CHAPTER 2: Contracts & Costs

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Topic 1: What is a Contract
1.1 INTRODUCTION
This Chapter is intended to give guidance on key aspects of contracting by providing an
overview of the various types of contract and contracting activities. It also highlights some of
the commercial and practical aspects.

It is not only a drilling unit which is required in order to drill a hole in the ground. Many
supporting services and materials are required for the operations, and they all need contracts.
To illustrate the point a fairly comprehensive list of what may be required is given below.

Drilling services Helicopter support services

Cementing services
Directional Surveying services
Deviated drilling services
Coring services
Well-head services
Liner hanging services
Diving services
Tubular inspection services
Explosive cutting services
Rental of equipment not provided by the
drilling contractor
Mud Engineering services
Mud Logging services
MWD services
Wireline logging services
Drill Stem Testing services
Production Testing Services
Water well drilling services
Construction of location, access road
and/or airstrip
Construction of survey/positioning beacon
site with access road construction
Surveying services on- and/or off-shore
Camp services (associated with
construction activities and/or materials
base)
Fixed wing support services
Rental of trucks
Land transport services (road and/or rail)
Chartering of Supply/Anchor handling
Vessels
Chartering of other water transport vessels
(Tugs, Barges, Fuel Barge)
Marine transport services
Construction of materials base
Rental of materials base
Materials base operations services
Rental of materials handling equipment
Rental of yard space at consolidation port
Clearing agency services at consolidation
port
Clearing agency services, local, for air/sea
freight
Purchasing agency services in central
foreign location
Telecoms services, including construction of
microwave relay stations
Meet & greet services
Courier services

You should note that:

not all of these are required in the same operation. For example if a materials base is
rented there is no need to construct one, etc.
many of these services are usually bundled together into single contracts in which the
contractor provides the services directly or provides some of the services through
sub-contracts. For instance all the ancillary drilling services such as cementing,
deviated drilling, mud engineering, etc. could be provided by one integrated services
group. Further service contracts may also include the requirement to provide some of
the materials need to construct a well, e.g. mud chemicals provided by the mud
engineering contractor. The extent of this contract integration will depend on local
circumstances and the local contracting strategy.
in large OUs the Drilling Engineering Department will use existing contracted
services that are used or put in place by other OU Departments, e.g. construction,

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 transport and materials administration services. In small OUs the Drilling Engineering
Department may have to handle them all.
this list does not include the "non-operational" contracts such as for office space,
housing, personal transport, etc.

1.2 REASONS FOR CONTRACTING OUT

Reasons for a OU deciding to contract out work include:

The contractor's ability to supply the works, services or goods at lower cost/risk than
that which the OU is willing to assume. The OU's decision may be affected by:
o external factors , e.g. geographical availability and logistics; international
market forces; political constraints:
o internal factors, e.g. no spare operational capacity; availability of financial
resources; internal logistics:
o the short term nature of the operations to be undertaken
The availability to the contractor of suitably qualified and experienced personnel
which cannot be furnished efficiently by the OU. In this respect the OU's decision may
be based not only on the relative availability and skills of its own and the contractors
personnel, but also on the political requirements of the host culture or country with
regard to the balance of national/expatriate personnel.
The corporate experience of the contractor in the type of operation to be undertaken,
especially in the specific geographical area and environment, which may be much
greater than that available within the Shell Group. For example the OU will contract
out drilling services because the direct ownership of drilling rigs, logging or cementing
units, etc., are not normally seen as part of Shell's business. At the end of a drilling
project it will wish to have the opportunity to close-out and stop its commitments for
the equipment and personnel required for the drilling project.
The Research and Development (R&D) efforts of Contractors can be much more
focused on their own speciality and thus be more effective.

1.3 WHAT IS A CONTRACT?

THE AGREEMENT

Very simply, a contract is an agreement between two parties, A & B, that if A does something
for B then B will do something for A, and vice versa. In practice the contract will state that "in
consideration of A performing a certain operation, B agrees to pay a certain amount to A; and
in consideration of B paying that amount to A, A agrees to perform the operation."

A good contract clearly defines: what each party has to do, when, where and how, what price
will be paid by for this, and what happens when something goes wrong or either party does
not fulfil its obligations.

