfhatwere the major ccnsidaratio!as behind the decisicn to use contractors? 3.— General —. .i. c ValUe Gf caSiUg spools? . Is your. Is your awlpany intendin$to use uore contmct than company drilling in the’future? Vhat have been the proportionsover the last ten years of ~ u : Company rigs to Contract rigs? Company footnge to Contract foda~e? 2. . of i3toc!&oli!ings of m~terialswhich ’cm * [al % &ttributnbledirectly to clrillin~.Profluction.. -. Process and Pipeline..Szlcl’Ioli —.antspares. “a “Total-value” of itti~e-h”olclin~s-oveti l“ait’ten-yeaz%? ‘=’--”‘-’‘-‘:--’ -------t! II II It b “Valueof casing’ .- —. . Rotor trfiriaport sparest pJ.g. or (b) be attributableto the &@< up servicesnecessary when the coupany is runnin~ its own drillin~ departucntt e.

~ . As 6 percentagesf vcdue of total stocks held.elemnt of’the contract? ~~ t .. 5* lfouldyo~ prefer your contractorsto have married accomotation in their field camps? Or not? Do you have Q say in the facilitiesthey offer their personn@lin the field? Vhere’poke-iblo do you allow tikeratoyse your social .techniques? I’ersonnel Financial inwhbility? Iiescrvoirdamage? Other faults? What do YQU look for in a contractorwhen con~idoringbids? Good local nanngeuentand personnel? Adequate equi’pnent? Lowest cost? Previous experienceof drilling in & similar area? Any other consideration? When your drilling pro~ranueextends beyond the ori~inalcontract. . cloeethe contractorhcwe access to ‘&e discountsyou Gxpect when buying on a large scale? 3.? Does the cost vary with the +ype of mterial . in future.. buildingsand handling equipment.d e f Value of other drilling spares net in (b) or (c) Value of mud materials &ad chenicalsover last ten years? Value of oilwell cenent OR other 0 s tl n cenent used in wells n 11 H ~i E! Valuo of Ml spares w s tl W b Value of’plant spores [) O 2.“ .of shippin~his rigs and bringing in new ones woult ibeconsiderable? And perhaps the devil you know is preferableto the devil you donlt know? 4* Vbt type of contracte.”. office equipnewtand rxdinery... expect to ~ave in terns of a b c Value c~ inventory. etc. M? your pvliay is to go to contractin~. conditions? Will you. Contractorsand 13ids Has your experienceof drilling contractorsbeen”genemlly good? Xf not~ . ‘ H k. ~partii.. & -. whet fi@mw do yoa use as a stores overhead charge? Eow is.. .turDkey_eOntx~9$a .by-tefid~ri@. what do.... wastagel obsolescence/deterioration.aa ‘eaywith drillingmaterial (few item of relativelyhigh value) and MT spares (largenuszherof item of small value)’? !.. perhaps$ the cost. .rsonneland mkiini~tra+ionl equi~nentdepreciationand runnin~ costs. one of the main reasons to cut down on your overseas inventories? If cost of ~. tiemfore..-..~. day-wor!znodifieclday-wore.$...... amenitieqa$d if. s$ores ‘“ I.po clo.turnkeyp do you prefer to negotiateunder (a~ developmmt (b) wiMcat .pud natm’ials$ cenent and wellheada? If not..this figure broken down? Dalesit includehandling. includingpersonnel..= or by increasingthe foota~e rate. tend towards increasingthe contraotmrts -. Deductions of nunbers of item? What sectionwill show the greatest saving? (d) Stores administrationservices.youahqrge. would you try tG retain your existing contractoreven if his work was barely adequatebecause.ip~tion.. cost of investnant.wha+have been the main faults? Bad field management? and laboar troubles? Faulty equiprmnt. In your drilling contractado yoa supitlycasing.= ..

