CHANGING

PATTERNS IN THE
.
..
WFiHM.S [JXJ.NELII
DRXLMNG
-DlDrWYlR3:

by

DEREK C. WILKINS
.,

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).

, $Jmml

PhF4!f
I
I

ABSTRACT
.

11

INTIuWJC9!KJN

111

THE UJ3, DOMESTIC

INDUSTRY
..

Iv

THE OPERATOROVERSFAS
z---

(a)

Crude Oil Production

(b)

The Recent History of Coqxmy Drilling

(c) FinancialConsideration - The Allocation

of Overheads

10

((l)

The Advantage of the Contractor

12

The Newn Type Operation

12

(f) The Oil Companies!Experienceof the

Contractor

13

(~) The Balance between Company and Contractor

14

(e)

THEDRILLIN%CONTRACTOROVERSEAS
(a) Administrationand Mmagenmt

15

(b) Personnel

15

(c) Field Relationswith the Operator

16

(d) Equipnent and Carq

17

PfIRT11
Vlt

VI $

MATER3ALSAND SUPPLY
(a) Trends

(b) Thu Supply House

19

THE OVERSEASCONTRACT
(a) The Form

21

(b) Types of.contract

(c) Turnkey Contracts

21

(d] Length of Contract

23

(e) Depreciation

2k

22

(f) The Tender

24
24

i) cost
[ii) Evaluation
PART 111
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VII% - SUMMM&ti
(aj

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Defining $
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,1

...

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CtiNtiLiJS~tiNS
Problem
The Operators ,
l%e Contractorra
ii)
The Manufacturertsand
iii)
Supplierts

(b) ~iSCUSSiOlt
.
(e) Rwmmmdwk%tma

29
29
29
2$J

32

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(con*d.)

PAGE
-

SECTION

!.-.

.
PART XV

xx

ACKNOWLEDGMENTS

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

4. Estimted Profit per Barrel of Crude

5. Contractors Cost Element Related to
Profit per Barrel

XI

9,

,/

M3St?FMCT
..
.

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superseded,by drilling contractors.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 agetof the operation: Likya,
.iil~eria
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
producinfl
histories such as Iran, Muwait and iatar still retain their
drillingdepartmentsbut there is ev~,dence
that equipnent
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
fl.actuating
as explorationGives wtiy%0 dsvelop:~ent,
with clmn~es in
politicalpressure,with physicalchanges in the rcservctir,
with.
~
changi~~patterns in the su:~pl.yof
and cknan~ for petroleum. The
employmentof the contractoris an eifective
wayof ensuring that wells
can be drilledwhen required without invokingkeayy capital @atlay
anclthe high running expensesof a drilJ.in~departmentwhose resources
are not nt all times fully utilized, The efficientcontractoris
able, by optizm.ndeployncmtofequipmentand 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
drillingcostsalso 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
engaged-inthe-pr~(luction-of
-crudeoil
-fro~~~-explor~tion
to-terminalf..~_
a large overheadburden which can be indirectlyattributedto the
drillingfraction of the tottilpro~?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
againstdrilling.

Xt is thereforeWe indirectcoats of a permanentdrilling

organizationwhich oil oompanymanagementsare intent on rdxoing.
Those companieswhich have recently started t%eir exploratdoik
find
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,
instellatioxxs,
inventories
and personnelusing only q immericallysmall nucleus oi ctin~any
supervisionto oversee tho 02cratioa. Comparisonbetween this metiaod
and ttieolder one shows clearly that stnrtJ.ing
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? lhe
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.

0,

.-

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
overseas.
(@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
.cont.ractor.
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 well.is capable of protucing
tens of thousmds of $arrelQ of crude per $ay and the payback pe+ricd
is uiiia-siredoxily
indayiadifferciice
of-eve~-tis
nudi as-IO@~
iii
the
contractorselementwould 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 - ;

contractorswill not be competinginthis 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.
.- ,

I%isnetlaodwill enable the o~arator to enforce the standard

elementwill
reqitiired
and wi~l simg}.ifyev~luation, A oonpe.titive
remain, 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.

INIX?DUCIION
.,.-.

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, In particular,the increasing
use of contract drillingxias to be investigated.

In recent years, in the fade of a world oil surplns,rising

costs and reducingprofit margins the major oil companieshaieenbarked
on a stringentpolicy of ~ost retiucticn
at all stages in the chain cf
yetroleumproduction,transportation,refiningand marketing- 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.
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, such as housing, offices, social amenities,workshops and
transport. Companies operatingthe older producingetieassuch as
Iran, Iraq and Kuwait already havinE extensivecapital instdkations
and a large investmentin inventories,are doing their best to diuinish
them.
,
Drilling operationscan be broa~ly divided into expler3tion
enddevelopment, Explorationfor oil is expensiveand wildcat drilling
in reamte areas a very costly part of it. In the past the back up
organizationto supportwildcat and devslcqmentdrillin~has aada up
a large proportionof the annual operatingexpenditureand capital
investmentof the pro&actionoperation. The part ,ofthi~ expenditure
which can be directlyapportionedlm the dril.1.iilg
of the well is
usually cIearl.ydefined in the costing system of the production
companies. But the ccst cf the backing organizationin the field &ld
in head officeswhich should be absorbedby drillingas overhead is
scmetimesvery diffivaJ.t
to apporticri.Eowiwer, 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,
It was intended,when t!~isstudy was begun, to investi~ate
the individualcompaniesapjjroachto this problem, 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,~
percentagebreakdownsrelating to Iabom costs to each section of
overhead for final absorptionby the drilling cost centre. It WM
hoped, in afklitionf
to couparQ ovevall figures over recent years for
such items ~s total inventorief3,
drillin~ inventories,xaotortrams~ort,
and plant inventoriesand their relationswitii
each other, perhaps
_...,.
..
..es.$ablishing~...tendnd..A.questiomair~.-was..~mepqred
-(A~ncmdix
.L)-and...
-circulatd to several com2anics. But in spite of the gootiwill
and
desire to help displayedby all the firms, it soon became obvious that
to extract the figureswould takea good deal ssoretine than was
availableto completethe paper. So numericalsupport for the arguments
put forward are, unfmtunatwly, not yet available.

9?0obtain an unbiased overall picture of the ovwrseas

drilling industrythree sec%ionsof the induakrywere interviewed,
najor oil companie5,contractorsand equipmentmanufacturers. T&eir
viewsl comments,complaintsand su~gestionscombinedform the ~04y
of this paper. The conclusionsand recorxmndationsat the ond arc
the authar?s oun, although similarviews have been express.edby
others in the course of the investi~ation.
Because of limited time and resourcesavailable to the
author it was not possible to tia!~e
a cmnpj.ete
study of the subject
on a worldwidebasis. 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.
obvimsly, the specificdetails of a Iimitedstudy cm.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.
will stimulotmdiecuasicnof a subject
of great importancein the industry,

1_

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TEN U,E!eDOIMW?lC INMHW

...
.

Although our subject concerns drilling outside the U.K.

no discussionof the industrycould neglect the domesiiicsituation
within the United States. In.fact, the state of the drillingbusiness
there has a very strong influenceon foreign operations. In 3962
contractorsowned over 947 of the Y074 drillingrigs in the U.S*/*.
@i~d
., Canadw. Of these about 2020 wexe active@,
Much has been writtinin 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, it has been suggested,short-sightedtendency
by the oper&tor to accept the lowest bid irrespectiveof other
oonsiderati
one,. A financialsurvey publishedin 1961, of newly one
hundred contractorsby a Texas Bank and the &edit departmento~ a
najor supply company providedsupport to what had,before been an
unconnectedseries of complaintsand warnings fron the parties
concerned.

The study concerned lcmd rig~ in the Southern States of

America, raainlyin Texas, covering companieswhose sole businesswas.
contractdrilling. The nain points brought out were:-

(b) Thevery lowmmmenet profit

to net worth (7.5fi
f .<

(sfterimx)

(c) The high debt tenet worth ratio (118X).

These figures compare closelywith the building industry,

notoriouslyunstable financially. A furthersignificantfeaturewas
tha insufficiencyof net cash flow which in many ccise awasbarely
able to cover depreciation, In extreme cases contractshave been
negoti~iedwhich have not even covered cmpens.eslet alone deprociaticn.
In such a capital intmsive
iridustry
such a policy is,proving disastrous
for contractors,both large and small, many of whom are leaving the
industryeiiher be.ccwuse
they are forced into liquidationby lack cf
working capitalorbecause.they I>referto nut what canital thev have
~ef tinto~largpro~it~ble.inyes.~~a$as.......1
._._._.___...~
.. _ ..
_...
_.._.. .... .

...

The experienceof the United states doaestic industryshould

be keFt in uind while consideringthe trends of overseascon$ract
drilling.

.....

Tm .(WW,W

f,YrExmL.s

(a) Crude Oi12r.dwtion

The function of a producingcompany is to find truck oil,
to produce it and to transport it to the point of sale. Ccuqmnies
differ in the way they aro structuredto pmforrc this task but
generallythey can be broken down into four prime functions:-

(i)

Exploration.

(ii)

Drilling and development,

(iii)

Production,andprocess,

(iv)

Pipeline and Terminal.

Drilling features in the first two of these functions. It

can be broacllydivided into Explorationand Developmentdrillin~.
After geologicaland g~ophysicalpartieshave iudicatcdfavorable
locations,the wildcat drilling operationrepresentsthe first
major investmentin the developmentof an oil productionsysten,
Because of the difficultiesof supply, the lack of facilities
and the teckniml hazards of drillin~ in unexploredfornntion~,
wildcattingcan be extremely ex~>ensive.The expense is magnified
if supporting?xme wgcmiizationsarc alltied to build up, rasuIting
in additionalovcrlxxvd
burden. This,dangeralso applies to the
developmentdrilling phase when a greater number of rigs is
employedrequirin~still more personneland su~plies.
It would be useful.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.

.....

(b) Tb.eZ.ecentHistory cf Company hilling

.....