An important part of the document is the one that defines the general conditions under which
all conditions of the same type are performed. This is known as the "Conditions of Contract".
It covers such matters as:

the definitions of terms,

the rights and obligations of Shell and the contractor,
defining how payments are to be made
specifying the law which applies to the contract,

and, most importantly

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 defines what happens when something goes wrong (including such things as
someone getting hurt) or either of the parties fails to fulfil its contractual obligations
i.e. their liabilities and responsibilities. It is in respect of responsibilities and liabilities
that lawyers need to be involved, as they are experts in the interpretations which
courts will put on the wording of this part of the contract.

The Shell Group has attempted to standardise the Conditions of Contract throughout the
world. It should not be changed without legal advice.

A contract should of course be valid and enforceable not only under its governing law but also
under the law of any country where it is to be performed. These can be different. It is
important in those cases that any specific local legal requirements with regard to the general
conditions are also taken into account, and the proper advice must be obtained.

The "promises" with regard to what each party has to do, when, where and how including the
price to be paid, and other matters which are specific to each contract, make up the bulk of
the document and are described as the "Specific Conditions of Contract".

These include:

the Scope of Work,

any relevant dates
the Specifications and Standards applicable to the Work, and
the Schedule of Prices and Rates which have been agreed.

SUPPORT

Two groups normally support engineers in the contracting process, lawyers and
Commercial/Contract Services.

Lawyers help the engineers identify risks, suggest structures and approaches. They also
ensure that the contract documents correctly reflect the allocation of risks decided upon and
that this can be enforced in the appropriate country. Legal advisors therefore also review and
endorse all standard contract forms and any changes. Neither the Form of Agreement or
Conditions of Contract should be changed without legal advice.
Further, in the event of a claim or potential claim under the contract, legal advisors need to be
consulted as early as possible.

Commercial/Contract Services are normally available in larger OUs to act as the focal point
for all contractual matters of a non-technical nature. Their prime responsibilities are to:

ensure that a consistent and commercially sound contracting approach is adopted;

provide advice on best practices in contracting particularly in the development of
contracting strategies
ensure that comprehensive input is obtained from all advisory functions-including
lawyers;
ensure that the administration of the various contracts is properly co-ordinated.

It is however important to take note of the fact that although "Commercial Services" will assist
(with drafting of contract clauses, negotiations, claims, etc.) the responsibility for drafting and
managing the contract remains with the "Contract Holder", the originator of the contract. In the
case of a drilling or drilling services contract this will often be a designated drilling engineer.

Exactly how contracts are managed varies between OUs. It is important that drilling engineers
new to an area acquaint themselves with the local contract management practices.

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1.4 THE CONTRACTING PROCESS
In general the contracting process can be divided in five distinct sub-processes.

Decision to contract out

Development of Contract Strategy (Preparation)
Enter into Contract (Contract Award)
Execution of the Work (Contractor Management)
Demobilisation/close out.

It important that you appreciate that whilst this Part will address in more detail the process of
Preparations and Contract Award, steps such as Execution of the Work (Contractor
Management) and Demobilisation/close-out are also important parts of the whole contracting
process.

When working on the wellsite or in supervisory roles in the office it is important that you are
familiar with the contents of the contracts under which work is being performed. Typically 80-
85% of the costs incurred in the drilling of a well are spent through contracted services and
materials. It is clearly important that line feedback on improvements to contracts is given to
the drilling engineers responsible for drafting contracts and contractor performance is
monitored. Typically feedback should be given on areas such as over/under specification of
equipment required, and ambiguities on either parties roles and responsibilities. Field staff
should be particularly familiar with the "Specific Conditions of Contract" for all the contracts
applicable to their operations and have copies of the contracts on site for reference.

Contracting (especially with respect to major contracts such as those for drilling and drilling-
related services) is usually subject to fairly strict company rules and regulations to control the
process. All OUs have a formalised policy defining why, what, when and how work should be
contracted out to other parties. In general the following applies:

The work to be contracted out is subject to competitive bidding or negotiation as

appropriate, in accordance with the OU's contracting policy and the local legal
framework.
A representative selection of qualified contractors or suppliers is invited to tender or
negotiate.
Tenders and tenderers are dealt with according to a fair and impartial procedure.
Tenders and tenderers are subject to proper evaluation.

1.5 THE TENDER BOARD

The Tender Board is a group of nominated senior OU staff who have a controlling
responsibility with respect to the process of contracting. The composition of the board
depends on the OU's organisational structure and the size and nature of the work to be
contracted out, but is cross functional and always should include a representative of the
Finance section. Its prime responsibilities are:

to ensure that the OU's commercial procedures are complied with;

to make an independent assessment of the proposed contracting strategy
to make an independent assessment of the proposed award of a contract;
to verify that the contract is in accordance with the commercial policies and interests
of the OU.

