What is an Oil Service Agreement?
Oil Service Agreements (or "Oil Field Contracts") are contracts that engage the services of contractors for works on an oil field. Generally, an oil field contractor is any contractor who provides goods or services used in exploration, drilling, production or maintenance at a well. Oil Field Contracts may be signed by a contractor or subcontractor, or by a supplier whose products are needed at the well.
Oil Service Agreements can be very short. For example, sometimes a company will need a contractor to immediately replace an oil well pump, with a cost of less than $1,000. An Oil Service Agreement that covers the cost of two hours of work and a small pump might be only a few paragraphs: "Contractor shall provide the following goods and services: [description of work]. Contractor shall be paid by Company as follows: [description of compensation]. Contractor will keep the following property: [description of property]." In other instances , An Oil Service Agreement can cover a year’s worth of goods and services at a complex oil field.
Whether it is a short term contract or a long-term contract, the parties to an Oil Service Agreement are almost always the owner of the oil field, or "operator", and at least one oil field contractor, or "service provider." These two parties may include such additional oil field contractors such as engineers, seismic companies, drilling companies, pipeline companies, transport companies, and manufacturers and suppliers of pumping equipment, drilling rigs, tanks, trucks, and housing.
Essential Terms of Oil Service Agreements
The essential components of an oil service agreement revolve around the work to be performed. While the specific terms will vary, the basic structure is similar among these agreements.
Scope of Services – This section requires a detailed description of the nature and scope of the work to be performed. It sets expectations for both the contractor and the client and is the starting point for analysis and determining if the contract terms are acceptable.
Payment Terms – This section generally contains detailed provisions on pricing, invoicing and payment schedules with rate or price variations based on service location. It may also contain liquidated damages provisions covering instances of late performance or nonperformance.
Performance Provisions – These provisions define performance criteria and result thresholds that must be satisfied for compensation to be made. This section may also contain objective means to measure or verify the contractor’s performance.
Termination – Provisions on the right to terminate ensure that the agreement does not last longer than the circumstances or situation dictate. Standard clauses include termination without cause upon proper notice and termination for cause with or without notice.
Types of Oil Service Agreements
The scope and scale of oil service work is vast and ranges from offshore activities like drilling, weld inspection and maintenance to land work which includes logistics support services for equipment that is used in drilling and completion such as wellheads, pumps and casing. Some of the major types of oil service agreements include:
Drilling Agreements – These are long-term agreements entered into by an operator with a drilling contractor. Usually, when the contract is signed, the contractor is already in the vicinity of the area to be drilled. Within a short time frame, the contractor can usually drill any new well that an operator may require being drilled. For example, an operator may wish to have three wells drilled in a field. As the first two wells are being drilled, wells three through five can be in the process of drilling, which means greater production for the operator.
Maintenance Agreement – A drilling contractor may enter into a short term maintenance agreement with a service company. A drilling contractor is more cost effective for a drilling operation, if it makes a turn key with a production unit arrangement with the operator.
Settlement Agreement – If there is a dispute between a drilling contractor and an operator, a settlement agreement will be drawn up.
Purchase Sale Agreement (drilling equipment) – These agreements are usually formed with a service company, whereby the operator may need to purchase some used parts. The service company is relying upon the operator to order parts.
Production and Testing Agreement – An operator will enter into an agreement with a contractor, whereby production will take place in a short time frame.
Transportation Agreement – An operator may enter into a transportation agreement with a contractor. For example, the contractor may offer a package deal, which would mean, if the operator is satisfied with the contractor, the operator can go to the contractor for future business.
Legal Issues for Oil Service Agreements
A critical aspect of an oil service agreement is ensuring that it complies with relevant government regulations and industry standards. Contractors must operate in accordance with the requirements of health, safety, and environmental laws, including the Health and Safety at Work Act 1974 and the Offshore Installations (Safety Case) Regulations 2005. The agreement should outline the contractor’s and client’s obligations in terms of ensuring compliance with these regulations, as well as other industry guidelines such as the Oil & Gas UK Guidelines on UK Offshore Petroleum Operations.
Liability is another key factor in oil service agreements. Clarifying who is responsible for losses or damages, both direct and consequential, resulting from the contract, is crucial. The liability cap is often a subject of negotiation, with many contracts setting this cap at either the value of the contract or the contractor’s insurance coverage. Importantly, any limitations on liability, such as consequential loss, should be carefully considered to ensure they do not unduly restrict a party’s rights to recover in the event of a breach.
Dispute resolution is an essential component of any contract but takes on particular significance in oil service agreements, given the international scope and complexity of the industry. Most oil service contracts are subject to English law, but parties should consider whether they want to submit to the exclusive or non-exclusive jurisdiction of English courts. Alternative dispute resolution mechanisms, such as arbitration or the option to refer disputes to an independent expert, are increasingly common.
