Elaine_Skene

THE ROBERT GORDON UNIVERSITY ABERDEEN BUSINESS SCHOOL DEPARTMENT OF LAW Oil and Gas Industry Standard contracts – is there such a thing: A critical analysis

2010

By Elaine Skene Dissertation Supervisor: Leon Moller Submitted in partial completion of the degree of LLM Oil and Gas Law

Word Count – 20,559

Abstract

Oil and Gas industry operations have continually adapted to the challenges presented by price volatility, maturity, evolving regulation and changing perceptions within society.

One of the key drivers of all companies operating within the Oil and Gas industry has been to reduce cost and improve efficiency to increase productivity. This resulted in the creation of a number of government lead initiatives, including the introduction of model contracts.

The aim of this paper is to evaluate the extent to which industry standard contracts are used within the UK oil and Gas industry, whilst comparing the variation of there application between companies and the alternatives to these standard models. With the ultimate aim to answer the question, Oil and Gas industry contracts – is there such a thing?

This paper starts by reviewing the basic contracting principles, highlighting the risks that exist within this process and identifying key contract clauses, with the main focus on risk mitigation. The study shall then analyse model contracts used within the UKCS Oil and gas industry with the focus being on how these are received and implemented by various companies working within the UK Oil and Gas industry. The paper will also look at companies such as ConocoPhillips UK Limited who do not use model contract. This research will allow conclusions to be draw as to whether model contracts are the best solution.

i

Acknowledgements

The author would like to acknowledge and thank a selection of people who provided guidance, involvement, assistance and support with the completion of this research dissertation.

The author is extremely grateful for the assistance, encouragement and overall feedback provided by the dissertation supervisor Leon Moller.

Many thanks to ConocoPhillips UK Limited, who financed the author through the final year of the LLM course and who also have also given guidance and support when required, and for participating in research interviews.

The author would also like to thanks all those who participated in the research questionnaire for their time and information, it really was invaluable for this study.

Finally, but my no means least the author would like to thank family and friends, who have always been there and provided support during the past 3 years. This work would never have been completed without their support.

ii

Contents

Page

Abstract Acknowledgments Contents List of Tables List of Figures

i ii iii v v

Chapter 1 - Introduction

1

1.1 1.2 1.3 1.4

Oil and Gas Industry – History Oil and Gas Industry – Present Industry Bodies Aims and Objectives

Chapter 2 – Oil and Gas Contract Law 2.1 2.2

2.3

2.4

Introduction What is a contract 2.2.1 Offer and Acceptance 2.2.2 Intent to be legally bound 2.2.3 Capacity to Contract 2.2.4 Consideration Types of Contracts Used within the Oil and Gas Industry 2.3.1 Joint Operating Agreements 2.3.2 Production Sharing Agreements 2.3.3 Licensing Agreements 2.3.3.1General 2.3.3.2 Licensing within the United Kingdom continental shelf Key Oil and Gas Contract Clauses 2.4.1 Indemnification 2.4.2 Consequential Loss 2.4.3 Limitation of Liability

Chapter 3 – Oil and Gas Model Contracts 3.1 3.2 3.3

Introduction Introduction to Model Contracts Advantages and Disadvantages of using model contracts

3.4

Model contracts within UK Oil and Gas industry 3.4.1 Cost Reduction for a New Era 3.4.2 Leading Oil and Gas Industry Competitiveness 3.4.3 Industry Mutual Hold Harmless 3.4.4 Additional Model contracts within UKCS 3.4.4.1 First Point Assessment Limited 3.4.4.2 UKCS Joint Operating Agreement 3.4.4.4 Master Deed

iii

1 2 3 6 9 9 9 10 12 13 14 16 17 19 20 20 21 24 25 30 31 33 33 33 35 38 38 40 43 46 46 47 49

Chapter 4 – Research Methodology 4.1 4.2 4.3 4.3.1 4.3.2 4.4 4.5 4.6

Introduction Research Objectives Primary and Secondary Research Secondary Research Primary Research Research Sample Data Analysis Research Limitations

Chapter 5 – Case Study, Contracting Philosophy at ConocoPhillips UK Limited 5.1 5.2 5.3 5.4

Background to ConocoPhillips Reasons why ConocoPhillips UK Limited do not use LOGIC Standard Contracts at ConocoPhillips UK Limited Future of Contracting at ConocoPhillips UK Limited

Chapter 6 – Questionnaire Results 6.1 6.2 6.3 6.4

51 51 51 52 52 53 57 58 58 60 60 62 66 72 74

Introduction Demographic Results The use of LOGIC Contracts Additional Standard Government Models

74 74 77 82

Chapter 7 – Conclusions and Recommendations

85

7.1 7.2 7.3

Introduction Conclusions Recommendations

85 86 87

APPENDICES Appendix A: LOGIC Standard Contracts Appendix B: Questionnaire Appendix C: Questionnaire Results