,lit
the end of Jorld.\?m2 the Middle East was at the beginning
of an explosiveexpansionperiod for crude oil production. The
companiesowning the concessionswere internationalmajors who,
after the war, faced ?everal problemsto which low cost Middle
East crude provided the answer. ikmnil for oil in Vest~rn.Europe
w~s rising but dollarswere skort. Tkre was awcrld shortage of
tankersand refining capacity in the U.S.A, due to increased
domesticdemandwas insufficient. First pricmitieswereto inwease
the output of fields already producinge,ndttodevelop fields
discoveredbefore
the War and subsequentlyplugged. simultan~ouaY__ ___ _...
.-...-
was begti anambit-ibtiii
wildcattin~
affort-tiovering
wid&ineasof=the Middle East.
The opsratingcompaniescomuittedat that tiae to this
tremendousexpansionwere not geared to cope with it, Trainsd
personnelwsre desperatelyshort, particularlyet all levels of
manageznent,
and consequentlyorganizationsuffered, Eoweverj the
main-objectwas to get the wells drilled and the productionplant
.

installedas quickly as possible and, one might say, irrespective

coat.
Thousands of expatriates,main?,yBritish and &ericnn~
were reawuited,andhad to be housed and fed, togetherwith their
families. Complete towns had to be built in the dosex% and then
maintained. With each expatriatehouse was requireda badqgrouud
organizationtoprovide power and Iight.tair condit~oning,
eommisaariat,social facilitic+s:
personnelservices, land and air
transport,oocumnioatims, etc. The build-npwns cumulative,emh
mm concernedclirectly
with oil productionrequiring severalmore
men to serve and administerhim. These in turn requiredwore ~enl
and so OXR*
of

Inikmse eazly dbys the drilling functionws+scerta.inly

at
the spearhead of the total effort and was responsiblefor a high
proportionof the total expenditureon capital equipnent,personnel
and apertating
c%oets. Like the rest of the operationit grew too
quickly for the availableorgani%at.ion
and conwquexrtlywm
wasteful of nen and naterials~ Trained drillers,toolpusheraand
drilling superintendentsinsufficient quantityand cifthe right
quality were available only fron the U.S.A. and as there was a
drillingboom in progress there as well, nen were hard to atiixact.
Inrxiny cases.tha wrong type were recruitedresulting iua high
labour turnover.

Wildcat drilling requireda.large proportionof th~ drilling

de.pm+uent!stotal effort. The ozga~izationand expense required
to locate and naintain a drilling rig for a year or nore in the
deaer% was considerable, Seni--pernanent
Staff and lahou.r,,
accommodation,offices and workshopswere built at the locations,
The drilling rig itselfwas set on extensivecmcrete cxztsand
foundationsand the rig-up, using cranes and bulldoz.era,
usually
took months. Semi-permanentroads were built at enomoux.,expense.

The transporta-ilable then was ill-suitedfor de~ert oil

field operationand had to be maintaineda+ base worlcshops,Base
canps were expandingrapidly to supply the &ervice5requiredby
the field workers, Kug.ineer%fronother industries,nore used to
the fixed michineryoonoeptithan to that of drillingrig nobility,
set up extensiveworkshops for aaiwtenanceand repair of drilling
EZMhinery, Heavy road-makiw equipuent,bulldozersand cranes
used for buildingvilikat locationsalso requireduaintenanca
workshops and the nen t~ run the~ Apart fro:>the very large
capital investmentin rmchinery,plant and buildingsnecessary
for initiatingproductioaa heavy investneatin inventorieswas
also essexrtial.It should be reuecibered
that, at that tine,
forei~ exchangeregulationsstipulatedthat British companies
should obtain their naterials fron ~on-dollnrsources if possible.
Delivery tines fron these souzraes
were.lonE and unreliable,
Consequently,the quantitiesordered took into account those
uncertaintiesand by modern inventorycontrol 8t@ndardswere
extrave.gant,.
But the fundamentalrequire~entof drillingwellti
and installingsurface plunt in orclorto get the fields producinp
I
in the shortestpossibl,etimewas aohieved. During this period
so~@ of the lar&%ei3*
oilfieldsin the WOrl_&W@rQ.disco~redand_. ------------------deve~opedi--- -- --;--- .
1
Gradually,aetivihy settleddown to a more gentle pace
altiough the search for new fieldsand the expansionof existing
ones.still proceeded, The administrationhad nore time to clear
up the disorganizationcreated in the period of hec%ie expanaiorh
,
But while the high level of~rilling and explorationsctivityhad

!-----1

slackened,the cwcrbmden of aikiinistration

nnd sarvic%sremained
and even tended to increase.
A departmentwhich, in particular,required Grastia re..
organizationin most couponieswas the stores. In D highly
technicalimlastry the requirementfor tednically kuowledgable
purchasennd storas officors is a basic one, Unfortwatcly few
were availableand so the stores had, in the nain, to r~ly upon
the technicaldepartnentsfcr advice a~ to the disywal of the
enormcus inventories,Kwchsurplus to rcqwireuentsand a good
deal ~baoltiteg
which they held in custody..On the other hand,
technicaldepartmentshad neither the time nor tho personn~lto
deal with stores problans ond the help was rarely forthcoming,
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,
orderinglevels were nit adjusted to suit future drilling&nd
other progmumes.

X%was this aikimiionthat faced aocm of the prcducingoil

Cwnpanieoabout six yelxrsage, after Suez, when political
instabilityin SOEM Kidi.leEastern countriescaused *kernto
reconsiderthe extent of their investmentin those countries.
In ad?.itiona t!uwmtonedworld surflus of petroleumnecessitated
cuttin~ costs to maintain Frofit unrgins. At abcut the same
tirleb.ostgovernmentswsre increasingtheir dennnd that
expatriatesbe replacedby nationnlsas soon as ~osnible. The
cmobinktiouof these circumstancesacceleratedrencdie~ (which
had Imm alrea+~ begun by some companies)for reducing the
administrativeoverburden. The first and most imp~rtanttask
was ts cut down on that administratio:l
not directly reqmi,red
for
the productionof oil. A large part of Vlis consistedof the
servicesrequired for staf2 and th~ir fauilies eitlwr clircctly
or inilirectly,The reductionwas effccteii
in wveral ways.
Rccruituentwas cut back to a mininun and bachelor status offord
k? new recruits, A gradual but drastic redundancyschema was
startedwhich, coupledwith natiaral
waatage,was aimed at rwh!cin~
st~ff by stages. Xn tkse countrieswhere trainednationalswere
&va!,lable,
expatriateswere replaced. Simultaneously,services
which had been au~~lied free to staff, such as recrentionol
transport,club mubcrship, la~~dry,air conilitionin~,
etc. wers
charged.
for. TO cwxpmsakc for this staff allowanceswere
iacreascd,the eftect being to obvicteany ol)ligatioil
by the
coupaniesto prcvide these aucnitiesat SOUQ future r:i;tewheu the
proporticaof expatriatesto n%itianalstaff would be mall.
At the saw tiue the compaxiesbegan to look at drilling
contractingas a possibl~mza.uaof (a) reducing capital investment
in drilling equipncntand tools and invontcryand (b) reducing
the administrationwhic?zhad grown up behind explorationand
dev~lcpmentdrilling,
(0) FinancialConsiderations- the Allocationof Cverheads
..
..

..--... .

. . .

Vkile it wtisa relativelysinple matter to dorivc from the

cost-accountingsystems the cost which oould be directlyallocated
to drilling, some companiesfcund difficultyin decidingwhat
proportionof the overheadburden was attributableto the drilling
effort and whet to the other.costaentros of poduction and
process,
pipeline and terminal. This ii not surprising,as
:.
. . --.....
. .
.

manqyment} atiiniskcationand services serve all the functions.

Various methods of appnrtionrcent
have been used. One metkod
which had much to reconnendit (althoughit could be criticized
in such a ca,piijal
in%ensiveindustry)wnB ia applY the
proportionateshare of Iabc}urand supervisioncosts of the four
prime functionsto the total opcratin~costs for the area, This
did relate fair?.yclctseh~to each divieiwh!sshare of the total
effort in producingcrude and in one company the resultwas
roughly as follGws:Lakour and SuvervisiouCosts
Exploration .* W .
Drilling . .. .. ..
Production& Process .
Pipeline& Ter~~inalt.

~. .* 9$
.. .. 36X
.. ,. 307
.. .. 2?}

Frou the operatinEcost total(of sone 620 million in,a year) were
deducted co~ts direcily allocable to drilline. Of the x=ainder
which cculd be called overhead 36j%wns applied as applicableto
drillinga.adexprew?d as a pro~ortic~of total costs,
Proportiono~
totnl costs

Direct expenses
~irect drilling costs
Drilling canp o]?arations
Drilling departmentex~ensea

23j$
4$
of
29$

Petroleumcm&j.ncering
exyxmes
Stores handling expenses
Servicesand general overhead
I&id Office expenses

0.6$
1.4$
13$
5$

Drilling
Other priue functions

20$
Gj
Sl$

This calculation,in spite of its weaknesses,indicatesthe

relative importance,costwisclof the drilling organizationin
the ~lold{t
type ~otoilfield operation. ~irect PrillingEx??ense$
accounted for some 29$ of Total OperatingEx~enditurelIndirect
Overheads20$, totalling49$ or nearlyhalf Total hnnutilOperating
Costa in a arudc oil productionarea. 36$ of al?.overhead in
one yem (1959) could.he attributedto drilling in this particular
company,
.

-.

At-the
t~mew$i&n
e&@iies wcirewc$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. But itwaa Eor@
compete and perhaps beat the contr.ac%ors
difficultfor them to argue that overall,taking into account the
hem-y overheadburden, they were cheaper to.the company. There
is no doubt-in the writerls mind that some cf these oosts should
.

never have been charged to drillinz~as the DrillingDe&tmen*J

s~sm as a cost centre and respf?neibility
centxe,had no control
over much of the expenditurewhich waa charged *O it. For
instance,although a large proportionof notor transportand
xmlxiloplant fleet was necassaryfor drilling oporationsjdrilling
dcpartuentshad little aay in ve%icle specificationor .wbseqacnt
deployment. Sinilar situationsexistedwith en.ginecrin.~
service
and workshops. Consequently,
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.
(d) The Advantqze of the Contractor

e.

