Risk Allocation in a Turnkey Drilling Contract

IADC Member

Abstract

Turnkey drilling, the drilling of a well for a fixed lump sum price, is steadily gaining
acceptance as a viable alternative to having wells drilled on a daywork or footage basis.
However, there is considerable lack of understanding on the part of many operators and
even some drilling contractors as to the concept of turnkey drilling. As a result there
exists a variety of turnkey drilling contracts which are either incomplete in addressing
turnkey obligations and risks or overbearing and require the turnkey contractor to assume
extraordinary risks.

This paper will delineate and compare the expectations of operators and turnkey drilling
contractors relative to the allocation of risk associated with turnkey drilling -- what risks
the turnkey drilling contractor will and cannot assume and what risks the operators want
the drilling contractor to assume. In order to assist the industry in delineating turnkey
risks and obligations, the International Association of Drilling Contractors (IADC) has
adopted a turnkey contract for land drilling operations and is presently preparing a
turnkey contract for presently preparing a turnkey contract for offshore drilling operations.
The IADC turnkey contracts and principles developed in the IADC daywork and footage
basis contracts will serve as points of reference in examining allocation of risks
associated with the turnkey concept.

Introduction

Although drilling a well on a turnkey basis is not a new concept, its recent rise in
acceptability by a wider segment of the industry has resulted in increased scrutiny by
operators and drilling contractors regarding the allocation of risk associated with turnkey
drilling operations. The turnkey concept is easily defined. Simply stated the turnkey
concept requires the drilling contractor to drill a loggable hole to a predetermined depth at
a fixed lump sum cost. Though easy to define, the turnkey concept requires the
contractor to accept more risks than required in the familiar daywork and footage
concepts. In drilling a well on a daywork basis, the drilling contractor is only responsible
for providing an operational drilling unit. providing an operational drilling unit.
Compensation is earned for each day the drilling unit provides services to the operator.
The contractor's only risk is to keep the rig properly manned and in operating condition.
properly manned and in operating condition. The footage concept requires the contractor
to assume more risk.