89 90 94

BIBLIOGRAPHY

96

iv

LIST OF TABLES Table 3.3

A summary of the advantages and disadvantages of Model contracts

35

Table 4.1

Fundamental differences between quantitative and qualitative research strategies

54

Table 5.3

ConocoPhillips UK Limited contract Templates

66

Table 6.1

Use of Logic across industry Sectors

78

Table 6.2

Type of Contract used by industry sector

79

LIST OF FIGURES Figure 6.1

Time involved within the UKCS oil and gas industry

75

Figure 6.2

Companies average annual turnover

76

v

Chapter 1 – Introduction

1.1

UK Oil and Gas Industry - History

Oil and gas were the most important natural resources to be discovered in the UK during the last century. The UK oil and gas industry benefits our lives in many ways. Its products underpin modern society, supplying energy to power industry and heat homes, fuel for transport to carry goods and people all over the world and the raw materials used to produce many everyday items. Through its extensive supply chain, it employs hundreds of thousands of people and makes a major contribution to the UK economy in terms of tax revenues, technologies and exports.1

For centuries small quantities of oil have been produced in Britain During the First World War, when the importation of oil became more difficult, the Government first began to consider the idea of encouraging companies to drill for oil. The Petroleum (Production) Act 1918 conferred on the Crown the right to control exploration and production in the UK and to grant licences for that purpose. The war ended soon after the Act was passed and, with the resumption of cheap and readily available imports, it was not until early 1930's that interest in exploration began growing again. During that time, a more systematic and concentrated exploration effort was initiated ranging from southern counties with prospects considered similar to the Paris Basin, to the Midlands, North of England and Scottish Lowlands. The Petroleum (Production) Act 1934, which repealed the 1918 Act, reaffirmed the

1

http://www.oilandgasuk.co.uk/knowledge_centre.cfm - last accessed 05/05/2010

1

Crown's ownership and set out the framework to allow production. The first successes came in 1937 when an onshore gas field was found in Yorkshire, soon followed by a small oil field near Nottingham. By the 1940's 40,000 tonnes of oil were being produced per year.

1.2

UK Oil and Gas Industry – The Present

Today the UK Oil and Gas industry contributes significantly to the UK economy. In 2008, some 450,000 jobs throughout the UK were supported by the servicing of activity on the UKCS and in the export of oil and gas related goods and services: The exploration for and extraction of oil and gas from the UKCS accounted for around 350,000 of these; this comprised 34,000 directly employed by oil and gas companies and their major contractors, plus 230,000 within the wider supply chain. Another 89,000 jobs were supported by the economic activity induced by employees’ spending.2 There have been many factors since the late 90s which have brought change within the UK oil and gas industry. One of the most significant changes was the steady increase on the price of oil. The price of oil and gas has increased steadily from approximately $10 a barrel in 1999 to approximately $140 in 2008. This resulted in increased turnover and made the North Sea oil and gas operators relatively cash rich. However, during 2009 the oil price has slumped

2

http://www.oilandgasuk.co.uk/knowledgecentre/supplychain.cfm

2

back from $140 per barrel to around the $40. 2010 has seen the price of oil slowly rise with the average price in April being $85 per barrel. 3

Oil and Gas industry operations have continually adapted to the challenges presented by price volatility, maturity, evolving regulation and changing perceptions within society. To overcome and manage these changes, oil and gas operators have created economies of scale through joint venture agreements and spreading costs over their many assets, traditionally, this industry has only been interested in cost saving initiatives during the hard times4. The industry has now begun to mature with total output in decline. As a direct result of this there has been a trend whereby the larger oil companies are selling shares in mature assets to focus on new emerging oil and gas markets. As a result there has been an influx of new entrant oil and gas operators within the market.

“There is now a broad array of firms that are

equipped in different ways to operate within the current economic climate” 5.

One of the key drivers of all companies operating within the Oil and Gas industry has been to reduce cost and improve efficiency to increase productivity. However during the period of high oil prices, cost became less important and the focus of the operators shifted to reaping the rewards available from producing oil and gas. However, the recent crash in the price of oil is likely to change the nature of the environment once again and resurrect the issue of cost reduction and efficiency to be top of the agenda for UKCS oil and gas operators. One way in which cost reductions and efficiency

3

Figures extracted from http://www.oilnergy.com/1obrent.htm#since88 - last accessed 25/4/2010 Cox, A., (2008), Wild-West or Collaborative Innovation?, obtained from article presented by Andrew Cox, Chairman, Newpoint Consulting and Visiting Professor Universities of Exeter, Nyenrode & San Diego, presented to oil and gas UK 5 http://www.oilandgasuk.co.uk/knowledgecentre/supplychain.cfm - last accessed 05/05/2010 4

3

may be achieved is through government initiatives and working with the Oil and Gas Industry bodies.