Normally there are several levels of Tender Boards in a company. In general, contracts with
larger financial values will be managed by Tender Boards drawn from higher levels of
management within the OU. For smaller contracts, companies set a financial value limit below
which no Tender Board approval is required.

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Topic 2: Contract Preparation
2.1 CONTRACTS AND SUB-CONTRACTS
Historically it was normal for the OU to enter into many contracts in the course of one drilling
operation. A list of the services which may be required is given in the box at the beginning of
Topic 1, the Introduction. The OU would have had a separate contract with an individual
contractor for the majority of these, and each one would have required a similar tender
exercise. After reading about tender exercises in the following Topic you will realise just how
much work that involved. (If you remember that word processors have been with us for very
few years, and photocopiers for not much longer, you will have sympathy with the drilling
engineers of previous generations).

In recent years there has been a move to reduce the number of contracts directly held by the
OU in order to make contractors more responsible for their performance, and to achieve costs
savings.

Provided the payment methods are also suitable, the OU's role in this process is more geared
to that of Quality Control and more emphasis is now being put on the management of the
contract instead of involvement with the day to day execution of the work. Performance
improvements will have a direct and positive impact on the contractor's profit margin, which
provides the incentive to invest in good quality personnel, equipment and techniques.

Reducing the number of contracts can been achieved in two ways.

Contracting with a company that can provide all the work scope using its own
resources (many service companies can supply a variety of the services listed in the
box of Topic 1)
Contracting with a company that then contracts some of the services from one or
more other companies - the latter are called subcontractors as they are contractors to
the company that is our contractor.

Integrating (or bundling) contracts offer savings to the OU in addition to simpler

administration. The contractor only needs one office, one local manager, one set of
accountants, one materials yard, etc. and in some cases one crew on site can cover two
complementary services (sometimes referred to as multi-skilling).

Savings can also be achieved by being able to make the contractor more responsible for
defining exactly what is required from the other services-an example is making a land drilling
contractor responsible for constructing the location - if in a tender the drilling contractor over
specifies the location requirements this will add cost to his bid that could make the
contractor's bid uncompetitive. The contractor will also have an additional responsibility to
verify that the location is constructed adequately to meet the needs of the rig, and the OU will
not have to bear all of the responsibility and costs for any future problems caused by poor
construction.

A further reason to "bundle" services together is that it gives the contractor more responsibility
and control over the selection and performance of personnel and equipment used to deliver a
defined scope of work and hence increase the contractor's willingness to accept responsibility
and payment based on the delivery of the work.

For example, any prudent drilling contractor would be reluctant to be paid a fixed price (lump
sum) to drill a well to TD, if he had no control over the mud, cementing, or directional drilling
contractors performance - This will be discussed in more detail under types of contract below.

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Exactly how the services are integrated will depend on many factors and considerations
which are beyond the scope of this document.

The most commonly used groupings in the Group are:

Lead Contractors: where one contractor is responsible for providing all the services
and sometimes the material required to drill and complete a well. These contractors
are usually drilling rig contractors or one of the major international service companies
such as Schlumberger, Baker Hughes, Halliburton and so on.
One contract for the rig and one for all the drilling services such as directional drilling,
mud, cementing, etc.

In large OUs a number of drilling rig contractors may be used but most of the service
contracts will be integrated into large contracts that provide services on all the drilling rigs. For
example one directional drilling contract which will cover all the OU's requirements to plan and
drill directional wells.

2.2 TYPES OF CONTRACT

The three types of contract utilised for the Group's drilling operations are:

Day Rate (historically most common)

Unit Rate (the preferred type and becoming the most common)
Turnkey (still used only infrequently)

As you will see the name of the types are derived from the payment method.

DAY RATE

With a day-rate contract the drilling contractor and the drilling contractors are paid on a fixed
daily rate (cost + profit) for the duration of the contract. This type of contract is normally used
when the scope of work cannot be defined at the start of the contract, or in cases where the
risks involved in the execution are of such a nature that they can only be poorly assessed.
Although the contractor has his reputation at stake he does not have any financial risk, other
than that associated with mechanical breakdowns. He does exactly what he has been
contracted to do, and has little incentive to make additional efforts and/or initiatives to improve
his performance. On the contrary, for example in periods of depressed markets, the
contractor would benefit from his own slower performance which would have the direct effect
of extending his rig commitment beyond the initial contract completion date in an otherwise
idle market. The only incentive which the contractor has is to keep his equipment properly
maintained and operational as, in cases of excessive downtime due to equipment failures, he
will be put on the so-called Reduced Rate (90% of the full day rate), the Special Rate (70%)
or even on the Zero Rate.

