Comparison of different models for integrated services contracts shows how cost savings fluctuate

By Stephen Whitfield, Senior Editor

Cost optimization is a critical aspect of any drilling operation. Humam Al Darkazly, Senior Wells Engineer at Petronas, estimated that drilling costs make up between 50% and 70% of the CAPEX for the operator’s typical development projects. To help mitigate financial risks and uncertainty, the company is increasingly relying on integrated drilling services (IDS) contracts, both to achieve cost efficiencies and to allow for greater adaptability to changing market conditions. 

“We’re trying to maximize cost savings. We want to ensure profitability regardless of any volatility we may see in oil price, ensure financial stability and minimize risk,” Mr Al Darkazly said at the 2023 ADIPEC on 3 October. 

However, there is no one-size-fits-all contracting model that can guarantee the most cost savings. So, Petronas utilizes three cost models in its tendering process for IDS contracts: lump sum cost per well, lump sum cost per meter drilled (as determined by the estimated total depth of the well), and lump sum cost per hole section. In his presentation, Mr Al Darkazly compared the advantages and disadvantages of each model based on an evaluation the operator conducted on IDS contracts in the Middle East. 

As part of the evaluation, the operator compared contract terms for the drilling of various wells in the Middle East. For the evaluation, three separate land rigs that possessed identical specifications were contracted, which Mr Al Darkazly said ensured “consistency and comparability.” Each well employed an identical casing design. Petronas provided the necessary casing, tubing and wellhead, while the drilling contractor was responsible for all other materials and services required for the drilling operation.

Of the three models, Petronas noted the most cost savings was achieved under the cost model structured by hole section drilled – in fact, savings were up to 50% more than the other two cost models. The calculated percentage of saving was based on the prices specified in the awarded contracts, and Mr Al Darkazly said savings from the hole section model were due to the effective categorization of hole section prices based on well inclination. 

Under the hole section model, the drilling contractor has the opportunity to propose lower costs for wells with lower inclinations. This is primarily because, with these types of contracts, the total number of meters drilled is typically less compared with higher-inclination wells. As a result, the contractor can allocate fewer resources while reducing drilling and tripping times, leading to less equipment usage, manpower and associated expenses. Additionally, lower inclination wells generally entail reduced drilling complexities and risks compared with wells with higher inclinations. The contractor is then able to offer more competitive pricing for these wells. 

The other two models – cost per drilled well and cost per meter drilled – do not incorporate well inclination as a factor, since well inclination is only useful for determining the lengths of a given hole section. However, although well inclination does not have a direct impact on the number of wells drilled or the total depth of a given well, it does mean that the drilling contractor assumes the maximum risk regardless of the well’s inclination and are likely to incorporate that into their bid. In such cases, the contractor must account for the possibility of drilling more meters and encountering more challenging conditions downhole, resulting in a higher proposed price to compensate for the added risks. 

By integrating well inclination into the hole section model, the contractor can assess and evaluate drilling conditions more precisely, allowing for more optimized bids based on the specific complexities and risks associated with each well’s inclination. This approach ultimately leads to the additional cost savings compared with the other two models. 

Even though Petronas saw greater cost savings overall with the hole section model, Mr Al Darkazly noted that the specific savings Petronas saw in a given well depended on external factors. Such factors could make the other two models more palatable to other operators utilizing IDS contracts. 

For instance, while a contract utilizing the drilled wells model has a fixed budget dependent on the number of wells to be drilled, the hole section model is based on fixed drilling targets, and changes to the well target by reservoir engineers can negatively impact the budget estimation. Also, S-shaped wells may increase costs for the hole section model due to increased well inclination, though some operators may opt for shallower kick-off points and higher doglegs to reduce inclination and lower costs. Well inclination has no impact on well cost for the drilled wells and meters drilled models because it was not incorporated into either model, so if the inclination category is not specified, the operator may prefer to use one of those models. 

The drilled wells and hole section models also provide easier invoice processing than the meters drilled model because they are fixed costs. More auditing is required to process invoices in the meters drilled model, as the operator must check the depths of each hole section. Mr Al Darkazly also noted possible disputes if the casing is tagged at different depths than the BHA, or if directional work deviates from the plan. 

Petronas’ review of cost models also revealed several potential areas of improvement for IDS contracts that Mr Al Darkazly said could help minimize disputes between operators and contractors.  

For one, by refining the risk-sharing mechanism in IDS contracts, operators can establish clearer responsibilities and expectations for contractors, minimizing disputes and creating an environment where risks are effectively managed and shared. 

A potential approach is to transfer the risk fully to the contractor, which may result in an increase in the contract cost. However, this ensures that the operator’s spend is closely aligned with the budget. For example, if the drilling contractor bears the cost of mud losses or left-in-hole BHA, that can help mitigate financial risk for the operator. Another strategy may be to share the risk with the contractor based on a calculated percentage, taking into account the probability of encountering issues downhole. 

Another way to minimize potential disputes may be to avoid specifying the number of rigs in an IDS contract, Mr Al Darkazly said. This is beneficial from the operator’s perspective as it allows for the potential provision of additional rigs when needed to expedite drilling activity or overcome contractor-related delays, ensuring adherence to the delivery schedule. 

Thirdly, under the per hole section model, true vertical depth (TVD) is generally specified for each hole section with a safety margin. However, conflicts may arise in cases where the total depth criteria are modified by the reservoir geologist to drill a deeper TVD. To address this issue, Mr Al Darkazly suggested two potential mitigations. First, the safety margin of TVD can be increased based on field experience, resulting in a higher cost estimate that can accommodate potential changes. Alternatively, a cost line item can be included in the contract for each additional meter drilled beyond the specified TVD depth, ensuring that any deviations from the original plan are accounted for and appropriately compensated.

Also, to prevent disputes and ensure compliance with established standards, IDS contracts should include explicit provisions addressing contractor practices that deviate from the operator’s practices. These practices may include reducing mud quantity, operating with minimal manpower, employing inexperienced personnel and other non-compliant actions. By incorporating comprehensive details and emphasizing adherence to the operator’s practices, Mr Al Darkazly said, operators can set clear expectations. 

“We have a competitive bidding process, and we’re awarding the contract to the lowest bidder, so we’re aware that sometimes the contractor must make decisions to save costs on their end, but we need to ensure that we are clear about our standards,” he said.   DC