1.3

Industry bodies

The UK Government and UKCS oil and gas operators for many years have agreed that it was essential that new ways to improve the efficiency of the oil and gas industry were developed.

This resulted in the creation of a number

of initiatives in the 1990’s to find away forward.

The main initiatives are

outlined below.

1. In 1992 the Cost Reduction Initiative in the New Era (CRINE) was created. The initiative was steered by a committee comprised of senior executives from all sectors of the UK offshore industry and its main objective was simply to find ways of reducing capital and operational costs on the UK Continental Shelf (UKCS). In 1996 when it became clear that the whole industry supply chain must be engaged in finding new and innovative ways of reducing costs and working more efficiently, CRINE evolved into 'CRINE Network' - a body comprising representatives of all sides of industry including operators, contractors and suppliers of equipment. This marked the beginning of the creation and formulation of a series of new bodies and initiatives designed to reduce costs and promote the efficiency of the North Sea as an environment for doing business6.

2. In 1998 the Oil & Gas Industry Task Force (OGITF) was formed in recognition of the dramatic fall in oil prices, the maturing of the UKCS, and the urgent need to reduce the cost base of activity in the basin. Its overall objective was to create a climate for the UKCS to retain its

6

CRINE (1999), Executive Summary, Oil and Gas Supply Chain, CRINE Network, London.

4

position as a pre-eminent active centre of oil & gas exploration, development and production and to keep the UK contracting and supplies

industry

at

the

leading

edge

in

terms

of

overall

competitiveness7.

3. PILOT was established on 1st January 2000, as the successor to OGIFT. Pilot is a joint programme involving the Government and the UK Oil and Gas industry – operators, contractors, suppliers, Trade Unions and SME’s – aiming to secure the long term future of the industry in the UK.8

4. LOGIC (Leading Oil and Gas Industry Competitiveness) was created in 1999 by the Government's Oil and Gas Industry Task Force (OGIFT) to improve competitiveness in the UKCS by targeting efficiencies in the supply chain9.LOGIC was the vehicle used to educate the Oil and Gas industry on Supply Chain Management. Its other function was to manage a number of cross-industry projects such as vantage POB, the Master Deed, Industry Mutual Hold Harmless Deeds and Industry standard contracts10.

5. Oil & Gas UK (OGUK) is the leading representative body for the UK offshore oil and gas industry. It is a not-for-profit organisation, established in April 2007 but with a pedigree stretching back over 30 years. OGUK’s main aim is to strengthen the long-term health of the offshore oil and gas industry in the United Kingdom by working closely

7

http://www.pilottaskforce.co.uk/data/phistory.cfm - last accessed 09/05/2010 http://www.pilottaskforce.co.uk/data/aboutpilot.cfm- last accessed 09/05/2010 9 http://www.logic-oil.com/about.cfm- last accessed 09/05/2010 10 Ibid 8

5

with

companies

across

the

sector,

governments

and

all

other

stakeholders to address the issues that affect business. OGUK achieve this by 

raising the profile of the UK offshore oil and gas industry, one of the country’s greatest economic successes in modern times



promoting open dialogue within and across all sectors of the industry on topics that influence your activities, including technical, fiscal, safety, environmental and skills issues, and brokering solutions



developing and delivering industry-wide initiatives and programmes engaging with governments and other external organisations with a stake in the industry’s future11

1.4

Aims and objectives

This paper aims to evaluate the extent to which industry standard contracts are used within the UK oil and Gas industry, whilst comparing the variation of there application between companies and the alternatives to these standard models.

This aim will be achieved by undertaking a review of literature already completed on this subject and will be supported with practical examples to provide evidence of its impact. The key focus of this paper shall be on the following –



to critically analyse the use of Standard LOGIC contracts within the UK Oil and Gas industry;

11

http://www.oilandgasuk.co.uk/aboutus/aboutus.cfm - last accessed 09/05/2010

6



to evaluate whether there is a trend as to what types of companies use LOGIC and the reasons for doing so;



an evaluation of those companies who choose not to use LOGIC and the reasons for this.



to identify and discuss alternative contracting methods used by various companies, in particular ConocoPhillips, who use a variety of bespoke contracts,

In order to meet the above defined aims the following stages will be necessary:

1. An introduction to Oil and Gas contract law. This will outline the basic principles of contract formation. It will also identify and discuss many key contract clauses explaining there importance within the Oil and Gas industry. Consideration will also be given to the different types of contracts used within the Oil and Gas industry and how this can vary.

2. A critical analysis and review of Standard Oil and Gas industry contracts. Firstly the concept of model contracts will be introduced with a discussion on the advantages and disadvantages of using such models. The focus will then move to the formation of CRINE/LOGIC, who created the contracts and why.