..onnel are req~ired for one... Are you prepared to assist the contxnctorin such things as custom film-woi procurementof visas whero your existing ux~ymizationwill have m d<fjtlnc+..the ... .... . When you dec~deflto take on contractor was there any doubt in your...-.– . why not? 14.-. ...=.fmr years. . .$i@. Do you insist that your contractoris coveredby insurance? lire you covered against non-fulfillrwxxt’of workby the contractor? 12.when contractorsare drilling ia renote locntions your ccmpany supervisorypersonnelare livin~ in contractors accommodation.nind abo~t the r~lntive efficiencyof the company drilling ‘ effort? In-ocsks? In technique? In equi...’... Would you consider‘len@ening the nornal contmet existingme of two years to say three or .particularlyif he has narried quarters. . . Do-you insist on a minimm standard for then? Are they co~lpensatied for hardship?” 10.L . Do you find that company and contmactorrsdrilling personnel opsr%tingaway fron base have difficultyin intcrprctin~the legal jtirgonof the contrac~ to their autud sa’tisfmtim? 9* Presumably.... khat. What would you consider to be a fair return”m net worth for a drilli~ contractor? tera frou the 13.——. .. . in terns’ofpekcentage~is the differencebetween the highest and the lowest bid for a tender? Do nest of the bidtexa fall within the sane range or are they widely separated? 11. fl.overall .your col~panydiillingdepartnont.= “H b (to includebackup:serviceti)? o_f. Do you find the contractor..Aw]ent? In personnel? In organization? In back-up sarvices? !fereyou concerneti at the very large investmentin overheadswhich had built up behind the drilling operation? 2* Did the performanceof.. . .—...with crude nneniiiesand no security of employcwnt cr pexsion? (M is this pwely the contractor~s bnsines~? 6. asswin~ that the drilli~ progrmne was fairly i?irnthat far ahead? If not..?. .. Do you think the oontractortspersonnelshoald be given-high uonetary rewards... . was cheaper> a in direot drilling costs .’h@co!qpe. . in . 3* When assessingcontract drillin~against corqmny drillinswere j you able to i~roveby a financialexercise that one or the other .. :.@lg<&’il~~ng .._-.. ...ccntractor c lrilli}~ -.locateshis base ccmp close to c~~ipanyareas? Do you find trainingnecessary for your own personnelto enable the~ to deal with contractors? 7.vsntage wer his? ‘ Drillin~l?fficiency/Costs 1. . inprove _uDdw’. What nmber and categoriesof conpony su~ervisorypcr. two or sore contractoratrigs? 8.. sane area? ..

insuronce... Em your companyts costin~ systm been successfulin separating $irect drillin~ costs fro!. .. po~iticali trado union inspired skrikes? D~ the contractorshave sinilar troublos or has the sitw’nticn improved? firethe contractorsconuiktedto a training pro~rauae by tk heat ~cverment? If so. I (a) —. work fycn his crews? / 8.excessiveti=e off for prnyin~ and other religiou6duties. <. Was there o natural resistancefron drilling departments when contractorswere introtiucecl? 5* Did conpany drilling departmentshave labcur troubles e. refusal by drilling crews to nix rrxl. .: .. h~e it beotidue *O the fact that a b [1 The contrcctortariS i~ bett~r unitized for qaic!zu&ing? The controctorlstremsportis deai~ned around the rig uovin~”operaticnand is thereforenore efficient? (c) The contractorrs drilling crew uove with the rig m. when doin~ a comparisonwhat overheadfigures floYOU use.coulcl be done to reservoirsby inefficientor caraleas contractorpersotielwhc are nninly interested in naki~ kcle? hre you considerin~cm increasein overt.-. -.. for extmple.of cmipanymcl cmtrsct :lrilling? If not..home l. tc the saue extent as the oorqymy? Does the conpany ultimatelypay fo’rthe training proflrarne directly or indirectly? 6. what drillin~ and drillingengineering personnelhave you enployed? In mmbers? In annunl salmy[wfige bill? In the field? In head offices? ~ 2%s it reduced or increasedin direct proportionto the nunbcr of conpany rigs runnin&? Has there been a noticeablereductionsince contractorswero enployed? 7. .nage. -- I&at proportionof total transgort (if Transportoverheads? overheadsiD a fielflwhere developmentand wildcat ara in progress is tirectly and indirectlyqqwrtionod to drilling’operations? (J Stores overheads? As (b) only stores overheads? .. for 4 .y to wells drilledby..i ore responsiblefor the whole.:.. rig-clownto spud-in by conpany ri~s has been cotipetitive with that achieved by contract rigs? If not. social auenities...+-? .e. _ ..- 4..:-.cave.say in renote areas.. . Do you considerthat rig mwin~ time i.. overheadsattributabletc drillin~ S. accurate comparisoncan b~ nade between the cwts} direct and indirect..11corq~anysupervision “particularlyin wildcat operations? 9* Do you expense the cost of drillingyour wells? What items are capitalized? Cpsing? Tubing? Casing SDOGIS? Christuas &sea? 10. .contrnct. Do you find that the supervisionyou are able to app?. Annual cost of keeping a nan and his fanily in the field ~ during his conpany career.g.-:.-–.conuissariat.... continuouscperation? (cl) Do you consider that the contrric.... . inclxdinghis housin~. over large drillinficrews..Othat direct. is sufficientto ensure that the well is drilled to your specification? Ch’areyou nfraid that ds.tor gets nor.... etc. Over the lasi ten yeara..pension fund..