It is in the kind of situationjust describ.cd

that the
contractorscores heavily. Zis total opor%tionis erfymizedrm.xnd
and for the drillingrig. There is nc divisicn Gf p.xq?osc.!!is
rig is designedand built for quick Moving. ?&at is also iaportant
is that his transport,particul.arl.y
his herwy trans~39rt,
is
virtuallyan integralyart of the rig @
can be xscd for every
?.sind
of oilfieldopc?rztion,
includingrig noving, transporting
pipe, cetient,
blow-out prevontorsand other equip~ent, More
iqxxtmt
still
is thak the contractorsplant, traneportand
workshop, is under the control of drilling personnel. A relatively
small stock of spare parts andreplacementsis carriecl,
thus
ninissising
stores overheads. Living and ofiice acconmxhationis
adequatelycom~cwtablennd highly nabiie. Subsidiaryservices
SUC2 as water-we?.I
drilling,cmuissariat cervices
md passenger
trnnsportare usually sub-contractedto local firm, For a two~Iovarben-dll
staff c9nsSstS Only Of a field n~nager?
rigoperatitin
an accountant,a storekeeFzrnnd a transpcrt/p3.&nt
supmviaor.
The contractoris thus able to keep his cverhead to an absolute
h~ finisheshis dril?.ihgassignmentand moves away,
minimum. !l!!en
all that is left behind as o,per@ancnt installationis the apjroach
road, the site .sndthe well.
(e) The N.wlType Oimration

In recent years importantd scovoriesof.oil ~ave been made

in severalnew areas, notably in Libya and tinePersian Gulf. The
ap~roach to the exploitationof ~hes~ new fields has been noticably
di~ferentfrGL?I
the-old
system describedabove. k breakdown of
expenses of a typical oparationin Libya to develop a tield by
contractwould be as follows:Contractortspayments--drillingand transport .,
Naterials suppliedby cperatar ,. .. ., ,. .,
Concessionpayments.. .. ., .. .. ,. .. ..
Depreciation
*
4s * ** a
0p9rator~ssala& .s;;,w;~esil.. .. ., ., V,
PersonMelservices .. .. ., ., ;. ., ., ..
Rent, rates and mndries
,, ,. ., ., .. ..

,,42fi
,.32$
,, 5$
*. 5$
.413$
.. $@
, 1;4

100$
......_-...___________ ._.
.,____---- __-..
._
Itwill be noted that the k2$ of the total cost is to tke trans~ort
and drillingcontractors. The operators 58$ consists ~f 32$
materialsand 26$ other expenses.
In this type of operationthe operator,to administerthe
has only to provide a ~lc~dcst
base organization,comprising

project,

an office and a stores yard, Company drilling personnelsupervising the contractorlive in the contractorscmp, the base
nersonnelare
hmuaed in rented accommodation. Canital investnont
*
Material requirements,rlai;lytubalars,
is kept to a .mj.nimum.
mud, cenent and special tools are phased and supylie~as required,
keeping total inventoryat any one time at a low l~vel, Contract
trans~?ort
would be used as required on a ton/mi?.cage
lxwis to
traaaporkcoupany suppliedmaterial to th~ well Bites.
Vhen all wells hnwe been drilled the ccnln%ctormoves on,
leaving only the wells. The operator should have renainingonly
nominal stocks of drillingmaterials. h nodest office and stores
organizationsremaiu5 to deal with the next phase, the installation
of productionplant, Of course, in practicethis would be a
simultaneousprocess.,the productionwork proceedingat the sme
tine as thewellsme drilling. Ewt the drilling yocess itself
should leave no large residue of naterials,personnelor fixed
capital,
Unfortunately,
it is not possible to publish the absolutet
cost of the new ty~e of operationand to attenpt a comparison
with the toldJ;
J3wezyfield is different. Eowcwer, the advantages
are obviouswithout resort to striat nunericalconparisonc
*

(i)

TheOil Ccmaniesl exucrienceof the Contractor

At the beginning of the period tider discussionoperators
had little experienceof tiealingwith drillingcontractors.
Equally, few of the relativelysmall number of contz%ctorsin the
overseasmarket had nuch practicalexperienceof o~eretingwckside
the hericas .(thel?rcnchcontractorswere the Qos$ible exception).
One or two of the Iargestwere Certainlyorganized-forthe job
but nest of the otherswere companiesformed to meet the denand.

For a period the assvciatioti

was not an easy one. It is
possible that, due to inexperience,the operator c!ccse
the v:roag
contractorsfor the job. Clearly sone contractorshad very little
idea of, agd.took
no steps to deteraine~the probl~~s that tkey
would face in the field,working away fron suppliesand services.
They underestimatedthe time rtiquiredto set Up an,organization,
howevermodest, in an orientalcountry. They assumed that such
things as cu~toms clearance,railw~y service, contracttransgort
would be as efficientas they were used to in Vestcrn countries.
Anyone who has worked in the Middle East will know of the
frustratingdelays which can occur over the simplestHatter. It
was not surprisingthat spudding-indates were r~rely net,
,
Supply is possiblythe biggest headache in running a drilling
rig in the desert. It is patently impossibleto guard against
every eventualityby holding every possiblereplacementpart,
But some of the early contractorswere not even able to keep
themselvesin buch consumableitem as slush pump parts and tong
dies! Consequently,the oil companiescomplained,rightly, that
they were bei~ used as supply houses. Tkywere, in addition,
having to lend bulldozers,cranes and other equipmentwhen the
__.co$&actox_s_.brG
lse.
dom, ..___
_______________
..... . . _..:___
..______
_____
Another com~laintwas that drillersand toolpusherswere of
such poor quality that company toolpuaherswere virtuallyrunning
the rig, Sone operatorswere Dlso concernedat the high turnover
.... of contractors staff, They consideredthat this was not conducive
to good field operation.

Nowadays,nest operatorswill cs~rcmthat the servicehas

improvedbut they are still concernedat the poor etnndardof.
contractnan.agement
both in the field and at head offices Their
view isthat the success or failure of the operationhin~e~ to
& very large degree on the contractors field rcanager,They say
that they get t!w best service from the nodiun size con%r~ctor
who has all his rigs, perhaps two or three, operatingin one
area. A larger contractorwith his rigs spread over several
different countriesdoes not have his organizationsufficiently
decentralizedfor local efficiency,
A further criticisrl
Ievelledat contractorsis that, altho-ugh
they are good hole-maketis
they are not as efficientaa they
should be at functionsli?~eceuenting,coring and drill stem
testing, 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 future,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.This company favours
foolage controctafor all drilling in this area~ includingwildcats, and would like to see at leas+ part of any savings in
drilling costs passed to them by the.ne~otiationof lower rates
for new contracts. The cmtr~ctor in this case vw reported to
be [making
noneyitand tsatisfied~l
althoug.:.
his return was
unspecified,

Other companiesrirecautious in their ap~roach,prefa=i%

to divide the wor!<about ~0/~0 between the contractorand the
company. Their plan is to use the conpany drillingdepartmentas
a nucleus with the ccntrnctortaking u? the slack in constantly
changing drillingrequirements, Generally speaking,company rigs
axe all-purposerigs and are perhap8bettersuitedto wildcatting ._
where they have the extra power and equipmentto cope with
difficultdrilling conditions,while the highly unitizedancl
quick snovingcontractors rig .iswell suited to dcveZopizent
drilling.
Companiesshow awareness of the possibilitythat further
reductionof their own .!Iepartments
may dissipateto a dang~rous
degree the considerableexpertiseand skill built up over many
years. To do this, they feel, could.leave them more or less at
the mercy of the contractor, .Theirown drilling organizations
have benefited considerablyin efficiencyby, for the first tiue,
having to face competition, In fact the benefits are mutual when
cowpany and contractorwork side by side.

But this increasein efficiencyhas brought other troubles

to the companies, They me finding it increasinglydifficultto
attract and to keep long service drillingand patroleum
engineeringpersonnel. Ydereas before these men lived with their
families in companyhouses, they are now obliged to work under
bachelor conditionsin contractorsCSLWS. The cowens~tov
. .
...extra.leaves..hawe..nt.t,kl-seerns.$.
made..u~..the
~.eii~iency...anuen?n?.
.....
_ .. ..:.
particularlythe yoiin~erones, are not ptieprarea
to suhhit to
~
family separationon a long-twinbasis.

The contractor,if he has rigs running in more tho.none

country,will usually hrmw two layers of r.uumgeuent,
one in a
head office, ~erhqm in Europe, and one at the field.loc~ticn.
Ope.rntors
and controctio~s
agrw that the field manager is the
key man in the organization. On his efficiencyrests the
reputationof the contractorand the success or otherwiseof the
drillin~ operation. 3e must be a man of many parts.
Ee should
have an extensiveknowledge of drilling techniquesand practice,
lieshould have a workin~ backgroundin accounting,transport,
stores and personnelwork and mat be able to administerthese
departmentsand co-ordinatetheir ef?crts to~iardsackieving the
objectiveof drillingwells. It is vitsl that he should bo able
to inana~eas well as administerand ideallyhe should have a
knowledgeof modem ~anagenmnt,toolsand techniques. Lzstly,
and of great importance,his characterand personalityshould be
such that he is completelyacceptableto the operatorsstaff,
It could be said that one of his major functionsis to display
diplomacyin his relationswith the operatingcompany.
It is not surprisingthat this type of man is difficult
to find and even more difficultto retain. But rightly cr
wrongly, the ccntroctorsperformancewill be measured mainly
by the success of their field manager in co-operatingwith the
operators field personnel. And the reparationhe gains for
his cosqyanyis not alway~ strictlygeared to footagemade,
Base managementis; of course, enga.gcd more in gaining
contracts,en~a~i~ personhel,purclmsing. Their role is
essentialbut their corLymys reputationand, t!:areforsP
SGCCCSF
will hinge mainly on the performancein the ii~ld-

Vhilo all persmnel in a cmtractorfs r~thcr sparae field

efficientrig-men are absolutely
force are, in a sense, !.cey.staff,
vital. 13 particular,the toolpusher and the rig mechanic mst
be of first-classc~libre if the rig is to keep running, Most
operatorsagreethat for kole-makin~Ambrican drillersare
difficultto beat, 3ut it is also true that the Iabour turnover
of hnericans in foreignwork is very high. They are also exymsive
to attrcbctoverseas.