Day rate contracts require additional OU supervisory personnel due to the necessary day-to-
day management of, and direct involvement in, the drilling process.

UNIT RATES

This type of contract is intermediate between the Day Rate and the Turnkey types of contract.
The work is divided into smaller parts for which individual pricing schedules have been
agreed, each of which provides the contractor with a financial incentive to operate more
efficiently. This could be lump sums for hole sections, or a logging job. The overall objective is
to have the well drilled for a lower price in a shorter time than would have been done under a
day-rate contract, and in such a way that both parties gain.

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TURNKEY

In a Turnkey contract the drilling contractor and the drilling contractors are paid a fixed
amount of money (one lump sum) to deliver the "end product" in accordance with the
specifications laid down by the OU. Examples might be a well, ready for producing
hydrocarbons, or, in the case of an exploration well, a set of evaluation logs. This type of
contract can only be used when the "end product" and its specification can be very accurately
defined prior to the preparation and award of the contract. Any changes in the Scope of Work
identified after award of the contract can have extremely significant consequences regarding
the total contract value (cost). The financial risk to which the contractor is now exposed is
certainly higher than that in the day rate type of contract. However it is the OU's intention to
limit his exposure to performance related risks only. For this reason the drilling contract
contains special clauses dealing with unexpected and severe problems; the Lump-Sum mode
of reimbursement is temporarily suspended and replaced by a Day-Rate until the situation is
resolved.

It is apparent that for a Turnkey drilling contract much more effort has to be put into the
preparation phase (Scope of Work and specifications), and less into the actual operations,
than for a day-rate contract, which is managed by the OU on a daily basis.

INCENTIVES

Performance related incentives are added to most contracts to encourage the contractor to
meet the well objectives. These can vary but often aim to pay bonuses for one or more of the
following

delivery of the well faster than planned

delivery of a well with higher productivity than planned
delivery of a well at a lower cost than planned

The OU gains because the cost is less and the well (or information) becomes available
earlier. A contractor's own costs are mostly time based (payroll, rentals, equipment
depreciation, etc.) thus he will only gain from a lower income per operation if the time taken is
reduced even more. Incentive arrangements have to be designed to make this result possible.

However, the same condition is applicable to incentives as was mentioned for the day-rate
contract - a higher daily income is only an advantage (i.e. an incentive) to a contractor if he
can keep his equipment and personnel continuously occupied, either on a long term contract
or moving from one contract to another. Otherwise the contractor would prefer to spread the
same income over a longer time and minimise the idle periods during which he has to store
the equipment and lay off staff-unless the incentive is large enough to offset these additional
costs.

Because of the very different degrees of control which the drilling contractor and the services
contractor(s) have over the drilling of a well the incentives have to be designed to suit the
circumstances of each. In fact, because most service companies have little control over the
overall progress of the operation it is difficult to design realistic individual incentive schemes
for them.

Incentives for the drilling contractor

To illustrate the principle of an incentive drilling contract consider the four common activities
which make up the operation of drilling to the planned TD. These are making hole, logging,
running & cementing casing, and nippling up the well-head/BOPs.

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Making hole

One of the simplest forms of incentives for a drilling contractor is a "footage" contract. In a
footage contract the contractor is paid per metre(foot) drilled rather than a day rate.

For example:

Day rate agreed is US$ 60,000/day

Expected well duration is 60 days
Well Total Depth is 3,600 m

The agreed footage rate would then be US$ 60,000 x 60/3,600=US$ 1000/m drilled

Under such a payment system the contractor would only be paid if progress has been
achieved on the well.

While drilling ahead the contractor has a major influence on the penetration rate but he still
does not have 100% control in as much as he cannot know what formation characteristics he
will encounter as he progresses. The contractor then will be unwilling to drill on a 100%
footage rate - so many dollars per foot (or metre) - since he cannot guarantee his income.

What is done in such cases is to split the payments so that a proportion is still dayrate (A
$/day) and the other portion is footage. Using the above example:

The day rate is US$ 60,000/day

Expected well duration is 60 days
Well Total Depth is 3,600m
Agreed portion of dayrate on footage is 0.4
The contractor would be paid US$ 60,000 x 0.4 = US$ 24,000 per day irrespective of
meters drilled.
plus US$ 60,000*(1-0.4) x 60/3,600 = US$ 600/m drilled

Thus by varying the portion on footage (often referred to as an "x" factor the drilling
contractor's exposure can be controlled.-This type of payment system is often referred to as a
modified footage contract.