. what is flelaying I .oyin8 drilling contractors is to reduce t!w very considerableovcrlmadorganizationbehind the aompccnydrillinfleffort. @direct Costt e hpproach royis & site preparation ilaterwells & supply Stores tandlin~ Rig-up/rAove Rig-down .11. If one of the nain reasons for e@. for the followin~ table brea!cinghwnwell costs? Direct Costs Development!Tells p to q.–.-to.supervision Pet.Eng/Geol.ooof Contrac$.sgipate” company drilling organizationccxqbtely? a 14● . M?.ingcosts are generallyhigher than corqxmy’ilirect costa? If so.~s? . salaries... gcverncients will support use Qf._.whethez. Ii’yoawere to start opckating in a new area would you as a matter of policy use drilling contractorsrather than move in ~ a eomanv clrillin~organization? If long will it take to reach optirwl size assunin~ eitker a couplete nove to ccnkractingor k partial one? Tfnot. Tubin&.Unce~tainty-as.transport log~in~. Rockbits/extratools transpwtlhaulage provide typical values. Is your experiencethat contractdirect dril?.=comtractorsin the future with consequentreluctanceto di. Completion(incl.was found in this new ..shootin~$etcc Capital expenditure. acid.-.. in round figures or peroen’%efl~ .. by what percenta~eap2roxinately? Is it the lower indirectcosts which Bake the contractor attractive? 13● . has this in fact happened? hre yousucceedin~ in reducinE the overburden? If so.orls Datiork & footage poy- Nud control/uaterials Coy.. the process? Tliehost govchymentrefusal‘oflabour reilunchmcies or insistenceon continuedtraining in the &illing int?ustry? Difficultyin disposal of eCiUip2Wntmfl inventoryholdin.. %lo. Cml. Xhas Tree etc.

