The Impact of Client-Contractor Relationship on Cost Decrease

The contracts made between drilling clients (operators) and contractors are of great importance in decreasing drilling cost. Incentive contracts are one instance of contracts leading to drilling cost decrease.

Client-contractor relationships have a significant influence on the decrease of drilling cost. The contracts made between drilling clients (operators) and contractors are of great importance in decreasing drilling cost. Incentive contracts are one instance of contracts leading to drilling cost decrease. These contracts enable the contractors to provide their staff with incentive pay. It is worthy to mention that the application of such contracts involves some complications in need of prompt management. Incentives can be either financial or non-financial; financial ones are considered as making adjustments in the contract digits or paid shares whereas non-financial incentives are in terms of change of contractors’ ranking, assigning priority in future contracts, etc.. This issue brings about a mutual advantage for clients and contractors. Another important issue is proper risk sharing between clients and contractors who encounter different kinds of risk during drilling operation execution.

Drilling clients face prolonging the drilling of wells; contractors encounter equipment damage or workforce injuries. Proper risk division between clients and contractors contributes to the establishment of a win relationship resulting in cost decrease in long term. On time client’s need declaration including staff, equipment and services is another remarkable issue. Since drilling services contractors make planning related to staff, equipment, and materials on the basis of client needs, they cannot have an accurate planning for investment if the need to new technology or drilling services is not declared on time. We should bear in mind that early need declaration is not solely sufficient; this request must have a high level of assurance otherwise lots of damage is imposed on the contractor. On time need declaration to services has a special effect on decrease of cost and planning fluctuations. Advance Order Commitment (AOC) is one method to this end. In this way, contractors can undertake their operational planning with greater transparency.

 Precise definition of each mentioned factors in drilling services contracts has a remarkable impact on the effectiveness of this method. Additionally, a shared think tank can contribute to synergy and collaboration in case of special and unforeseen situations and optimal management of risks stemming from such situations. Organizing brain-storming meetings with regard to these cases can be a helpful manner for the identification of risks and the origins of these situations. Integrated risk management by clients and contractors can be beneficial in different phases. In risk identification phase, interactions of clients and contractors can help the complete risk definition.

By doing this, not only the risks are defined comprehensively, but also they are defined on the basis of root causes with more thorough investigations. In qualitative and quantitative analysis phase, more accurate evaluations of risk occurrence possibility and its intensity will be achieved. For instance, it is possible that client or contractor lack sufficient data for quantitative analysis. By these interactions, both sides can have a more clear understanding of shared and even unshared risks.

These interactions are also fruitful in the phase of control and response plan development. Mutual notification of response plans helps to their successful execution. On the other hand, shared response plans which are gained through integrated risk management, are necessary for shared risks.