And shall include discussion on

additional government initiatives that are currently in use within the UKCS Oil and Gas Industry.

3. Empirical Research.

This will identify the research methods used to

gather the relevant information.

In particular it shall focus on the

development of a questionnaire used to provide an understanding of the

7

use of LOGIC within the Oil and Gas Industry and how this differences between companies.

4. A case study – the contracting strategy of ConocoPhillips UK limited. This will give a brief overview of who ConocoPhillips are and what they do. It will examine why ConocoPhillips do not use standard Oil and Gas industry contracts.

It will then examine what bespoke contracts

ConocoPhillips use instead of LOGIC and there reasons behind this.

5. Questionnaire Results.

The information obtained will be collated and

critically assessed to see how many companies actually use LOGIC. It will also be used to identify and similarities in responses with regards to the number and types of qualifications that companies use and will be compared to the perceived advantages and disadvantaged identified during Literature review.

6. Conclusion. Conclusion on findings and any recommendations that have been identified through the research.

Now that the background and aims of this study have been outlined, it is prudent to focus on contracting within the UK. Chapter two shall begin with an introduction to contracting in general; it will look at the variety of contracts used within the UKCS Oil and Gas Industry.

Thereafter there will be

discussion on key contractual clauses and there importance within the UKCS Oil and Gas industry.

8

Chapter 2 – Oil and Gas Contract Law

2.1

Introduction

This chapter is concerned with identifying and examining the concept of contracting, both generally and in relation to the Oil and Gas Industry. Thereafter is necessary to discuss particular contract clauses, with the focus here being on risk management and its importance within the UKCS oil and Gas industry. This will be accomplished by considering the basic principles of contracting with reference to legislation and case law, and an analysis of its importance within the Oil and Gas industry.

2.2.

What is a contract?

Before looking at specific Oil and Gas related contractual issues, it is prudent to review the basic principles of what a contract actually is, how it is created and what is contained within it.

A contract is an agreement between two or more parties that is binding in law. The agreement generates rights and obligations that may be enforced by the courts. The name given to the document used to record an agreement e.g. Purchase Order, Agreement, Contract, etc does not affect the nature of the agreement or the effect of the agreement.

A much quoted definition of a contract is that it is ‘ an agreement which creates, or is intended to create, a legal obligation between the parties to it’ 12

12

Jenks, E(1917) A digest of English Civil Law, London, Butterworth and Co, Vol 2.1 – taken from Gibb, A & Gordon (2009) A Law basics – contract, 3rd edition, W Greenp2.

9

There are three basic elements in the formation of a valid contract.

First,

parties must have reached agreement (offer and acceptance); secondly, they must intend to be legally bound; and thirdly, both parties must have provided valuable consideration.

2.2.1 Offer and Acceptance An offer and an acceptance are necessary in order to ensure that the parties have reached agreement as to the terms of the contract.

An offer may be defined as a statement of willingness to contract on specified terms made with the intention that, if accepted it shall become a binding contract.

Acceptance may be defined as unconditional assent communicated by the offeree to the offeror, to all terms of the offer, made with the intention of accepting.

In general there is no need to execute a document for a valid contract to be formed so a contract may be created as a result of verbal, e-mails or telephone conversations; however it is best practice to enter into agreements in writing.

There are a number of situations where it is obvious that offer and acceptance have been exchanged: execution of a written agreement, conduct of the parties indicating that a binding contract exists.

10

Furmston13 comments that a court will examine all the circumstances of the case to see if one party is assumed to have made a firm offer and if the other party has accepted that offer. However it is not always obvious that offer and acceptance has been made. Situations where not so obvious include: counteroffers, battle of the forms, incorporation of terms to name a few. In such a situation Lord Denning14 took the view that the circumstances as a whole should be examined in an attempt to discover if there was an agreement at all.

Poole15 argues that it has been proven that courts will certainly hold that there is a contract in place even if it is challenging or impossible to analyse the events in terms of offer and acceptance. This was view was reinforced by Lord Wilberforce16 when he stated,

….English law, having committed itself to a rather technical and schematic doctrine of contract, in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the marked slots of offer, acceptance and consideration.

Therefore it is clear that the courts when reaching conclusion will consider the words and actions of the parties during the negotiations.

Broadly speaking

there are two stages that are crucial to form a contract – an offer must be made by one party, and acceptance must be given by the other.