.corinG and fornaticntcwting? If he does. What proportionof your total cvzrsefis involvedin crude oil production i. @ ~....... .. ...doin~ it competently? IS h~.. by service CGLU&lniW... area would you ccntinue to use contractorsfcr development drillinE? In old~r proven fields are you novinG tc contract drilling for developmentdrilling? For workover? For futuro wildcattingwill yGu enploy ccntraciors. Ovar the last ten years what has besn and is your investment in drillin~ equipuent Zcss depreciation? Will your policy bo to write i% off when contractorsare brc... in your opinicn. - . ~k& your host ~overnrxmtsany Ohjoctiontc your enjiloyuent of contractors. are attributable to Direct Drillin&Indirect Erillin~ Costs? 5. _ .S. 1s your contractorexpected in the terns of the contract to do special jobs.. . Would you consider that abetter return could bc obtained elsewhere on capital that is spent on drillin~equipmnt? Have you con~ideredl@asinG the equipnent~o that its cost can he expensed? operatingoasis in areas k... SUCh . perfomed in the U. i.. “. Exploration.your own drilling departmentor both? 15..m cerxmting.ern nethcds and cquipnent? 17.___ . . Pipeline& Terninal? d ““”’” 11-” . .... Process and Pipeline. .cm~servicebenefitsWOWI no lo~er a~L31y? (c) !IMde Unicn objects to’less favourobleworking conditions under contractors. .because (a) Company trainin~ schemes for local euployeesmay he jeopardized?’ (b) Conpany pension and other l. Is there a fiscal advan~a~ein eqxmsinC the ccmtractorfs drillin~ char~ewhic?zinclucles his equipnentlsde~rcciationas opposed to th ccrqxmy buyin: equipmnt and depreciating it in rate of depreciationis allowed on kxwy the usual way? I:That drillin~rwwhinery in your areris? 2..- a percentageof total dril~in~ expenditurehow sauchis spent on a) Dri~lifig Research b IiesiwvoirE ngineering [) . Xave you recentdy bqjht new drillin~ equipuent or am you runninz it down prior to turninflto contracting? Would you like lm sell Son@ oi’your riflsif you could’? Financial 1.---3rixling”” -~” c Production& Process ‘._ _ _. . coa~s are Bllocatedto IE+@mtim ~. .using +ke uosi noc’. —. are you satistie~l that k is. .e.? 16...~ht in? (M p~rhai~s to off~r it to contractorat residualvalue? 3. Drillingj ~ Production. ...“ 6. .. 4% perccmtaGes.wliatproportionsof total Iabour anti supervision ~ .

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“4 r-n i3= WI o % o i)’” {t{ 43 ● . .. 1- I ??! m I-1 I G UJ I i I —.—” .— ..

3 1 ‘ 1 17 .. -. 2 .. .. 17 ... 5M7 ~. I 6 17’ “IF” : I 1 107 ‘ . T? RIGS . ). -.Total: .. ‘.. 4“ !7 . -. Sub~. ~ 1A” ~ .! !. 28 6 Iv ..g . MEXICO .AI 13 — . MADAGASCAR .A - IVORY ~’ !& IL :4 I .’ e SECTION X APPE.. ..’ ‘otal Active Rigs in Free Nodd OUt~ide U.S. -.ARGENTINA BOLIVIA 1 BRITISH HONDURAS COLUMBIA COSTA .. “17 41 17 28 – 4 17 . x 2 THE DRILLING CONTRA i INDUSTRY WORLD WIDE DISPOSITION OF LAND RIGS+ 1.’ 2 . COUNTRY CO::R::T*RS ‘.ub ~~otals .1 .— 1 — – 24 ‘ – 2 3 AFRICA 116 ..A. “ . .’ ~. LIBYA 17 2 4 COAST 4 2 ‘ -. ‘2 ! { 2 I .$A 2 2 3 3 I 1 28 ~... IF 2 jG ‘ “. -.3 ~F 1 ID 1 2 SENEGAL IF 2 TUNISIA 2A flF.. 21 1A VENEZUELA I . 2A IAR . NIGERIA SAHARA- FRENCH sAHARA– SPANRY+ 1A 9’ ID 1. & Canada++ MIAR]C]F:~BhDIG 4 .. 2A .. ! . 2 \ 1 42 . – – – LATIN AMERICA 347 1 9 1 . IF VI 21 1A RICA .’IF 4 t ‘ 1 2A’ .

? .u M .’ . . ... -1 \.

