Petroleum Engineering Summer School
Dubrovnik, Croatia.
Workshop #26 June 9 13, 08
Hole. H M
June 2008
Geothermal Well Drilling Services Contracts
Hagen Hole
Geothermal Consultants NZ Ltd., Birkenhead, Auckland, New Zealand.
These activities and processes may be provided to an
Owner under a large number of totally separate and
discrete service contracts, or conversely under one lead
contract, or any mix between these two extremes.
An Owner who desires to drill a geothermal well, will
have to decide on what contractual basis each and
every one of these activities and process is to be
provided. The level of control, responsibility and risk
that the Owner wishes to take, will determine the mix
between having many separate contracts or just one
lead contract.
ABSTRACT
The contract environments that are currently utilised by
the geothermal well drilling industry range from unit
time rate, unit metre rate, through to turnkey contracts.
This paper reviews the associated benefits and
drawbacks of these various contract formats.
Keywords: geothermal, drilling, drilling services contract.
INTRODUCTION
Icelands current geothermal drilling operations are
being executed under drilling service contract
structures which are predominantly metre-rate and
turnkey in nature. This is in contrast to the contract
environments currently adopted in recent New Zealand,
Kenyan and Indonesian geothermal drilling operations
which are predominantly unit time rate contracts.
GEOTHERMAL OWNER RISKS
Owner risk could be defined as the potential cost to
the Owner if the actual outcome of an operation does
not match the planned and expected outcome.
An Owner carrying out a geothermal drilling operation
is faced with a number of risk components. Unlike a
building or civil construction project, a drilling
operation involves a significant unknown factor.
A building or civil construction project is generally
carried out on the basis of a blue-print a detailed
plan of exactly how the construction process will occur
and be completed. While the blue-print can never
totally eliminate all unknowns, the majority of the
activities relate to visible and tangible situations.
In comparison a drilling operation is based on a
nominal programme, which is based on best
estimates only, and deals with invisible and
interpreted situations.
COMPONENTS OF A GEOTHERMAL
DRILLING OPERATION
Any geothermal drilling operation includes a wide
range of activities and processes all of which must be
provided and executed. These activities and processes
will include, but not necessarily be limited to:
Reservoir engineering and well targeting
Well design and specification
Drilling materials specification and procurement
Well pad, access road civil design and
engineering
Water supply design and engineering
Civil construction supervision
Well drilling engineering and supervision
Provision of drilling rig and equipment
Provision of drilling personnel
Provision of top drive unit and personnel
Provision of cementing equipment, personnel and
services
Provision of directional drilling equipment and
personnel
Provision of mud engineering personnel
Provision of aerated drilling equipment and
personnel
Provision of mud logging / geology equipment
and personnel
Drilling tool rental
Drillpipe inspection
Drillpipe hard-banding
Provision of well measurements equipment and
personnel
RESPONSIBILITY, CONTROL AND RISK
The scope of work of a drilling services contract will
define clearly the split of responsibility between the
Owner and the Contractor.
For example, the contract may define that the
Contractor is responsible for maintaining sufficient fuel
on the rig site to ensure no interruption in the drilling
activities. The contract may define that the cost of the
fuel is carried directly by the Owner, or by the
Contractor who shall be reimbursed with an
appropriate mark-up. The responsibilities, as defined,
place control of ordering and procurement of fuel with
the Contractor. The Contractor carries the operational
risk that in the event that he fails to maintain sufficient
fuel on site and drilling operations are effected then he
will be penalised accordingly most likely he will not
be paid for the period of lost time.
Hole. H M
Petroleum Engineering Summer School
Dubrovnik, Croatia.
Workshop #26 June 9 13, 08
June 2008
The Contractor will factor into his fee structure an
amount to cover the possibility that he will be
penalised at some stage.
managerial resources. The Contractor in this case, is
totally responsible, has full control of how and when
activities occur, and carries all of the operational risk.
The price the Contractor will charge the Owner will
include an amount to cover the equipment rental and
personnel, a management component, and an
operational risk component these management and
risk components can be significant.
Operational responsibility, control and risk are all
interlinked.
Operational
responsibility
implies
operational control, but imposes operational risk, as
depicted in Figure 1.
THE COST OF OPERATIONAL RISK
In comparing these two extreme contract models the
costs of the equipment rental and personnel
components should be the same.
The cost of the management component should be
similar, either the Owner pays for his own resources or
he contracts them in either through a consultant hired
directly by the Owner, or through the Contractor.
RISK
CONTROL
It is the cost of the operational risk component that will
be significantly different. In the case where the Owner
takes full responsibility, he will incur costs associated
with risk only in the event that a problem occurs. The
Owner will pay for additional rig time only in the event
that there is a problem causing a delay.
RESPONSIBILITY
Figure 1. Responsibility, Control and Risk Matrix
An Owner who may decide to take technical and
managerial responsibility, receives operational control
but must accept the consequential risk.
This situation is implied when an Owner selects to
enlist all, or a significant proportion, of the activities
and process under separate and discrete contracts.
In the Turnkey contractual model, the Contractor will
have to assess the likelihood of problems occurring,
and will build into his price a component to cover such
an occurrence. Of course his objective will be that he
will manage the operation successfully and avoid
problems, turning the operational risk component of
the price into a pure profit component.