There ap~wm to be several rewons for this state of affairo

and ttieyare be,sedupon the state of the domestic industry in the
used to be swell-paid industryin the !J.S.A,
U.S.A. Dri?.ling
but in recent years the differentialbetween it and other more
sedentaryoccupationshas narrowed considerably. l!mng r~enme
no longerattrtictedto the heavy workwhm they can get only
-------sl
ight-lyinferior pay-workin:-i
n-a- supermarketi--Those-who--do
---------j- ------:,
start and subse:y~ently
marry soon lkave os the itinerantnature
c

of the industry is not suited to family life~

The result of this is that older men, who know no other

trade, are the ones who stay in the industryand who are willing
to work overseas, Sone of then change their jobs frequently,
perhapswanting a change in location,and crop up regularly,as
itwere, on the circuit of cverseas contrfietora,
Ml this is not conduciveto stable Iaboiarrelations and
ihe .uaintencume
of technicalcoqwtence and the situatiomis
not helped by the fqch that some contractorspayscales are well
below oil company standards.
For tho reasons outlinedshove many contractorsprefer to
---enploy a high proportionof Europeanswho, generallyspea?ii:ng,
are teuperamentall.y
well suited to foreign contract conditions
and who can be retained for lower salaries. This is certuinly
,truefor the rig nec!mnicj a most.vitalnember of the team, who
is responsiblefor keeping the drilling equipmentrunnin~. A
iyge particularlysuited for this work is the ex-naval ~nginoer,
who isused to running similarnachineryunder difficult conditions.
Europeanacccuntan+sandstorekeepersare also well suited for
the overseascontractorand are fairly easily found.
e

A really good contracttoolpusheris of vital inportnrace,

as it is he wlm will be directly responsiblefor the drilling of
the well. Foreign conditionsdemand a good deal more of a toolpusher khan would be expected,say, in t&e U.S.A., as his rig is
usually situatedwell away fXOilcivilisation, He should be a
gocd well man, ~fficientat fishing, corin~, testinz,running
and cementingcasing and many other jobs which at home would be
done by service coqmnies. He uust also be able to plan ahead to
economisein the use of materialsand to improviseand uakeshift
when required. There are no su@y houses for him tz turn to,
Most of all he uust,kave the,drive to t+skehole. Like the
contractors.field kmager the ~ocd ovcrsenstoolpwher is hard
to find,
.(.) ~ie~d Wlations with the oParator

Formal contact between oper~torand contractoris nmaally

the higher between the cwuirac$nanager and the
,.+at.tw~
Ieval.s,
companyrepresentative,who may be a field superintendent,
drilling superintendentor senior toolpusher,and the lower
between the contract toolpueherand the coqpany toolpuslmr. It
is of the ubuost importancethat there is agreementbetween the
parties-asto the structureof authorityand communication
between them, Under normal conditionsmatters of policy regar6ing
the operationwould be a&eed at the higher level,whilst matters
concerningthe running of the rig would be dele~atedto the toolpushers. Vithout this agreementand a strict adherenceto i%
there is dangerof)nisundersytandingwhich
could result in, at the
least, friction and perhaps in extreme cases disaster- Moat
companiesprovide contractorswith com~rehensivedrilling
j;ro~rammes
providinga frameworkwithin which he can works But
drillingrarely conformsto schedulesand good communication
..___
..__
.._-between both pgmties--is.ess
ential~.-!l!hia highlights...te.impOrOt.anCnQ_____
..
of good cxmagcnent in the field operation.

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

~ECTIONV.X
..

(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 fast post-warexpansiondescribedin Section IV could

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

i1

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

,.

,...

SE CT IO NVII

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

..

well-known,e.g, developmentdrilling in proven fieldst In

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

..

The risks and dif~icultiesare fully appreciatedby the oil

companiesoperatingin rernot~areas; they have had many years
experiencethemselves. They are fully aware that, 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.

Eow nuch more would the najor companies Iike tlm contrtmtor
ho taka over? Oparatorlso~inionsdiffer sharply on tbia point.
Om corqxmywould like to see cmuplotelyturnkey contracts. A
secondwould like the contractorto grovide all natcrialsp
transport,communications,aviation,etc~ but would wish to retain
coinpletely
oontrol over drilling techniques,drillingengineering
and mud control. A third cow,?any
WOUIC1prefer to hire the rig
and personnelon a pure day-work basis. It claius tb.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, In which c=el
the operator say~, he would prefer to have the grzater control
afforded by a day-rate centractwith perhfipsa.smal?.
elementof
incentiveincludecl,He would continue to run tho ancillary
serviceshimself,
(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.afiniehed one he is able to send hisrig and camp
dircckly ho the next one. On the other hand it is clif$icul+
for
the operatorto guaranteework for a con$raotorfor long periods.
Ris drillin~and productionprogramneaare constantlyclxmginfldue
to fluctimtionsin world demand for, and eupply of,oil. In the
14iddleEast, even in the largest fields, the number of extra wells
required considerably*O increase.field profluction
is rela%ivaly
small. The contractorwo>ld prefer loncer contracts. .The
operntorrequires the contract to cover only the period required
to drill.hiswells, 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,laas
possible.

From theseconflictinginterestshas evolved a conpronise.

Some oversens contractsspecify a inaxicxua
period (which is
usually eighteenaonths to two years but is sometimeszw low as
one year), plus the number of wells to be drilled in the period,
Lebout clausesara inchdedwhich provide equitablerecompense
for either yarty if the original conditionsare not met, For
instanc~,if it ie decided to drill fewer wells than planned or
to change the locationof the operationthe contractorwould not
normalhy lose. If tho contractorfails to comply wii% the
s%andcmvls
agreed the operator can invo!cathe,let-out clause and
either retain a new contractoror operate the rig itselfF
---

Xoweverl at least,twomajor opqrntors,CompaniesAfand C?

*Lonet 8~-ecify
a period-intheir cotitrfititi;
rti5tioning
tih-at=they2
------ prefer to keep the agreement flexible to enable ohanges of plm
~d be easily resolved, Presuinblyin this case the contractor
w-J.d have to satisfyhimself from the bcginnin~,that
the prospects-
of.keepinghis rig employedwith these companiesfor a rew-vmable
pariodwere good, nnd that ii the availabledrilli~ was ce+ited,
. .
1 in less khan a year he would still cover his overhca~s,.and

depreciationand make a profit, He would, upder these conditions,

hnve the problem of finding a new contract to employ his rig,
(e) D~meciation
By the nature of the operation,the contractorhas a large
investmentin equipncnt,plant and transport,and, therefore~
dep~eciationforms an i.mportmrt
part of his bid, Some operators
when tmndoringask for details of the contractors depreciation
calculations, Gthersallow the cmtrcctor +0 i?c~raciate
8s he
1i?cw.
Clearly, ii?t?lecontractorcould ho sure of continuityof
work for his rig, he would be satisfiedto ~przad the depreciation
over longer periods, Yut this is rarely the case and consequently
he >as to pitch his depreciationrate at somewherebetween {hat1:.e
estimatesthe competitivemarket will bear and t!letrue .r&teof
mechanicaldepreciationof his machinery. A had estimatemay
price him out of a contract leavinghinwith a stacked,rig. Even
if he does obtain a new contract quickly, the rigs ho owns UCY
not be of the right specificationfor the new Job.

In addition to these uncertaintiesthe contractorshould take

into account the replacementvalue of his equipmentat the end of
its life. 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 duringtheperiod,
-,
(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.expenses.The operator
can affect this outlay considerablyby the way he frames
his invitationto tender, k?ecm rmke the bid easy to
calculate,or diffimlt and expensive. At least one major
coupany,in recognizingthis, has broken the elements of
the tendcx down in such a way thatit has beenyossiblc to
send it out as a pro forma, the essentialfigures to be
filled in by the contractor, This rietbodwould seen to
offer advantageto the operator,as well as the contrzctorl
as it present him with exactly comparablevalues to evaluate
when assessing severalbids.

(ii) Evaluation

.-

How are bids evaluated? It would a~~ear fron current

Junericanwriting that many operatorsin the U.S. domestic
industryopt invariablyfor the lowest bid. And it can be
p.rgvqd.thata
._if.ell,.othex._cqe!.i4@?e$i?n?,.a??
..ww~~..!!+is
_.
is the only policy to pursue, But it is,~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, This is pcm+.icularly
truein the ovorseas industrywhere in reiimteareas running

. -..-...

..

a drilling rig is a coic~lex

and expensiveoperation?
cwtainly-dem~nding more fron personneland ecyipnentthan
would be-expected in a domestic industry.
1
considerations,other than cost, uust the
operator
look at when assesain& competitivebids?
Basically, they are +hree. Equipment,personneland
reputation,with pcrhaFs a femth, the financialsoundness
of the contractor.
What

The operatorwill require the drilling rig and its

associatedequipmentto be of the correct specificationto
drill the well, R should dso be in good nec.baaical
condition, If the rig is new there is no difficdty ?wt?
ii!used, a 6srvice ?aistorygiving details of footage drilled
is normally.demanded. In some cases,where it is possible,
a visual inspectionis nade, Generally spea!ling,
however, the
operator relies for his informationabout the rig on what the
- contractortells b.imand is obliGed to assume that a rig
which has drilled 20$000 i?ectis in better conditionthan one
which has drilled say 100,000 feet.