In deciding whether an agreement has been reached by the parties, the courts tend to take an objective approach. The test is whether or not it would appear th

13

Furmston, M (2007), fitfoot & furmstons’s law of contract, 14 Edition, Butterworths, Cheshire,p39 Butler Machine Tool Co.Ltd v Ex-Cell-O Corporation (England) Ltd (1979) 1 WLR 401 15 Poole, J (2006), Contract Law, 8th Edition, Oxford university press. London, p21. 16 New Zealand Shipping Co Ltd v M. Satterthwaite & Co Ltd, The Eurymendon [1975] AC 154 (PC) 14

11

to a “reasonable man” that an agreement had indeed been reached. As stated by Lord President Dunedin17,

Commercial contracts cannot be arranged by what people think in there inner most minds. Commercial contracts are arranged by what people say.

However, Elliot and Quinn18 state that acceptance may be inferred by the actions and behaviours of the parties as in Brogen v Metropolitain Rail Co.19 Depending on the volume of communications between the parties silence may be an acceptance of the offer if the offeree suggested that there silence would be sufficient as in the case of Re Selectmove Ltd20.

Now the key issues of offer and acceptance have been considered, the other essential elements required to form a contract will be examined.

2.2.2 Intent to be legally bound

For a contract to be binding it is necessary to show that there was an intention to create legal relations. Not all agreements create a contractual obligation. Huntley, Blackie and Cathcart21 state that the difficulty lies in establishing logical and fair rules for differentiating those which do from those which do not.

Some agreements are so serious in their consequences that the law

generally requires that they be in the appropriate form if they are to be legally binding. Another technique is to establish a presumption that parties to

17

Muirhead & Turnbull v Dickson (1905) 7 F686 Elliot, C & Quinn, F. (2003) Contract Law, 14th edition, Longman Press, p19 19 (1877) 2 App Cas 666 20 (1995) 1 WLR 474 21 Huntley. J, Blackie.J & Cathcart. C (2003) Contract – cases and materials 2nd edition, W green, p14 18

12

certain types of agreements intend to enter into legally biding relations. The corollary would be that other categories of agreement are presumed not to be legally binding. This is backed by Bradgate and Savage22 who state that the intent of a party is dependent on the type of contract. Contracts that have no intention usually involve domestic or social agreements such as Balfour v Balfour23.

There is a presumption in law, relating to commercial transactions, that parties intended their agreements to have legal consequences.

Elliot and Quinn

support this,

There is a strong presumption in commercial agreements that the parties intend to be legally bound, and, unless, there is very clear contrary evidence, this presumption will not be rebutted.24

2.2.3 Capacity to Contract In addition, to the intent to be legally bound, the parties must have the legal capacity to contract. The law requires that persons entering into a contract have the necessary capacity.

As a general rule, a contract with a person suffering from mental disability or drunkenness is valid, unless the person is, at the time of contract, incapable of understanding the nature of the transaction and the other party is aware of this.

In addition minors, I.e. persons under the age of 18, are subject to

provisions on the Minors’ Contract Act 1987. However in consideration of this paper only corporate capacity is relevant.

22

Bradgate, R & Savage, N. (1991) Commercial Law p24 (1919) 2KB 571 (CA) 24 Elliot, C & Quinn, F. op cit p20 23

13

Furmston confirms that it is essential that a contracting party is a person recognised by law as having capacity to contract, however persons in law are not limited to individuals;

Two or more persons form themselves into an association for the purpose of some concerted enterprise…a trading company; the association is in some cases regarded by the law as an independent person25.

Companies are classified according to the manner in which they are created, they are either registered, statutory and chartered. The main focus of this paper is registered companies. A registered company is one which is registered under the Companies Act 1985. These companies have capacity to enter into contracts that are within the limits of the objects clause of the company’s memorandum of association.

This is a public document without

which a company cannot be registered.

Any contract entered into that is

outside the activities detailed in the memorandum is said to be ultra vires, and therefore invalid. Elliot and Quinn26 explain that the purpose of this limit in capacity is to protect the shareholders and creditors against directors who use company resources for there own unauthorised purposes.

2.2.4 Consideration In addition to offer and acceptance and contractual intent, consideration is an essential element in the formation of any contract.

Consideration is not a

requirement under Scots law which recognises “unilateral obligations” or “promises”. However most contracts within the UK oil and gas industry are governed by English law, therefore consideration is essential. 25 26

Furmston, M op.cit. p564 Elliot, C & Quinn, F op.cit. p60

14

Consideration is the requirement of reciprocal obligations on the parties to a contract.

Both parties must receive valuable consideration for there

performance of their side of the contract. In other words each party must give something in return for what it gained from the other. Poole27 argues that this is because English law assumes that only bargains should be enforced.

A

promise not supported by consideration is referred to as a gratuitous promise and is generally not enforced by law.

In business contracts there is rarely an issue with consideration as businessmen rarely promise something for nothing.

Business contracts are

usually bilateral whereby the price requested by the promisor is accepted in exchange for the promissors which is bought as defined by Lord Deundin 28. However Bradgate and Savage29 argue that the consideration is important in commercial contracts in a number of situations, such as an awareness that consideration cannot be in the past, it must be in return for the promise or act of another party at the same time or after.