Logging

To a first approximation the drilling contractor has no control at all over the progress of
wireline logging operations. It is thus common for an incentive type contract to specify 100%
day rates during logging operations. You will be asking why the expression "to a first
approximation" was used. In practice the logging operations are influenced by hole
conditions, which the drilling contractor can control. With enough experience in the area, and
a logging programme defined within close limits, the contractor may be willing to accept a rate
during logging which is a combination of day-rate and lump sum.

Running and cementing casing, and nippling up

These operations almost completely within the control of the drilling contractor, with very few
geological or other uncontrollable risks. It is thus common to agree on a unit rate per length of
casing plus a lump sum for nippling up. The incentive is given by reducing the rates according
to an agreed formula as experience is gained. The art again is to reduce the rates by a factor
which is large enough to require a meaningful increase in efficiency to obtain the same
reward, but small enough for it to be feasible for the contractor to beat it and thus increase his
effective daily income.

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Topic 3: Operating Cost
3. DRILLING COST ELEMENTS
The costs for drilling and completing a well are broken down into three basic elements.

Time-dependent costs
Depth-dependent costs
Fixed/Once-off costs

3.1 TIME-DEPENDENT COSTS

Time-dependent costs fall into the fallowing categories:

Contract payments
Personnel
Consumables
Service fees
Company overheads

CONTRACT PAYMENTS:

Included in the time related costs are all contractual payments for services applicable during
the contract period of the rig that are specified as a daily rate. For example:

Rig and crew hire

Cementing
Diving
Wireline logging
Geological surveillance
Drilling/Completion fluid engineering
Telecommunications
Transport on/offshore
Insurance
Tool rental.

The above mentioned types of contract mostly specify a daily rate for the rental of equipment
with in addition a rate for executing a specific activity with that equipment.

The latter normally will be converted to a daily rate for estimating purposes.

PERSONNEL

These time-dependent costs relate to costs for Company personnel specifically dedicated to
the relevant well. For office-based operations staff working on only one well, the latter will be
charged with all their costs; this is often the case in a Single String Venture or a small OU. In
the larger OUs there may be more than one well being drilled at the same time, and
preparation work for future wells will also be undertaken. In this case the cost of staff will be
allocated to the wells according to the time spent on each.

Examples of the office-based personnel meant here are:

Operations Manager

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 Head of Well Operations
Well Engineers
Site Representatives
Administrative assistants in the Well Engineering Department
Civil Engineer (if solely concerned with access road and location construction/
rehabilitation)
Geologists

In an OU solely engaged in drilling activities, i.e. an exploration company, Materials/Transport

staff would also be included in this list. If production and/or engineering activities are being
undertaken they would be treated in the same way as non-operations staff and taken up in
the OU overheads.

CONSUMABLES

The cost per day for consumables usually only includes payments for the fuel and lubricants
for the rig, supply vessels, standby vessel and helicopters if they are not already covered by
the day rates for contract payments.

The sum of the above mentioned time-dependent costs is often referred to as the DAILY
OPERATING COST for the rig.

SERVICE FEES

New Venture Operations (NVOs) are normally set up and supported by Shell International,
who levy charges for support up-front and during actual drilling operations.

Shell International charges all OUs, including NVOs, for general support on the basis of a
specified amount per string-month, which is evidently a time-dependent cost chargeable to
each individual well.

Other than that Shell International also carries out specific tasks at the request of the OU in
the same way that any other contractor would do. Such tasks are invoiced at so much per
man-hour. The type and amount of work involved depends on the size of the OU. A large OU
will have its own geologists, reservoir engineers and petrophysicists and will only ask for Shell
International assistance with major projects which are not related to specific wells and will
thus not be included in well costs. On the other hand a small OU, or NVO, will typically ask
Shell International for assistance with geological interpretation and well evaluation, or advice
on specific borehole difficulties, on a well-by-well basis. These costs will be charged to the
well to which they refer. Although this assistance is not strictly time-dependent there is a
general correlation between the amount of time spent on a well and the amount of assistance
requested, and for convenience these service fees are both estimated and charged in the
time-dependent category.

Shell International may also makes reconnaissance visits and/or audits on behalf of OUs and
NVOs. These are once-off costs as described below.