Some operatorshave attemptedto impose minimum standards

on contractorspersonnelby asking for personal details of
the emplcyeesto be engaged on th~ir operation. One company
inposed a condition(since rescinded)that at least 503iof
the men must have a niniinumof 2 yearls servicewith the
contractor. 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 withdrawnisan indication that it is not possible to impose these condit$ona
in the present day.overseascontractingindustry. 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.

The thir~ factor onwhick the operatormight %asz his

judgment is the contractorsreputationand this, perhaps,
more than the other two conld be lISM to be a Lood indication
of possible futuro performance. There is no doubt that o
few of the larger coinpanies
with many years proven ovcrseaa
success could.berelied upon to live up to reputationand
provide a goodtechnicclservice aud management in WY part
of the world, Wt the rmainder, althoughbac!<edin some
cases by reputableAmerican firma, are likely to have pfitchy
records. This is not surprisingwhen one rwnembersthe high
labour turnover in the industry.
3oth the cmrlzmctorand the operatoragree th~t it is
the stanclardof personnelwhich will make or break a contractors
reputation. It is the soundly based contractor
who can
,*
retain good men who will be able to maintain o consistent
level of achievencnt,

.-. -.
.-
..-..
:___.:
._.
_ ._..__
-.
For an operfatorto gain ailinsight into the contractors
financialpositionhe would have to dmuand and be given
accee~ to thefimu~s financialbooks. This is.not usually.
done and inmost cases operatorsare satisfiedthat the terns
of the contract,particularlythe clauseswhich Rllow then to

take overthe contractors eqiiipment

and personnelin case
of default, are sufficipnkprotectionof their intevesta.
Ctintractsgenerally ccxrhin clau5e5 re~airing the
contractorto insure himself against third party and other
coamrcial risks. Ttieoperwtorapgmars ho have m interest
in the profit being note by the contractorunless ,the
contrc+ctmis prepared to divulGz it.

So itwoald semn that fciurcf the five parancters

used by t4e ogerakar in attel@inE to forecaat the
contractors future performanceare questionableyardsticka~

The fifth considerationis the qmtedpr

ice.
The
evaluatorwill usually find hinself confrontedwithl BnY)
ten figures.ranging from the highest to the lowest bid.
From experience,the pattern of bids tn!:esthe fmxa, in a.
batch of ten bids, Gf one or +WO very high figures, one or
two very low, with the remaindergrouped around the mean.
The riostexpensivebid will he perhnps 100$ higher than the
low bid, He may appreciatethat his other yardsticksare
dubiousand could be forgiven if, in the interests.
of his
company,he selects.the lowest contractoron the list whose
reputation,by hearsay, is reasonableand whose rig, although
unseen, is reportedadequate. But normally the evaluator
has no means of knowing the full circumstancesbehind the
figure he accepts,unless he is told by the contractor~
The low price may be due to a variety of reasons. For
instance,the contractormay have a rig and crew available
nearby which is just finishinganother job, Ee may,
therefore,be prepared to pass the saving in rig LlGviXU3
expenses on to fhe operiator,On the other hand, heuay
have all his rigs stacked and be bidding lowin order to
obtain the contract,using the ~rocecds to cover his fixed
overheads, Whatever the reason,th~ operator stmida %0
gain in the short tern by acceptinG low bids.

How then is the evaluatorable to validate his performance

in evaluating,bids?What differenceto his coupny in terms
of cost of productionwillhis judgment of the contractorta
price make?

.-

As long as tha wcli is drilled and ccx.q?leted

to
apecific~tionpoduction should not be affected. cost
of productionwill certainlybe affectedby the cost of the
well but to what degree? Of course, +his will depend on
the spread of the coat over the volmle of crude oil prcduced
from the well. Obviously,the less productivethe well the
more criticalthe drilling cost,
..
It is not intended in this paper to enter the complex
world of oilfieldeconouics. But for the evaluatorto
estimate the effect of the oontractbit?on the cost cf =the
end product,crude oil,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
.wellsm
----.. ......
... ...
In order to estimate payback periodanassumptionwas first
made that the oilwellsunder discussionwere ca~ital plant
and.not eipensed itens (actuallyonly part of the well cost
is capita~izecl,
usualJ.ythe cost of tubing and wellhead but
sometinesincludingcasing); This is not an outrageous
.
.

assumptionto moke as, tax considerationsaside, a

proiiucir,
gwellis efi?evtively
just as much,a piece csf
capita:.plant as, say, a sepam.tor m 9 tds or a pipe or
any other @art of the productionSysieu, That a develop-.
nent oilwell is cdlowcd for expense agzinst tax is perhaps
partly traditionalanclpartly for incentivepurposes.
R<ferencc to Appendix 5 will Live the evaluator of
wells in this range m A3icntion of t~c effQct of the
cofitractors
eler..ent.of
the well cost on the profit from
the urude. 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. COIWKUI(h) reduced this furtherby ap:~lyingthe
contractorseIement of the totnl wellccwts (estimatedas
follows and inkppendix 15n). The costsofdrillinga
well by contractorcan be divided into three parts~
1, The cotitof items normally suppIiedby the
operator e.g. aa~ing% tubing, cerwnt and
nud chemicals, This costwould be fixed
irrespectiveGf whether the well was
drilled by the cor@any or contrac-hor.

2,

!lhccost of services indirectto the drilling

of the well, e.g. acesg roads,water wells
and pipeline,rig moving char~es etc. These
are usually bid for at a fixed rate per mile
or per foot,

3.

The payixmt for the contrnctcrlsequipment

cnd services in drilling
the we~l~

Reference to Appendix Jw, inwhick sone typicalwell

ccsts in Middle East fields are shows &rw,?hicslly,
will
lzi@lightthe fact that the contractorsclementt i,e.~
Nos. 2 and 3 above, account for no nore than 50-60j4of
the total well cost, the rest being accountedfor by fixed
cost items.
In Colunn (i) the tax shield on an axpense~w~ll is
.assunedto be 497 and is ap,-diet?
to the contractors
element in Column (j). !&is fi~ure is, say, the cost
per barrel of the low bid, The cost per barrel of the high
bid, 100$hiSherthan the Iowbid$ is shown in Colunn (k).

0
.

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. Of coarse, the lower prcrtacticr,
rate, the sharper
the pressuredecline; the shorter the well life and the
higher the well cost the &reater will be the importanceof
thecontrcctortselement,

.
-,

r..

. .

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,or will :
present in the future, a series of pr~bleusto the parties
the contractorand the
directly conoernod,i,e, the oper-;tor,
supplier. They can be summarisedas follows#(i) The Operators
(a) Are i%ceclwithdecidingthe level to which they
are preparedto run down drilling clepartments
in
favour of contractors.

(b) Am concirnedwiththe problem of retainingtheir

own long-servicedrilling and petroleumengineering
staff who may not tcleratehard living and family
separationin the new drilling pattern,
(c) Ewe onposingopinionsas to the degree they would
like to-go towards the turnkey.operati.on.
(ii) The Contractors
(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.
(b) In view of (a) are concernedthat they will not
be able to meet the increasingoperatorprc%sure
for improvedtechnicalserviceand equipment.

(c,) Are finding difficultyin finding and keeping

good staff, particularlymana~ernent and toolpashers,
(iii) The I%nufacturersand Su?mliers
(a) Because of improvedinventorycontrol andbhe 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) Eur.pean manufact~zrers,
nothaving alargedouestic
market, are gacing heavy competitionfrom the U*SJL.~
where quick delivery and excelkenttechnicalservice
..
-isrG%~tfya-+T16blei-
--------x-----

,<

..

experiencedin the U,S, dosmstic industrye Althoughop@ra*ors

are broadly aware of the problem, there is scant appreciation
within some company drilling departmcn$sM? the internal ~
finnncialnnd economicworkings of contractors- Naturally)
companiesare uainly concernedwith cutting drilling costs and a
great deal has alrmdy been achicweidin tha,aew ailfielils
by tha
employmentof contractors. Cor@ccnyclrill,in~
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. But they are showin~,by 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.
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,

After a b%:lsffirtthe contractoris now fulfillin~a need

for th@ aperator,that of taking up slack in fluctuatingdrilling
programmed. Be has established.
himself as a hole+naker,but
not as an all-rounddxilling service~Via equipmentis good but
his staff doubtful. But company drilling departrmntshave,
thro~h competition,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.g. ri~-moving.

..

The operatwraare now clenanding

better technical
sm?vice and
staff from the contractor. For instance,uost contractsnow
specify that the contractormust provide a drilling eufiineer.
What standardtho contractorwill be able *O furnish ia very uuch
.dcpendenton the salarieshe is preparedto pay and it is a
surprisinfl
fact that his rates m-c currentlyER.V3h
lower than the
oil conpanies~w%ereas, consideringtho lackof amenitiesand
sporadicnatir~ of the work, they should be higher. Why is this
so? There could be two reasons. 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
.topay nore. The wutlmr prefers the second reason, ,
Future staff requirementsof both contractorand operator
will be largely dependent on the oil companiespolicywith regard
to the type of contract they negotiate. Will they reqair~ the
contractorto trikeon more respcnsihiJ.ity
or less? .&longthe
cQn~ymiesthemselvesthere are dianetricnllyoflposed
views.
Although some would like to .%ss Gn rmre responsi~ilitythey are
suvswlxit
douhtfkzl
as to the contractors ability to run the
operationl
boae~ on pst experience. Others have already rcmched
the conclusionthat they have nore control in the dnywork contract
which, incidentally,re:.ucesthe contractorto littlenore than a
plant hire company and staff agency.
- ---~cith-optmutor
and-contr%ton-=e.findingti$zi~~lt~ $W
.......-..
_._:._._
.....
ratainingtheir field personnel. The reasons are not hard to
finfi.!?hereas.
previouslythe najority of overseasdrillihgwas
done byuajor ccnpanieswho provideda high standardof aaenities
,
and mhrriedaccorqodationfor their drillin~ personnel,
the
patternhas nowchnngedandnen are now asked to live for long