If all of the above requirements are complied with the parties should have a binding contract. As a general rule all Oil and Gas contracts must meet all the requirements for binding legal agreement, this is confirmed by Lowe 30

A promise becomes a contract, a legally binding agreement, only if there have been an offer and an acceptance of clear and unambiguous terms…..supported by consideration, between two persons or entities with legal capacity to contract.

27

Poole, J (2006) op.cit, p185. Dunlop Pneumatic Tyre Co.Ltd v Selfridge & Co Ltd (1915) AC 847 29 Bradgate, R & Savage, N. (1991) Commercial Law, Butterworths , London p18 30 Lowe, J.S ( 2003) Oil and Gas Law , 4th Edition, Thomson press, p383 28

15

Although the foregoing discussion concentrates on contract formation at a general level, the same principle must be applied to contract places within the UK Oil and Gas industry. This is because the contracts placed within the Oil and Gas industry will be subject to the same legal proceeding should there we an issue, for example breach of contract, or a claim against the contract under indemnity or warranty provisions.

Now that the basic principles of contract formation, under English law, have been established it is necessary to consider some of the major legal and contractual issues associated with contract drafting, focusing in particular on risk mitigation. These contracting issues will then be examined in relation to the Oil and Gas industry.

2.3

Types of Contracts used within Oil and Gas Industry

Oil and Gas companies enter into a variety of different contracts, some of these agreements are forced upon them by the Law and others are to aid operations, reduce costs or share risks with other like oil and Gas companies.

Oil and Gas companies commonly enter into agreements with other oil and gas companies to pull resources via Joint venture agreements or for the provision of goods and services.

They also enter into contracts directly with the

government in the form of Production Sharing Agreements or Licensing agreements, this is because the government hold the right for exploitation of petroleum. Some of these agreements are discussed in greater detail below.

16

2.3.1 Joint Operating Agreements Joint Operating Agreements (JOA’s) are one of the most important and commonly used types of contract in the oil and gas industry.

Originally

developed in the USA, they are today used by oil companies all over the world. A JOA is entered into to regulate the interests of the parties who come together in a joint venture. These parties pool their resources for the purpose of exploring or exploiting a certain area of licensed acreage, and share in the associated risks and rewards. Styles31 believes there are several benefits of entering into a JOA, Joint ventures allow oil companies to mitigate their risks and share in the outlays required for capital-intensive exploration, development and production activities.

Joint

ventures

also

facilitate cost savings and economies of scale which enable the participating companies to operate with fewer employees, permit the elimination of duplicate facilities, equipment and functions and allow cost savings through bulk purchases of supplies and materials. The joint venture is also important in that it allows upstream oil and gas companies to manage their portfolio of assets in a manner that seeks a balance between minimising risk and maximising returns.

In essence the JOA has two principal functions, one is to document the proportions in which the parties will share the rights and obligations of the venture. The most common division is in accordance with the interests of the participants. The other is to specify the way in which the operator will

31

Gordon, G & Paterson, J(2007) Oil and Gas law- Current practices and emerging trends, Dundee university press, p265

17

manage, subject to the direction of an operating committee, in the event that such a committee has been constituted.32

Prior to entering into the JOA the parties will have enter into a Joint Bidding Agreement (JBA) at the stage of making their joint application for licence acreage. In addition to conditions of applying for a licence, this agreement will also include key points to be incorporated into the JOA if the application is successful.

The JOA will detail each party's percentage interest, entitlement to benefits and liabilities. The standard approach is to share benefits and liabilities in relation to the parties' percentage interests. Liability will usually be several, not joint, and will be backed by indemnities. The indemnities will usually contain the provision whereby the parties agree to indemnify and hold each other harmless for any claims and liabilities, to the extent of their percentage interests under the JOA. Indemnities and limitation of liability are discussed in greater detail in 2.3, of this chapter.

The parties to the JOA will appoint an Operator to run the joint venture. The Operator will, in most cases, be a party to the licence and have a substantial interest in the venture. The Operator's role will include: organising meetings; proposing and implementing programmes, budgets, and Authorisations for Expenditure; providing co-venturers with data; liaising with government; acting as agent with third parties on behalf of the venture and the day to day operations. The Operator will be supervised by an operating committee made up of representatives of each of the parties to the JOA.

32

Smith, E. E, et al.(2000) International Petroleum Transactions, 2nd edition, Denver, Colorado: Rocky Mountain Mineral law Foundation, p164.