The parties will often also consider what happens in the event of a change in control of one of the parties. Many oil service contracts include a ‘Change of Control’ provision that gives the other party the right to terminate the contract in the event of a change in ownership or majority shareholding of the other party. In addition to protecting the parties in case of a control change, a ‘change of control’ clause serves a useful purpose in providing additional certainty as to the relevant party that will assume its obligations under the contract.
It is advisable for parties to retain legal counsel experienced in oil service agreements to ensure that all legal considerations specific to their circumstances are taken into account, and to answer any concerns or potential issues which the party anticipates may arise.
Negotiating a Successful Oil Service Agreement
Negotiating the terms of an oil service agreement can be a complex process, requiring patience and the ability to carefully consider the needs and interests of both parties. In this section, we will explore some best practices for negotiating an oil service agreement that is fair and mutually beneficial for both the operator and the contractor.
First and foremost, both parties should take the time to fully understand the other’s business model and priorities. This means that the operator should do their due diligence by researching the contractor’s track record in the industry, as well as their financial health and business goals. Likewise, the contractor should seek to learn as much about the operator’s business operations and financial situation as possible.
It is also important to identify your key negotiating points before you begin the negotiation process. Make a list of which terms are most important to you, along with any points that you are willing to be flexible on . This will help ensure that you do not get sidetracked by less important matters during the negotiation.
As you begin negotiating, be sure to keep an open mind and be willing to consider the position of the other party. Just as it is important for you to be clear about your priorities, it is equally important for you to understand the other side’s priorities and objectives. This will allow you to consider solutions that may work for both parties, even if they do not fit squarely into either side’s original proposal.
In addition, be sure to put everything in writing. After each negotiation session, draft up an updated copy of the oil service agreement that reflects the most recent terms discussed. This will allow both parties to maintain a correct and current record of what was agreed upon.
Finally, remember that an effective lawyer can be an invaluable resource when negotiating an oil service agreement. Your attorney can help you understand the terms of the agreement and can provide advice on how to negotiate for your best interests.
Issues and Disputes in Oil Service Agreements
Like any other business agreement, the oil service agreement (OSA) is liable to various challenges during implementation. The challenges range from failure to perform under the contract, fluctuations in the price of oil and other raw materials, environmental issues, government policy changes, force majeure events to the technical challenges that arise while providing the service. The OSA also presents challenges in specific aspects of the task. For instance, there may be challenges in the performance of specific tasks like drilling or creating a wellbore, or challenges posed by the requirement for high-quality equipment. These challenges may arise as a result of: (i) failure to apply the appropriate technology to attain the required precision of work; (ii) lack of adequate knowledge in the use of technology or equipment, (iii) improper application of the relevant procedures for performing technical tasks; or (iv) failure to perform in line with applicable standards. The general challenges above can lead to a number of problems in the execution of an OSA. Some of these problems include: inability to meet the timelines for tasks, cost overrun, excess waste and pollution, and accidents especially where the OSA involves extensive use of technology and equipment. For these reasons, it is imperative that an OSA has a clear allocation of risks. There should be appropriate provisions for indemnification, liability limitation and insurance. Drafting for these clauses can be complex as insurers have increasing difficulty determining their exposure as the liability of oil service providers has largely remained unlimited. An OSA should also have clear requirements for compensation and payment. The fees payable under the OSA tend to vary depending on the type of oil service that is being rendered. There are three broad categories of the remuneration structure under an OSA: hourly rates, fixed fees and basic/variable fee combination. Regardless of the type of payment structure, the compensation should be calculated in such a way that the oil service provider is reasonably incentivized to minimize costs, be cost-effective and guarantee efficiency.
The Future of Oil Service Agreements
As new digital technologies continue to reshape the oil and gas industry, oil service agreements are likewise evolving to address the opportunities and challenges that may arise from those developments. From widespread use of big data analytics to the increased use of drones, artificial intelligence and other advanced technologies, new contractual legal issues will have to be addressed and negotiated in oil service agreements. Increasingly, the nature and manner of data collection, and resulting data ownership, will come into play in negotiations. Further, the service provider’s ability to maintain cybersecurity protocols, especially amid increased reliance on remote monitoring and control, will need to be considered.
Sustainability is another key issue in the oil and gas industry that is likely to impact service agreement negotiations. As energy companies seek to align with the United Nations’ 2030 Agenda for Sustainable Development by adopting the 17 Sustainable Development Goals (SDGs) , including energy efficiency and climate action, oil service agreements will be affected. The means of measuring and monitoring compliance with sustainability goals may need to be addressed. For example, the use of advanced metering technology that can generate and deliver both energy consumption data and data on the sustainability attributes of energy resources may need to be addressed, as well as who owns that data.
Industry standards continue to evolve in ways that are affecting oil service agreements. For instance, to mitigate methane emissions from the upstream oil and gas sector, the Environmental Defense Fund, and a group of producers, NGOs and universities created a standardized approach for continuous monitoring and detection of methane emissions. Where applicable, adherence to such industry standards may require reference in oil service agreements.