Typically an Owner may have within its own resources
a geoscientific and engineering capability (or
separately contracted these capabilities through a
consultant). The reservoir engineering and well
targeting; the well design, materials specification and
procurement; the drilling pad and access road civil
design and construction supervision; and finally the
drilling engineering and drilling supervision, will all be
provided by the Owner through his in-house or
consultant capabilities.
The drilling services contract in this scenario would
typically be a simple unit day rate contract the Owner
is simply renting the drilling equipment and personnel
required to operate it. The Owner is fully responsible
for instructing the Contractor through each and every
step of the operation, and has total control on how each
step will be performed. The Owner carries all the
operational responsibility, and of course all the
operational risk. If there are some downhole problems
and delays to progress, the Owner continues to pay the
daily fee rate.
The difference to the Owner is that he will pay the
operational risk component whether a problem occurs
or not.
DOWNHOLE RISK
A significant sub-set of geothermal drilling operational
risk is the downhole risk the risk of losing drilling
equipment down the hole, and the risk of losing the
hole itself in part or in full. Typically, drilling contracts
pass the downhole risk, in full, to the Owner. That is,
any damage to or loss of equipment that occurs below
ground level, and any damage to or loss of the hole
itself is generally always to the full account of the
Owner. The only exception will be when proven
negligence by the Contractor can be shown to the cause
of the loss.
In Turnkey type contracts there is often a proportional
responsibility, where even though the Contractor has
full responsibility and control of the operation, some
proportion of the cost of covering the downhole loss or
damage will be borne by the Owner.
In contrast to this model, the Owner may decide that
the operational responsibility and control should lie
totally with the Contractor, a contractual model
generally termed Turnkey. In essence the scope of
work given to the Contractor could be drill me a
geothermal well in this particular place into this
particular reservoir come back and tell me when it is
finished.
The Owner may have no in-house
technical capability, and may not have the required
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Petroleum Engineering Summer School
Dubrovnik, Croatia.
Workshop #26 June 9 13, 08
Hole. H M
June 2008
RESOURCE RISK
Perhaps the most significant Owner risk is the
production (or reinjection) success of the completed
well, generally termed the resource risk. This form of
risk is obviously extreme in the case of exploration and
green-field wells, and will be inversely proportional to
quantity and quality of the geoscientific survey work
carried out. The resource diminishes as understanding
of the reservoir structure and the nature of the resource
and formation increases. With each well drilled and
completed comes a better understanding of the
formations and the resource, resulting in the lowering
the resource risk.
OBSERVATIONS
The trend observed recently in operations in New
Zealand, Kenya and Indonesia, has been toward unit
time rate contracting with owners demanding full
technical and managerial control, with a willingness to
accept the operational and financial risks.
The upswing in demand from the oil industry over the
past five years has created a shortage of available
drilling rigs and suitably qualified personnel, which has
in turn hardened the market and reduced the
willingness of drilling Contractors to accept risk unless
significantly higher levels of compensation are offered.
As stated in the Introduction, this situation is in clear
contrast to the current practice in Iceland, where it is
evident that a unit metre rate contract structure that
places significant operational risk with the Contractor
is practiced and accepted by both Owners and
Contractors.
It is extremely uncommon that an Owner can pass the
resource risk to others through a contract structure. One
example where this can occur, is a steam production
based drilling contract where the Contractor is paid
for drilling a well on the basis of the mass flow or the
Megawatts of electricity produced from the completed
well. This type of contract was used for a short period
in New Zealand, but as far as the author is aware, with
unsatisfactory results.
The drilling Contractors that are, or were, operating in
New Zealand, Kenya and Indonesia are without
exception Contractors that operate predominantly in
the Oil industry, with only relatively small involvement
in the geothermal industry. It is evident that the reverse
is the case for the Iceland based drilling Contractors.
CONSEQUENTIAL RISK
In the event that some significant drilling delay occurs
or the productivity of a well or wells is not as expected,
delays to commencement of planned generating may
occur. The lost revenue, and possibly penalties for nonsupply may be a result, and would fall into the category
of a consequential loss. This type of loss is typically
covered by insurance, but unless negligence can be
proven, must be to the account of the Owner.
REFERENCES
Hole, H M., 2001, Geothermal Drilling, Geothermal
Institute, University of Auckland, Auckland New
Zealand, Paper 665.620.
FINANCIAL RISK
The Owner of a geothermal drilling operation will
usually be constrained to a financial budget of some
form while executing the operation.
If an Owner desires full technical control of a drilling
operation and accepts the associated responsibilities
and risks, this normally leads to some form of a unit
time rate contract, which will impose a financial risk
with respect to the budget. By definition a unit time
rate contract is unlikely to be completed on-budget,
there is a chance that the well be completed underbudget, and there is a financial risk that the cost of
completing the well will exceed the budget.
The only way an Owner can minimise the financial risk
is by converting all or part of the drilling operation to a
fixed or lump sum contract. Any conversion to a
fixed fee, shifts responsibility and therefore control
back to the Contractor and away from the Owner.
AN OWNERS CHOICE
The Owner of a geothermal drilling operation is faced
with balancing the level of technical and managerial
control of the drilling operation he desires, against the
level of operational and financial risk he is willing to
accept.
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