COMPANY OVERHEAD

Costs allocated to company overhead include expenditure by departments providing services

to other "customer" departments. In the case of a Single String Venture all overhead costs are
charged to the well being drilled (but still under the heading "overheads". In the case of the
larger OUs, they may be treated in different ways, either as an independent budget item or by
being allocated among the "client" departments by means of a time-based system of internal
fees.

Examples of the type of expenditure covered by such overheads are:

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 the salaries of administrative staff
the cost of housing
office rental
the rental of yard space, wharves and warehouses
the cost of company vehicles
the cost of air fares for company personnel

3.2 DEPTH-DEPENDENT COSTS

Costs for depth-dependent items are those payments for equipment and consumables which
are used and/or remain down hole. These items include:

Bits
Casing and casing attachments
Cement and additives
Mud chemicals and lost circulation materials
Completion tubing and attachments
Completion fluids and chemicals

Depth-dependent costs can vary from approximately 350 to 600 US$/meter of well depth
depending on whether the well is on- or off-shore and in a remote area or not.

3.3 FIXED/ONCE-OFF COSTS

In addition to time-dependent and depth-dependent costs a large part of the total well costs
can be taken up by costs which do not fall into either category. These are known as fixed or
once-off costs. In general the term fixed cost usually refers to a single "lump sum" payment
specified in a contract, whereas a once-off cost is the cost of something that happens or is
used only once per well. The exact magnitude of such a once-off cost is not necessarily
known beforehand.

FIXED COSTS

The costs for mobilising a rig and all related service contract equipment and personnel from
one part of the world to another is very much dependent on the distance to be covered and
the means by which the transport is to take place. This is usually specified as a fixed amount
in the contract(s) and can be in the order of 1 to 4 million dollars, depending on the
circumstances.

Another example of a fixed cost would be the drilling of one (or two) water wells per location
or group of locations for a fixed price.

Fixed costs which are independent of the number of wells drilled (eg mobilisation) are
normally allocated equally to all the wells which benefit from that expenditure.

Rig-moving may be done on a fixed price basis, or on unit rate per kilometer basis. In the
latter case it would be classified as a once-off cost. But in any case all costs related to moving
a rig from one well to another are normally charged against the well to which the rig is moved
(which is admittedly not consistent with the principle of sharing mobilisation/ demobilisation
costs between all the wells).

ONCE-OFF COSTS

In new areas, all facilities that have to be set up specifically for the execution of a project are
once-off costs charged to the well or wells that are to be drilled. These can, especially in
remote areas, be the costs for the installation of an infrastructure such as office construction,

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installation of long distance telephone network etc. (With established companies these costs
are usually charged to overheads.).

As mentioned above reconnaissance visits and audits by Shell International would be classed
as once-off costs. The cost of a reconnaissance visit would be shared equally among the
wells drilled, but the cost of an audit would normally be charged to the well being drilled at the
time.

For onshore wells, costs related to building drilling locations and access roads are "well
specific" and added to the well account as once-off costs. The same would apply to water
wells if they are drilled on a unit rate basis (but the mobilisation of a water well drilling unit
would still be a fixed cost). For an offshore operation the costs related to seabed surveys,
seabed preparation and rig positioning are similarly once-off costs

Other than the cases mentioned above once-off costs are those relating to non-time- and
non-depth-dependent costs for permanent well equipment and work undertaken for a specific
well only. The major item is the wellhead and its related equipment. If the wellhead is
recovered, often the case with exploration wells, the costs allocated to the well are those of
refurbishment and depreciation.

Typical operating costs

The tabulation below is presented only to provide an impression of the order of magnitude of
the daily operating costs for various types of rigs and operations.

These figures reflect the situation at the beginning of the year 2000. Rig rates can however
fluctuate quite aggressively and normally follow the oil and gas market price. This was
demonstrated in 1998/99 when the oil price more than halved followed by a reduction in
drilling activity. The normal supply and demand situation that developed resulted in a 50%
reduction in rig rates. In offshore operations, especially in the North Sea, the same market
conditions will also heavily influence total operating rates are through the supply
boat/transport market situation.

Daily rental Total

Operating cost
US$/day US$/day
Semi submersible 155-250,000 245-325,000
Drillship in Single String Venture 175-220,000 255-320,000
Semi sub North sea 105-125,000 180-200,000
Platform North sea 40-55,000 130-145,000
Jack-up North sea 75-95,000 145-165,000
Land rig Single string remote area 35-50,000 80-120,000
Land rig Europe (sensitive area) 35-45,000 80-100,000

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TU WE Manual Chapter 2 - Contracts & Costs.doc