18

As discussed at the start of this chapter, Oil and Gas companies often enter into contract directly with the government for the rights of petroleum exploration. A Production Sharing Agreement is an example of this. 2.3.2 Production Sharing Agreements Production sharing Agreements are the main type of contracts used for the development of petroleum reserves in jurisdictions where the government do not grant licences over areas to exploit petroleum, as is the case in the UK, but instead the government, or often the state oil company on behalf of the government enters into a PSA in co-operation with a contractor, whereby the contractor develops the reserves and supplies all of the resources required to do that for a share of the petroleum reserves. The contractor is rewarded with a share of production. A production sharing agreement is a contractual arrangement made between a foreign oil company (contractor) and a designated

state

enterprise

(state

party),

authorising

the

contractor to conduct petroleum exploration and exploration within a certain area (contract area) in accordance with the rules of the agreement.33 Licensing Agreements are also another example of contracts between Oil and Gas companies and the Government.

33

Taverne, Bernard, edited by David, Martin R,(1996) Upstream Oil and Gas Agreements, Sweet & Maxwell, p44.

19

2.3.3 Licensing Agreements 2.3.3.1General A licence is essentially a permission granted by a state to an Oil company to exploit a certain geographical area in return for a fee or a royalty.

In the early years each arrangement was negotiated separately with each individual company. Over recent years countries have implemented model contracts and petroleum codes to help standardise the process,

The leases and concessions developed in the early years of petroleum

development,

which

provided

extraordinarily

advantageous to the companies receiving rights to develop the petroleum have in almost every instance been terminated or modified.34

The processes by which these changes have occurred vary; in the US the courts and administrative agencies have played a huge role in changing the original agreements. Sovereign states have not had the option to turn to the courts

or

administrative

agencies

and

as

a

result

have

turned

to

nationalisation to regain control over natural resources, this was the approach taken by Mexico. Where as the Middle East nations managed to talk the oil companies into renegotiation the original concessions.

34

Hamilton, (1973)Concession to Participation: Restructuring the Middle East Oil Industry, 48 N.Y.U.L Rev 744, p 776-77

20

2.3.3.2 Licensing within United Kingdom Continental Shelf In order to explore for oil and gas it is necessary to have access to lands or subsea areas which are not usually owned by the companies’ conduction the exploration. All oil companies must ensure it has all necessary and relevant permits and authorities to enable it to do so. This will involve the co-operation of the host government and compliance by the company with whatever consents are necessary.

Procedurally these consents in most jurisdictions came in two forms: either the grant of a concession in the form of a licence or a lease, or alternatively by the conclusion of a production sharing agreement.35 The UK's onshore petroleum licensing regime was set up under the impetus of the fuel demands of the First World War. The Petroleum (Production) Act36vests all rights to the nation's petroleum resources in the Crown, however the Secretary of State can grant licences that confer exclusive rights to "search and bore for and get" petroleum. As with any licensing system, many of the detailed regulatory provisions are laid down in conditions attached to the licences known as Model Clauses. It is the Licensee's responsibility to understand these conditions and ensure they are observed. Licences can be held by a single company or by several working together, but in legal terms there is only ever a single Licensee, however many companies it may include. All the companies on a Licence share joint and several liability for 35

Jennings, Anthony,(2001) Oil and Gas Exploration Contracts, Sweet & Maxwell, p1. The Petroleum (Production) Act 1934, This Act has since been consolidated along with other petroleum related legislation, in the Petroleum Act 1998 36

21

operations conducted under it. Each Licence actually takes the form of a Deed, which binds the Licensee to obey the licence conditions regardless of whether or not s/he is using the Licence at any given moment.37 There are five different types of licence available under the UK licensing regime – 1) Production Licences (Seaward) 2) Exploration Licences (Seaward) 3) Promote licences 4) Onshore petroleum Exploration and Development Licences 5) Supplementary Seismic Survey Licences. The first three licenses relate to offshore exploration and production. The main type of offshore Licence is the Seaward Production Licence, which confers exclusive rights over defined areas. They do not only cover production - they cover the full life of a field from exploration to decommissioning. For licensing purposes the UKCS is divided into quadrants, each quadrant is further divided into thirty blocks. As there are companies which only carry out exploration activity over wide areas of the offshore sector and do not require exclusive rights to do this, petroleum exploration licences are available. This type of licence was made available, as it would be impractical and prohibitively expensive to require a production licence in respect of pure exploration activities.

Exploration

licences are non-exclusive and will run for three years and permit the holder to conduct non-intrusive surveys.

37

https://www.og.berr.gov.uk/upstream/licensing/overview.htm - last accessed 02/05/2010

22

The promote licence is a relatively new licence which has been created by the Department of Trade and Industry (DTI known as BERR) in pursuance of the objective of catalysing offshore activity in the UK. Under the promote licence the licensee would work up potential prospects without being required to undertake substantial seismic drilling activity.