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 .
Must be sone new thinking in this area. Wh3tover the remedies
.. are which will be applieflthey will inevitablyresu2tin
higher personnelcosts. How can the contmc$or reconcile the
demand for improvefl
equipment,personneland servicesand yet
be able to uaintaia his position.in a hiskly competitivemxr!~et~
at the same time depreciatinghis equipment costs and providing
binselfwith a reaso~ablereturn on his capital? The plain cmswor
is that he cannot, under.the present systen, do all these things
and the najor factor preventinghin is the method by which the
,
operator seleots the conimactoro The ~~bious rensonin~behind
the yardsticksused in selectionare discussed in Section VI.
It
is doubtfulwhether current selectionuetkods could be prcred to
be better than random selection.The field for cut4hroat
competitionis left wide open, to the ultimate detrixaent
of the
industryas a whole.
Zow then cm the .confl.ictin~
requirenentmof cantrol and
competitionbe reconciled? ;iuiteclearly,only by the operators
themselves,who must set.the stan~ardsthey rcquire$dmand and
nest
enforce thenaml then be prepared to pay for the~l. ine
vital element of the service the contractoris selling is the
knowledgeand experienceof his personnel. It must be renlis@d
that to attract and to l~ep hi@ calibremen, whc will be spending
their working life in renote and relativelyW@CaSan* Conditionsl.
salary scaleswill need drastic upward revision. Leave peribtis
will requireto be lon~er Dnd rlorefrequent-

The second vital element in a contractors costs is

~dq?reciation. Tobe able to provide a high.standcuxlin equipuent
his profit must be.a~equateto allow for relativelyfast
depreciation.
The operatoruust.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.so
that each contractorbiddinS must dimalge the cletaileil
content
ofhis bid, Every bid should be in the form of o financial
statewentof costs and should itemise, in particnl.ar,
the salary
and conditionsof ccntraet of every nember of the contrac%orls
staff.

Comlete financialdetail should bc given of each rmjcr item

ofequipaentincludingori~inal cost, book valueand intende~
depreaiatim rate, Other items could be dcdmiledif requiredbut
personneland equipnentare the xmst essential,
At the end of the stateuent,after tota~ costs, a percentage
for profit shoul~ be.adfled. The total will be the lxd ~xice.

,.

The advantage of this systeu for both operatorand contractor

are obvious. The operator is able by inspectionof all bids to
-.asce~tain.w~ibh
contractor.is-likely.
im pr,ovi:le:.t!ae..
best..persome:.: .__...,-and equipfieat,An asswqtion cm be nade that hi~her salaries
will attract the best nen anclthat new equipnentis better than
old. A1l bids will be set.out on the sane basis so that direct
,
comparisonscan be made. The contractorin his turn can bid
secure in the knowledgethat his competitorsare fi~nring on the ~,
sane biwis and that~wellpaid staff, new equipuentand a high

.-

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,,
fhisapproachwould not elinin~lte
the co~Pe*i*iv@el@rlentof
tenderingas there would be EUUP1Oscope for competitionin the
areas outside salariesand depreciation.For exauple, there
would nearJ.yalways be variation~in shippin~co~i% to be Wmn
advantag~of by the operator,
All this will require newthinkingby najor ccmp~nies in their
approach to evaluatingbicls. Havin~ cstablishetthat they require
higher standardsfrcu contractorsthey~lust~dine Whnt t~@s@
standardsshould be in direct numerical terns, They must stipulate
that major item of equipnentshould be of a naxinun age, let us.
say, of four years, and havins done that ~iustallow the contractor
to depreciateat a uininum of 25$ p,a.~ (based on ~as$ @~Peri~nce
replaceL~ent
costswill have increasedsome 30$ in Zour years),
The contractorin return must allow inspectionof the original
purchasedocuuentsand his financialhccks by the ccrnpmy.
On the personnelside the oparator should indicate,on tiii
invitationto tenfier,
ninirrm salaries,based on his own ex~?erience
and knowledge,,
which he would expe,ctthe contractorto pay his
staff. 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,
fhePresidentof the JaerieanAssociationof Oilwell Drilling
Contractorsrccetatlyforesaw that within ten to fifteen years
nest of our drillers and rig superintendentswill be operating
engineerslC

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.
The contractor,in his turn, would be assureflGf Q fnir
return cn capitcl mxl the opportunityto build up his financial
strength. It is clear that a change to this open relationship
be+xieen oil conpany and contractorwill require soae romljustrzent
on both sides, The contractorwill have to reconcilehimself to
having his business affairs,particularlyhis financialboo!fs,
closely investifjatedbThe operatorwill have to forego the
artificiallylow rates to which he has been accwtoned in exchange
for future technicalcoqmtence, In view of the overlying
financialand ccononic importanceof the drillingcontracthe
wou?.dbe well advised to entrust the evaluationof contractsto
a departmenti
qualified in those fields. At least two uajor
comprrnies
have tilreadydone this. Drilling departmentscould
be conwaltedon any technicalquestion on behalf of the coupany
but should be put in the positionof a e.ompetitor
whenever a
decisionhak to be Made as to whether to eaploy a contractor,

.-

-----(
c)--lle-conncndations-------- ----------,
---------------

-- ----=

1. Tenders should be presentedas apro forma s.tatenent

of
,costs,in,particulardetailingsalariesand other ercolunents
and financialand servicehistory oi.equi@ent,

,.
,1

I1

--------

.!..

Gross pzofit margins should be statedby the contractor,

--.
.. :
. :

.,

3*

The evaluationof bids shouldbe effectedby financially

qualifiedpersonnelwho are not members of the.operatorts
shculd submit
drilli~ department. Drilling cle~artmcurts
bids in competitionwith contractors,

4, 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$.Odinstead aet up miniauu salaries
and rates of depreciationfor inclusionin invitationsto
tender. Having set the standwxls.
they should impose
sanctionson any contractorwho fails io.conform.

6.

In view of the high staff turnoveron bolh sides cf tlie

industrymi the need to attract technicallyqualifieduen, ~
higher salariesandnore frequent leaves should be offered.
The lead should be taken by the oil companieswho can, in
turn, impose ninimums en the contract industry.

7.

Drilling departmentsshould consider themselvesto be in

direct competitionwith contractors. Coqmy cost
accountingsystemsmust be construate.cl
so that drillin8 g
departmentsare sirnultnneously,
responsibilitycentres and
cost centres, i.e. they-areresponsiblefor anflkave control
over expendituredirectly conqernedwith the drilling of
the well. ~pportionmentof overheadburden must be c~~arlY
attributableto the drilling function,

. 3. Manufacturersand supply companieswill,it seems have to ~

accept the new pattern and endeavourto r~eetit, Sclnll ~
quantitiesoff tha shelf can best be bet from the U.$.3&
where there is a domesticdemancl~The iqmactibil.ityof
overseassupply houses and the ef~iciencyof air-frei@t
supporis this view, Little canbe said for maintaining
large r.aanufacturin.q
units in Lfi.nwpe
to make Anerican equipnent
althou~h sales organizationsare still essential.

,!

,.,

SECTION
.-..

lX

The author wishes to thank the followingconpanies for

their kindness in allowinfi
hin facilitiesto conpile information
and o$%ain opinions? In particular,thanks are due to his friends
within these companieswho gave him so much willing and unsolicited
assistance.

Iraq Petr.oleuu
Company Ltd., and~.ssocia+ed
Companies
British %troleuiiConpany Ltd.
Shell InternationalPetroleunLtd., and~ssociated
.Conpanies
Gulf Eastern Company Inc..,
Kuwait Oil Coqxmy Ltd.
KellogfiOvsrseosCorporationInc.
EuEhes Tool Company LtdContinent&Ekwco Company Ltd.
.

Special thanks are given to Dr. Ei~ltTa?,bo*,B.S~,~DrJur*~

the author~s tutor on this project. Eis constructivecriticismsof
the drafta and the a.vailability
of his wide kmwledge of industrial
. ._ee.omdcB._w.ere
?,

i.nyg.\w.pie_.t9:<hg_R~t~gx

.in.:.eac~~%

hi?.c~nclus~o~~~

SzlclIoli

General
.

x
..

,,
.

1. Is your awlpany intendin$to use uore contmct than company

drilling in thefuture?
Vhat have been the proportionsover the last ten years of ~

u
:

Company rigs to Contract rigs?

Company footnge to Contract foda~e?

2. When did you stark usin~ contractors

on any scale?
lfhatwere the major ccnsidaratio!as
behind the decisicn to
use contractors?
3.

Has contract drillingbeen successfulin fulfillingthe

re~uireuents0$ your con2any?
Financially
:
Technically
[)
If not, for what reasons? Will ym
company drillin~?

thereforego back to
,.

4.

Is your,policy to ru down you own drilling departucntond

equipuentan<.go completelyto contractdrilling?

5,

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
ofnll typcw
size, exi~ressed
in terms of noney,
-. of i3toc!&oli!ings
of m~terialswhich cm *

[al % &ttributnbledirectly to clrillin~,

or
(b) be attributableto the &@< up servicesnecessary
when the coupany is runnin~ its own drillin~ departucntt
e.g. Rotor trfiriaport
sparest pJ.antspares, itmns for
company drilling staff houses etoFrom this can itbe shown that the ~loveto contracting,if
any, has resulteclin reductionin overall ~tores Loldings in the
operhtingareas?
1, In your oilfiekls,i.e. where the opmwtions are Exploration,
Drillind,Profluction,
Process and Pipeline,what were and me .-

..

a Total-value
of itti~e-holclin~s-oveti
laitten-yeaz%?
=----:--
-------t! II II
It
b Valueof casing
.
c ValUe Gf caSiUg spools?
.. .christzmstrees
n
11
II n
conpletim equipmmt
tubing
/.

--H
.

..

. .-.,

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 ofplant spores
[)

O
2.

In your drilling contractado yoa supitlycasing,pud natmials$

cenent and wellheada? If not, cloeethe contractorhcwe access
to &e discountsyou Gxpect when buying on a large scale?

3.

