Upstream Oil and Gas Drilling Rig Contractors

In this lesson, we’re going to discuss an important segment of oilfield services, the drilling rig contractors.

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Drilling Rig Contractors and Rig Contracts

If you’re new to the industry, you may not realize that the oil companies themselves do not actually drill the wells. Wells are drilled by rig contractors and technical service and equipment suppliers in what is called the Oilfield Services industry.

Today, most of the global drilling rig fleet is owned by large, global contract drilling companies.

While it is very rare that an E&P company will own and operate their own rigs, it does happen. For example, Chesapeake owned a fleet of rigs in their NOMAC subsidiary for years.

There are two main reasons that it has become rare for E&P companies to drill their own wells:

First, the core competency of an E&P company is to find and develop reserves, and they generally want to stick to those activities.< The second reason, is that the E&P companies prefer that the rig contractors manage the risk of drilling the well. Choosing a rig contractor is an important decision. The drilling rig is the largest single cost of drilling a well. So, close attention is paid to the type of contractor selected, the type of rig used and the structure of the contract.

Land Drilling Contractors

All onshore wells are drilled from the surface using a land rig. Land rigs can also be jackknife and helicopter rigs. These types of rigs can be broken down into small enough pieces to be transported to a remote land location by truck or helicopter.

The onshore rig industry tends to be localized because of the expense of moving the rigs regionally or internationally.

In the recent US drilling, deep shale gas plays require higher powered rigs with over 1,500 horsepower. Shale wells are one of the highest cost options in a E&P operator’s development plan.

As always, market prices of oil gas determines whether it is economical to drill these wells.

The key land drilling contractors in the US market are listed below. All of them are public companies and their annual reports and management presentations are excellent resources for more information on the industry and each contractor’s operation.

The three largest rig contractors – Nabors Industries, Helmerich & Payne, and Patterson-UTI – control a little over 1/3rd of the US rig rental market.
Other major land contractors include:

Precision Drilling
Pioneer Energy Services
Parker Drilling
Unit Corp
Independence Contract Drilling
Seventy Seven Energy
With the US shale drilling boom in the early 2000’s, the market became more fractured with quite a few local, “mom & pop” drillers.
It remains to be seen how many will survive the crude price collapse of 2015.

Offshore Drilling Contractors

Offshore rigs are massive, self-propelled, semi-submersible rigs and drill ships designed to work in water depths that now exceed 10,000 feet.

An offshore drilling rig investment can be hundreds of millions of dollars, so close attention is paid to the market supply-demand situation before a new drilling rig is commissioned.

The complete list of the US 12 offshore drillers is shown below, and will be included on the lesson web page. Again they are all public companies so we have also shown how access their public information.

Atwood Oceanics Inc. (NYSE:ATW)
Awilco Drilling Plc. (OTCPK:AWLCF)
Diamond Offshore Drilling Inc. (NYSE:DO)
Ensco Plc. (NYSE:ESV)
Hercules Offshore, Inc. (NASDAQ:HERO)
Noble Corp. (NYSE:NE)
Ocean Rig UDW Inc. (NASDAQ:ORIG)
Pacific Drilling S.A. (NYSE:PACD)
Rowan Companies Plc. (NYSE:RDC)
Seadrill Ltd. (NYSE:SDRL)
Transocean Ltd. (NYSE:RIG)
Vantage Drilling (NYSEMKT:VTG)

To give you an idea of a contractor’s scope here is a quote from Transocean’s 2014 annual report.

“Transocean is a leading international provider of offshore contract drilling services for oil and gas wells. The company specializes in technically demanding sectors of the global offshore drilling business with a particular focus on deepwater. Transocean operates a fleet of 79 mobile offshore drilling units. In addition, the company has nine ultra-deepwater drillships and five high-specification jackups under construction.”

Rig Contract Types

Three factors drive the type of contract offered by the drilling contractor, and selected by the operator:

Current market conditions which affect the drilling day rate
The type of well being drilled or field being developed
Operator preference and risk assessment of the drilling prospect

There are three main types of drilling contracts.

Day Rate Contracts

Day rate contracts are the most common. Here, the drilling contractor provides all needed equipment and is paid a specified sum by the operator for each day that the rig is used.

For the contractor there is little downside risk. However, there is no financial incentive for the contractor to drill more quickly which affects the operator’s well cost. As you can guess there are numerous contract clauses negotiated to protect both the rig contractor and the operator.

Footage Contracts

Footage contracts are used when drilling in mature or well-known fields and reservoirs. A specified rate, per foot (or meter) drilled, is negotiated for a well of a certain depth.

With a footage contract, the drilling contractor has a real incentive to drill the well faster.

Here, the operator must pay particular attention to the safety and compliance terms that are applicable to the drilling operation.

With these contracts the operator “company man” is on the rig at all times.

Turnkey Contracts

Finally, are turnkey contracts where the drilling contractor is paid a lump sum to drill a well of a certain depth in a given field. The drilling contractor arranges all needed equipment and the third party technical services.

One criticism of turnkey drilling by operators is the possibility of lost of control over operations – unless the contract terms are clearly specified. On the other hand, the usual criticism of turnkey drilling by contractors is their exposure to the risks of downtime or well problems.

In summary, it is up to the operator to pick the contract type that suits the field development and well plan. The correct contract type can change over time as market conditions change.