! ) CA@NG & I cAS!NG 8 CEMENTINC 17~o I I L SUPEFW”... CAPITAL 3% :OMPLETION ~ INDIRECT . INDIRECT .. . 8~0 A 24% Direct v ‘ . TRANSPOW ETC... . .. ‘ LAB OUR AND SERVICES COMPLETIONIf MLW~G~N.% . . )tilPMENT . .“SECTION X. INDIRECT CAPITAL3! CAPITAL BITS. “ . f) BY.. .. .’! CAPITAl :OMPLETIOtd. > . —.. . 7 3% :OMPLETIONJ! ? ~Y CONTRACTOR PROVIDE . ‘... . .+W!TER~AL.. ..JAL} LABOUR ... ——:— b’” . !. . LOGGING SUPERWI. . al.-. :ONTRACTOR CONTRACTOF ONTRACTOf ONTRACTO .. : .rt“ ~. ~j.‘..!. ONTiACTO . Direct CEME%TING 1’ !“ I 17% 1 + PROVIDEO cONTROL CAPITAL 8Y C?V51NG “ ..... THE - PLUS OPf RATOR PROFIT AND DE PRECIATION. ..“. ‘ 12000 6700 APti 3 + 4 DEVELOPMENT ‘WILDCAT \ - ) -.- LOGGtNG.} m~. .< .. ‘MUD MUD CONTROL 9y0 _— — ——— I CEMENTIN .. . .& SERVICES . “. .. . COMPLETiOl ~ I@ERATOR ‘~-. — 21% ?rei ..J “ t.MATER. Ion.MU iud. . . -. .: . :. i 1 43X Direct 1 CASING 227. ~~ . . ... . l-. .. INDIRECT LOGGING4. VIUD LOGGINI k SWERW 5 .. IN OIRECT 1 :. 23% 1..—— CASING & CEMENTIN( 16% & LEMENTINC 19% 227... . .. Bits.!..

30 c 4“ .:..2C”’ . Less: i’ 10%-DISCCWNT ?“ < ../” PRQFIT. f.. . and ‘&sian ~.... <.’. 9C I after tax Add: Net cash flow producing —. .... . .. . x – AmNDlx I b . ‘+... . . .80 less ’10% discount per bbl.. . / / . .!. ESTIMATED . ------ . 4 $: :85C . .. $0”65 - Deprecation FLOW .’ . . 1 1.. ..S.. 1.> \ ‘... * * Am a~rage figure >...: ‘. $0 “76 per WI. .. . NET CASH Government NOMINAL PROFIT *Effective net cash flow coy. . “ ! .. . !.’ SEcTlON ! . -.1.... ‘. .-0 /.J $.: =-%.! ‘ m . .’ w An assumptio~ is mcide that the trading . / OPERATING COSTS INCLUDING EXPLORATION DRILLING company.’..11 ‘ —.. . 1’ f .. / “/ . e . 0“30 Less: Cost of sales Cost oil ex producing $1”50 company :. GOVERNk4ENT . .. .. Sales trading Posted -. . price [$2) . in the GpJf prices -$ producing company per U. 19C oltcOM. 1.!. / . . t COST OF PRODUCTION 1’ “ ———— ———’— f..’ . $1. . ........ i ..: . I .@ANY ‘.”. ———— 0“85 tax ~rading coy.Net profit -.“” .!..“ !.. ..... .. . I company% skreholding between Med iterraneal.... . bcirreL is in direlt proportion to it’s of fiake of crude..“ #“ . ). .“. ..” . .. TAX . . . 1..~-.. . [9c+ 2c) to trading’” company ().. . “ :y85c e . :“. .PER BARREL OF CRUDE . .

APmNmx C@fDITK!NJ ‘1W AND Mi7JXORS AWJMED ‘ 1. a sir~ple payback period calculationis used. .:This calculationis . the sequence cm position of the well drilled is unspecific* m 3. . !iTmtthe revenue obtainedfron the well will be a~~~lied*O amortizing’thecost & the well before any other part of the productionSystem. ~. ho avoid the conplicationeof introducingthe conce:?t of !aar&inalcost hrto the calcu@tion. . 2..and becouse itwould lx? difficultto decide on a suitabledi$ccuntrate.. ““ ._. ignoringpresent W.. . That the ~ilwellshave a life of ‘h?entyyears? flowin~ three “ hvndred days/ye’ar.. with an cwera~e of half the m%iuuu. 4.—— .’ J . That.. i do~reciation) per barrel of crude oil is 76 cents. starting at naxinun production ending at NIL‘. That for the purpose of simplification. . :. . detailed in Appendix 4. That the net crashflow (net profit after tax.laes of’ future cask flows. _.