M? your pvliay is to go to contractin~,is one of the main

reasons to cut down on your overseas inventories? If m, what
do.you expect to ~ave in terns of a
b
c

Value c~ inventory.
Space, buildingsand handling equipment.
Deductions of nunbers of item? What sectionwill show
the greatest saving?
(d) Stores administrationservices, includingpersonnel,
office equipnewtand rxdinery, s$ores accountingsections.

k, As 6 percentagesf vcdue of total stocks held, whet fi@mw do

yoa use as a stores overhead charge? Eow is.this figure broken
down? Dalesit includehandling, cost of investnant.,
wastagel
obsolescence/deterioration,
cost of ~.rsonneland mkiini~tra+ionl
equi~nentdepreciationand runnin~ costs, etc.?
Does the cost vary with the +ype of mterial - aa eaywith
drillingmaterial (few item of relativelyhigh value) and
MT spares (largenuszherof item of small value)?
!.
Contractorsand 13ids
Has your experienceof drilling contractorsbeengenemlly good?
Xf not~ ,wha+have been the main faults? Bad field management?
and laboar troubles?
Faulty equiprmnt,techniques? Iersonnel
Financial inwhbility? Iiescrvoirdamage? Other faults?
What do YQU look for in a contractorwhen con~idoringbids?
Good local nanngeuentand personnel? Adequate equipnent?
Lowest cost? Previous experienceof drilling in & similar area?
Any other consideration?
When your drilling pro~ranueextends beyond the ori~inalcontract,
would you try tG retain your existing contractoreven if his work
was barely adequatebecause, perhaps$ the cost,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.~, day-wor!znodifieclday-wore,turnkeyp
do you prefer to negotiateunder (a~ developmmt (b) wiMcat
,, conditions?
Will you, in future, tend towards increasingthe contraotmrts
-. ..$, & -..-,,,. ~partii.ip~tion.and.
tiemfore.risls.by-tefid~ri@..turDkey_eOntx~9$a
............
.....=
or by increasingthe foota~e rate,elemnt ofthe 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? Vherepoke-iblo
do you allow tikeratoyse your social
,
.
.. amenitieqa$d if,po clo,youahqrge.th?nfor.it?

I;

..

Do you think the oontractortspersonnelshoald be given-high

uonetary rewards,with crude nneniiiesand no security of
employcwnt cr pexsion? (M is this pwely the contractor~s
bnsines~?
6.

Do you find the contractor,particularlyif he has narried

quarters,,locateshis base ccmp close to c~~ipanyareas?
Do you find trainingnecessary for your own personnelto enable
the~ to deal with contractors?

7.

What nmber and categoriesof conpony su~ervisorypcr;onnel

are req~ired for one, two or sore contractoratrigs?

8,

Do you find that company and contmactorrsdrilling personnel

opsr%tingaway fron base have difficultyin intcrprctin~the
legal jtirgonof the contrac~ to their autud satisfmtim?

9*

Presumably,when contractorsare drilling ia renote locntions

your ccmpany supervisorypersonnelare livin~ in contractors
accommodation. Do-you insist on a minimm standard for then?
Are they co~lpensatied
for hardship?

10, khat, in ternsofpekcentage~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. Do you insist that your contractoris coveredby insurance? lire
you covered against non-fulfillrwxxtof
workby the contractor?
12, What would you consider to be a fair returnm net worth for a
drilli~ contractor?
tera frou the
13, Would you considerlen@ening the nornal contmet
existingme of two years to say three or .fmr years, asswin~
that the drilli~ progrmne was fairly i?irnthat far ahead?
If not, why not?
14. Are you prepared to assist the contxnctorin such things as
custom film-woi
procurementof visas whero your existing
ux~ymizationwill have m d<fjtlnc+.
fl.?.vsntage
wer his?

Drillin~l?fficiency/Costs
1, When you dec~deflto take on contractor was there any doubt in
your.nind abo~t the r~lntive efficiencyof the company drilling
effort? In-ocsks? In technique? In equi.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.your col~panydiillingdepartnont,
inprove
_uDdw;h@co!qpe.$i@.gn
o_f,@lg<&il~~ng
.ccntractor
c
lrilli}~
-._-.- ...
... in
. .the
.... .. .. .
sane area?
.,
,.
3* When assessingcontract drillin~against corqmny drillinswere
j
you able to i~roveby a financialexercise that one or the other
.-,
was cheaper>
a
in direot drilling costs
. .= H b
(to includebackup:serviceti)? ,
,.L
..
.- ,;.overall
.....-.- ,=,. ..- ..
., :- .. ..... . . ..

.-

4. Was there o natural resistancefron drilling departments when

contractorswere introtiucecl?
5*

Did conpany drilling departmentshave labcur troubles e.g. refusal

by drilling crews to nix rrxl,excessiveti=e off for prnyin~ and
other religiou6duties, over large drillinficrews, po~iticali
trado union inspired skrikes?
D~ the contractorshave sinilar troublos or has the sitwnticn
improved?
firethe contractorsconuiktedto a training pro~rauae by tk heat
~cverment? If so, tc the saue extent as the oorqymy? Does the
conpany ultimatelypay forthe training proflrarne
directly or
indirectly?

6.

Over the lasi ten yeara, 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.

Do you considerthat rig mwin~ time i.e. rig-clownto spud-in

by conpany ri~s has been cotipetitive
with that achieved by
contract rigs? If not, 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.i ore
responsiblefor the whole, continuouscperation?
(cl) Do you consider that the contrric,tor
gets nor. work fycn his
crews?

8. Do you find that the supervisionyou are able to app?.y to wells

drilledby.contrnct,say in renote areas, is sufficientto ensure
that the well is drilled to your specification? Chareyou nfraid
that ds.nage,coulcl
be done to reservoirsby inefficientor caraleas
contractorpersotielwhc are nninly interested
in naki~ kcle?
hre you considerin~cm increasein overt.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. Em your companyts costin~ systm been successfulin separating

$irect drillin~
costs fro!; overheadsattributabletc drillin~
S.Othat direct, accurate comparisoncan b~ nade between the cwts}
direct and indirect,of cmipanymcl cmtrsct
:lrilling?
If not, when doin~ a comparisonwhat overheadfigures floYOU use,
for extmple, for 4

..

(a)

Annual cost of keeping a nan and his fanily in the field

~
during his conpany career, inclxdinghis housin~, social
auenities,pension fund, insuronce,home l.cave,conuissariat,
etc.+-?
...........-:.
.-.-.
.:-..
.:
....... <......... -..
_ . . . .:. --

I&at proportionof total transgort

(if Transportoverheads?
overheadsiD a fielflwhere developmentand wildcat ara in
progress is tirectly and indirectlyqqwrtionod to
drillingoperations?

(J

Stores overheads? As (b) only stores overheads?

11. Cml,you provide typical values, in round figures or peroen%efl~ .

for the followin~ table brea!cinghwnwell costs?
Direct Costs

Development!Tells
p to

q,ooo~

%lo,ooof

Contrac$,orls

Datiork
& footage poy-

Nud control/uaterials

Coy.supervision
Pet,Eng/Geol.
Rockbits/extratools
transpwtlhaulage etc.
@direct Costt

hpproach royis & site

preparation
ilaterwells & supply
Stores tandlin~
Rig-up/rAove
Rig-down

,.

Completion(incl. acid,
salaries,transport
log~in~,shootin~$etcc
Capital expenditure,
Tubin&, Xhas Tree etc,
M?.

Is your experiencethat contractdirect dril?.ingcosts are

generallyhigher than corqxmyilirect
costa? If so, by what
percenta~eap2roxinately?
Is it the lower indirectcosts which Bake the contractor
attractive?

13
.,

If one of the nain reasons for e@.oyin8 drilling contractors

is to reduce t!w very considerableovcrlmadorganizationbehind
the aompccnydrillinfleffort, has this in fact happened? hre
yousucceedin~ in reducinE the overburden? If so,how long
will it take to reach optirwl size assunin~ eitker a couplete
nove to ccnkractingor k partial one? Tfnot, what is flelaying
I
.
the process? Tliehost govchymentrefusaloflabour reilunchmcies
or insistenceon continuedtraining in the &illing int?ustry?
Difficultyin disposal of eCiUip2Wntmfl inventoryholdin;~s?
.Unce~tainty-as.-to..whethez.
gcverncients
will support use Qf._.
:.-...,..=comtractorsin the future with consequentreluctanceto di.sgipate
company drilling organizationccxqbtely?

14
,,

Iiyoawere 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 oil.was found in this new

. .

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,your
own drilling departmentor both?
15. ~k& your host ~overnrxmtsany Ohjoctiontc your enjiloyuent
of
contractors,because (a) Company trainin~ schemes for local euployeesmay he
jeopardized?
(b) Conpany pension and other l.cm~servicebenefitsWOWI
no lo~er a~L31y?
(c) !IMde Unicn objects toless favourobleworking conditions
under contractors.?
16, 1s your contractorexpected in the terns of the contract to do
special jobs, perfomed in the U.S. by service CGLU&lniW, SUCh
.m cerxmting,corinG and fornaticntcwting? If he does, are
you satistie~l
that k is,doin~ it competently? IS h~, in your
opinicn,using +ke uosi noc,ern
nethcds and cquipnent?
17,

Xave you recentdy bqjht new drillin~ equipuent or am you

runninz it down prior to turninflto contracting? Would you
like lm sell Son@ oiyour riflsif you could?

Financial
1, 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, 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.~ht in? (M p~rhai~s
to off~r it to contractorat residualvalue?
3,

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, What proportionof your total cvzrsefis
involvedin crude oil production i.e. Exploration, Drillingj
~
Production, Process and Pipeline, are attributable to Direct
Drillin&Indirect Erillin~ Costs?

5.

4% perccmtaGes,wliatproportionsof total Iabour anti supervision ~

,.
coa~s are Bllocatedto IE+@mtim
~.,___
.
,._
_
_.
_
, .............. .......
.. ..
,---3rixling
-~
c
Production& Process
.
Pipeline& Terninal?
d

11-
;

6, @
~.

i.

