An Overview of Service Contracts in the Oil and Gas Industry

An Overview of Service Contracts in the Oil and Gas Industry

1.  Introduction

The exploration, production and development of oil and gas requires that certain technical services be performed over oilfield assets. Many of these services are outsourced to third-party contractors who perform them for a prescribed fee under an agreement known as an oil and gas service contract. Oil and gas service contracts are generally of two forms: pure service contracts and risk service contracts. These forms differ in their scope and, to some extent, in the possible parties that may enter into them.

Pure service contracts are agreements for the provision of specific oilfield services, such as the acquisition of seismic data, drilling and construction. They are between an oilfield operator, who is usually an oil company, and the service contractor, who provides its technical service in exchange for a prescribed fee. Although this type of contract exists between an oil company and a host government, it is quite rare. These services form part of a broader oilfield exploration and development plan. Risk service contracts, however, encompass a broader scope of services than pure service contracts. Under a risk service contract, a host nation contracts with a (foreign) oil company to explore and develop its oilfield asset. The oil company assumes all managerial and technical responsibilities and bears all the financial and operational risks, in consideration for a prescribed fee. Risk service contracts represent the evolution of the contractual framework for oil and gas exploration and development, from the concession and production sharing contract models that granted the foreign oil company some interest over the oil. Under a risk service contract, the service company is only entitled to a fee for services performed. Despite their differences however, both pure and risk service contracts are similar in that they are agreements for the provision of an agreed upon service in exchange for a pre-determined service fee.

This article will review both forms of service agreements, considering the contexts within which they are applicable and the major terms that are found in them.

2.  Pure Service Contracts

Pure service agreements are contracts for the provision of specific technical oilfield services. These agreements stipulate the procedure and schedule for the performance of and payment for such services. Model contract forms are very popular with pure service agreements. While many oilfield operators and petroleum service organizations have their own standard form agreements, in practice, operators usually insist on using their own standard forms, which contain terms that are favourable to them because they regard themselves as having the upper hand in negotiations. Recently however, operators and service companies, through their respective representative industry organizations, have jointly published endorsed model forms. The most important terms during negotiation are the payment terms and the allocation of risk in the liability and indemnity clause.

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