.:. . 40Q....:..1.. 1 .$11. ...~ ~. . . -~EcT]ON X – APPENDIX 5 -.. .. .. at 76c / bbl per.F . (f) - Net Cash Flow Production Rate over 2i3 Year life bbls /.1.’:~b) I jod ~otion Rat e .. .’‘ . . .. .000 I $. :4 ‘{ .“e. ‘ “ @fi~RAcTOR’S COST ELE~E~T REIA~E~ TO PROFIT PER BARREL “.600 I 30 .” . ..~ 1’ . . . over 20 year $3...! .$ 20... . II .800 . $.day . % . -. “ .-u.. ... ‘r’ . .. “i’.. ..... ‘“$500..4’ ..0Q0 :... 10..1 I 10.000 Payback Well Cost li_fe =20 x 300 :’ m]llions / bbls (h) (i) Period [days)’ ‘7 105 66 ‘ per. ..’.. .. d: $Start of:’ Period .. (cents) . :.000 .000’ .0... .33 084 0“83 0’54 od (D Effective Effective Contractor’s Total Production Average (9)- Tox Shield at 45% say Contnxtark Eie GMtractor’sEle ent per bbl x 2 ent per bbl (at Law Bid ) (cents) (at High &d) i{ -a-+-t+ ...... .. !. __L ‘ .1 . ‘... ...000 I (c) (d) (e) I -.. .... ... ih. ...“: . b$h/doY l.7.000 ).( ‘. ... .. . . bbl [cents) Element per bbl (60%) (cents) 0“09 0906 ~. 60 5..

-. . London ~ Drilling iSJE@COIUin~ Inetituteof Petroleum Review. 13i ASHTONAJ39 14.. . VRINS TtJs How to Plan Successful . 3?etrolemEngineer v3k .L~oyds’BankReview Finanaing the l?u~e .. Londoti Faker and Faber. $ The Econonics of Middle Eastern Oil :~y and Faber. . Intermticnal Oilrum OverseasDrilling 1959.13 and 1% Contracts 7* BORU3G0 E*G. Oct.9 tiu 4* SHEEHANJ..inGs. 12s ASH10NAJ3-.— SOURCE No.Global Job Drilling 1961 V22-12 8* HARTSHORNJ.’./Criticisnand Mar.9 Kit 5= SHEEKANJ. Sanity or Suicide? h~lling 1961 VX!. ContWactorls Survival Drilling 1961 v22.. Letts Pick the Right Man for Oilla.. . 10.Inveatwrrt Iwtituteof Petroleumpaper ‘ “ -.B %vi~=. ‘ . Oil (!onpenies& Faber hilling 1961 v22-13 . FREDERICK33*O t The Turnkey Drilling contract Drilling 1961 V22. 1963. 1. Drilling ?eehnoltigy :.11 end 12 j -. . Gcwerments { 9.ter The Drilling Indu@’y. Buoys. MelWNJ. MWU?. . 1961.EconomicHopes ..” Cheaper &Fas.. 11.’ .E.~ Journal of Pe+koleun Tkcbllology. .Challenge InvestmentPlanningby Private @terpriae . . Praise.G.AYWsJc . SLUTX)Nmd SURRATT 2. Harvard ~gs. What is the Low Bid? Drilling 196OV21-10 3.Capital..SE CT IONXI BIBLIOGRAIETY . Row to Evaluate New .g . A Solution to Survival 6. ISSAWI&YEGidWH FEmrNHBm..