. .-

a percentageof total dril~in~ expenditurehow sauchis spent on a) Dri~lifig

Research
b
IiesiwvoirE
ngineering

[)

,.,

. .

..

..

.-

.1

;.

1-

??!
m
I-1

G
UJ

I
i

.4

r-n

i3=

WI

%
o

i)

{t{

43

SECTION X APPE.
x 2
THE DRILLING CONTRA i INDUSTRY
WORLD WIDE DISPOSITION OF LAND RIGS+

1.

T?

RIGS

..

COUNTRY

CO::R::T*RS ;g

,ARGENTINA
BOLIVIA

BRITISH

HONDURAS

COLUMBIA
COSTA

.,1
.
-.

Sub~,Total:
. ,.

2A
,.$A

28
~,

1A

~
,.

MADAGASCAR

NIGERIA
SAHARA-

FRENCH

sAHARA

SPANRY+

1A

ID

1.

IF

jG

.3

~F

ID

1
2

SENEGAL

IF

TUNISIA

2A
flF.

.
-.

17
41

17

28

17
.

-.

LATIN
AMERICA
347

9
1

.
2

,.

3
1

17

-..

2
!

2
\

1
42

.,

!7

.IF

2A

..

6
17

IF

107

28

Iv

.
LIBYA

17
2

COAST

-..

otal Active
Rigs in Free
Nodd OUt~ide U.S.A. &
Canada++

MIAR]C]F:~BhDIG

,.

!
,,

-.,

17

,. 5M7
~.A

IVORY

~
!&
IL
:4
I
.
~,
),
,

IF

VI

21

1A

RICA

;ub ~~otals

..

21

1A

VENEZUELA

I
,.

,!
!,

2A
IAR

MEXICO

- AI

13

24

AFRICA
116

-1

\.
,.

,.

SECTION

X.

12000

6700

APti

+
4

DEVELOPMENT

WILDCAT

) -,
-,

: ..
,%

.,
,.
,,
!. .. ,
...
;:

ONTiACTO
,, .

:ONTRACTOR

CONTRACTOF

ONTRACTOf

ONTRACTO

,J

t,
,,
>

..

IN OIRECT

1 :,,

,.

INDIRECT

,,!.
.,

,.
. .

,<
,!.

CAPITAL 3%
:OMPLETION
~

INDIRECT
.,

.
l-.

)tilPMENT
.,

21%

?rei
,.
:,

b
,}

m~..

VIUD LOGGINI
k SWERW 5

..-

LOGGtNG,MU

iud,
al, ~~
..
Ion,
Bits,
..
;rt
~.
,,
~j..,

...
...-,
.
.
.!

CAPITAl

:OMPLETIOtd.

COMPLETiOl
~

I@ERATOR

~-,

LOGGING
SUPERWI.

INDIRECT

CAPITAL3!

CAPITAL

BITS,
TRANSPOW
ETC. 8~0

24%
Direct

,.;.+W!TER~AL,

LAB OUR AND

SERVICES

COMPLETIONIf
MLW~G~N;
...
CASING
&
CEMENTIN(
16%

&
LEMENTINC
19%

227.

23%

1,
i
1

43X
Direct

CASING

227,

Direct

CEME%TING

1
!
I

17%
1

PROVIDEO

cONTROL

CAPITAL
8Y

C?V51NG

.MATER,JAL} LABOUR - & SERVICES

,..
,

MUD

MUD
CONTROL
9y0
_

I CEMENTIN
.

INDIRECT

LOGGING4;

!
)

CA@NG
&

I
cAS!NG
8
CEMENTINC
17~o

L SUPEFW.
7

3%

:OMPLETIONJ!

~Y CONTRACTOR

PROVIDE
,
f) BY. THE

PLUS

OPf RATOR

PROFIT

AND

DE PRECIATION.

,.

. .

,
#
,..
,.

.,,

....

,,,

SEcTlON

!,.
. ..
,, ,,,: =-%.
:. .
,,

),

ESTIMATED

TAX

; ,,
f,
,1,,
,, .
!.,
+;,
,

..

,.

,.

-.

..

Sales trading
Posted

-.

19C
oltcOM,@ANY

,
.:,,
<.
------

,;
.
,;!,,
,
,,!

,,,

,.>
\
;30 c
4
,,/

PRQFIT- PER BARREL OF CRUDE

.,

I ,,

GOVERNk4ENT

$:

:85C

.:
.,.

x AmNDlx

b .,

,,.
1
f
,!,.... .J
$.. .
1
1,, ..
1.
,,!.;..
..
1,
:y85c

,,

..

OPERATING
COSTS
INCLUDING
EXPLORATION
DRILLING

company,

price

[$2)
.

$1.80

less 10% discount

per bbl.

030

Less: Cost of sales

Cost oil ex producing

$150

company

:, .-0

/,
/

,.

Less:

10%-DISCCWNT ?
<

COST OF
PRODUCTION
1

f,

9C

after tax

Add: Net cash flow producing

.2C

$065

Deprecation

FLOW
.

085

tax

~rading coy. - Net profit

-.

NET CASH

Government

NOMINAL

PROFIT

*Effective

net cash flow

coy. [9c+ 2c)

to trading company

(),11

.
$0 76 per WI.

,
,.
,~-,

An assumptio~
is mcide that the trading
,:
,

* * Am a~rage figure
>,
1,
I

company%

skreholding

between Med iterraneal.. and &sian

~,

in the

GpJf prices -$

producing

company

per U.S. bcirreL

is in direlt

proportion to its of fiake of crude.

,.

APmNmx

C@fDITK!NJ

1W

AND Mi7JXORS AWJMED

1. That the net crashflow (net profit after tax.plus do~reciation)

per barrel of crude oil is 76 cents,,:This calculationis
,
detailed in Appendix 4,
:.
2, That, ho avoid the conplicationeof introducingthe conce:?t
of !aar&inalcost hrto the calcu@tion, the sequence cm position
of the well drilled is unspecific*

3.

That for the purpose of simplification,and becouse itwould lx?

difficultto decide on a suitabledi$ccuntrate, a sir~ple
payback period calculationis used, ignoringpresent W.laes of
future cask flows.

4, That the ~ilwellshave a life of h?entyyears? flowin~ three

hvndred days/year,
starting at naxinun production ending at NIL,
with an cwera~e of half the m%iuuu,
~,, !iTmtthe revenue obtainedfron the well will be a~~~lied*O
amortizingthecost & the well before any other part of the
productionSystem.

.
.

..

_.._.. .

i
-.
,

4
.
II
.:

-~EcT]ON

APPENDIX 5

-,,

@fi~RAcTORS

COST

ELE~E~T

REIA~E~

TO

PROFIT

PER BARREL

.,..

.,!

.;, .,..

,,
,
!.
,;~
~,~
1
,,
,1.
:4
{

.;
__L .:~b)

jod ~otion Rat

e
,., d: $Start

of: Period

,e. - . .
,,,
,.
;$11.0,000
.,,,

b$h/doY

l,;.

40Q,0Q0
:,,. ,:,
$500,000
),
,
,,.
,,
$,
.,
,,
,,
i.
.
r
,..:,. .
-,
.1
.1;..
......
,,F
...
.,
.,(
..
.,..,-u,.
,, .,

10,000

,$

20;000

(c)

(d)

(e)

-.

(f) -

Net Cash Flow

Production Rate

over 2i3 Year life

bbls /. ..day
.

at 76c / bbl
per.day

over 20 year

$3,800 ..1
I
10,000 I $.7,600 I

30
.
60

5,000

Payback

Well

Cost

li_fe

=20 x 300
:
m]llions / bbls

(h)

(i)

Period

[days)

7
105
66

per, bbl
[cents)

Element
per bbl (60%)
(cents)

009

0906

~.33

084

083

054

od

(D

Effective

Effective

Contractors

Total Production

Average

(9)-

Tox Shield
at 45% say

Contnxtark Eie

GMtractorsEle
ent per bbl x 2

ent per bbl (at Law Bid )

(cents)

(at High &d)

i{

-a-+-t+
,

1
.

,,

:,.
ih,
,..

.,.
,

(cents)

SE CT

IONXI

BIBLIOGRAIETY
.

SOURCE

No.

1.

SLUTX)Nmd

SURRATT

2.

Sanity or Suicide?

h~lling 1961 VX!- g

..

What is the Low Bid?

Drilling 196OV21-10

3.

FREDERICK33*O
t

The Turnkey Drilling

contract

Drilling 1961 V22- 9

tiu

4*

SHEEHANJ.

ContWactorls Survival

Drilling 1961 v22- 9

Kit

5=

SHEEKANJ.
.

A Solution to Survival

6.

VRINS TtJs

How to Plan Successful , Intermticnal Oilrum

OverseasDrilling
1959- 13 and 1%
Contracts

7*

BORU3G0 E*G,

Letts Pick the Right

Man for Oilla.Global
Job

Drilling 1961 V22-12

8*

HARTSHORNJ,E.

Oil (!onpenies&

Faber

hilling 1961 v22-13

Gcwerments
{ 9.

10.

ISSAWI&YEGidWH
FEmrNHBm.

11, MWU?.AYWsJc
;,
12s ASH10NAJ3-.
13i

ASHTONAJ39

14. MelWNJ.G.

The Econonics of Middle

Eastern Oil
:~y

and

Faber,

Londoti

Faker and Faber,

London

Drilling iSJE@COIUin~ Inetituteof Petroleum

Review, Oct. 1961.
Cheaper &Fas,ter

The Drilling Indu@y- ~ Journal of Pe+koleun

Tkcbllology,
Praise,/Criticisnand
Mar. 1963.
,Challenge
InvestmentPlanningby
Private @terpriae

- L~oydsBankReview

Finanaing the l?u~e

. .
Row to Evaluate New
....Capital.Inveatwrrt

Iwtituteof
Petroleumpaper

-.

Drilling ?eehnoltigy
:. . Buoys.EconomicHopes
,
. . .

Harvard ~gs.inGs.B
%vi~=..,
..

...-.

3?etrolemEngineer
v3k - 11 end 12
j

-,