Under this new license,

licensees have a legal interest in the commercial value created by their work but, in order to retain their licences, are obliged to undertake or secure drilling activity after the expiry of the initial appraisal period. The Promote Licence demonstrates the governments approach to incentivising new entrants to the UKCS while desensitising operators who do not make active use of their licence.38 Within the UK system there are three ways of acquiring licence interests, by invited applications via licensing rounds, Out-of-round applications and Assignment of licence interests.

Most petroleum Production licences may only be applied for in licensing rounds opened by a notice by the secretary of state inviting applications in respect of specified blocks.

The notice will set out the information required for each

application as well as the criteria upon which applications are assessed. Most applications are made by consortia of two or more companies.

Most Petroleum Production licences are awarded in licensing rounds, however an out of round application maybe considered where a compelling case is presented such as clear grounds of urgency, or where it is considered there is no prospect of competition anyway.

38

Gyaltsen, S and Turton, A,(2003) International Energy Law & Taxation Review , The Master Deed and changes in the North Sea, p258.

23

Interested parties can also acquire a licence interest by purchasing it from current licence-holders.

The transfer of any licence interest requires the

consent of the Secretary of State and there are statutory regulations set out factors which should be taken into account. The main concern is whether the assignee is a fit and proper person to be a licensee in terms of technical and financial capabilities. Each licence carries an annual charge, called a rental. Rentals fall due each year on the licence anniversary39 they are charged at an escalating rate on each square kilometre that the Licence covers at that date. Rentals have two purposes: they encourage Licensees to surrender acreage they don't want to exploit, so as to free it up for others who do; and they concentrate their minds on the acreage they actually decide to keep. These examples show the diversity of contracts that Oil and Gas companies enter into. The accelerated pace of change in the Oil and Gas industry makes it one of the worlds most challenging and complex industries in which to understand, draft and negotiate contract.40Therefore the next section of this paper shall review the key contract clauses that should be given careful consideration. 2.4

Key Oil and Gas Contract Clause

In all oil and gas contracts there are a number of common issues with regards to content, regardless of what the contract is for. The main areas in which all contracts are similar is how risk to the parties it mitigated.

39

Except that for pre-20th Round Seaward Production Licences in their Initial Terms, rentals only fell due in Year 1. 40 http://www.emagister.co.uk/shared/uploads_courses/files_projects_2/106_oil_dubai_web.PDF - last accessed 09/05/ 2010.

24

The oil and gas industry is an inherently hazardous one.

Exploring for,

producing, transporting and processing volatile hydrocarbons is attended by a whole host of risks: to people, property, the environment, and to the valuable commodity itself.

The oil and gas industry has developed a number of

contracting practices to allow it to regulate and manage these physical risks. Generally speaking oil and gas contracts seek to depart quite radically from the common law’s presumptions about how risk should be allocated.

Three vehicles are commonly used to achieve this: (a) indemnity clauses; (b) clauses that exclude liability for what are commonly, if rather loosely, described as “consequential losses”; and (c) overall limitation on liability.41

Each of these key issues will be examined in turn.

2.4.1 Indemnification When an indemnity is included in a contract it is an undertaking by one party to reimburse the other party for certain costs, expenses, outlays or damages. This is a contractual obligation and must therefore be distinguished from any claim, which may arise in delict or tort. However, to ensure that a contact captures in an indemnity all possible claims, then it is common to see wording that includes claims in tort or delict in indemnity clauses.

Indemnities have long been used to control risk in contracts, not just those related to the oil and gas industry, and have been traditionally treated by the law with considerable suspicion. It is generally true that the sums due under an indemnity are more limited than those, which would be potentially due under

41

Gordon, G & Paterson, J op.cit, P 335

25

the normal rules of damages arising from breach of contract or from delictual/tort claims.

An indemnity is a contractual provision whereby the indemnifying party agrees to make payment to the party having the benefit of the indemnity in the event that the indemnified party suffers loss as a result of the occurrence of a specific event.42

This type of indemnity clause is often referred to as a simple indemnification. Oil and gas contracts often contain a number of simple indemnification clauses, as described by Gordon, above. However within oil and gas contracts, it is common that additional wording is added to simple indemnification clause to state that the parties will also defend claims taken against the indemnified party.43

Although simple indemnifications are used, the most common type of indemnity used is a mutual indemnity, often referred to as a ‘knock-for-knock’ indemnity, this type of indemnity is;

A contractual device where the parties with one hand give and with the other hand take an indemnity in respect of species of loss which, if the indemnity is to avoid circularity must not be identical to each other, but which are usually closely related.44

In other words mutual indemnities provide that each party shall be responsible for and shall save, indemnify, defend and hold harmless the other from and

42

Gordon, G & Paterson, J op.cit,, P 336 This was discussed by Lord President Rodger in the inner house phase of Caledonia North Sea Limited v London Bridge Engineering Ltd 2000 SLT 1123 at 1155. 44 Gordon, G & Paterson, J op.cit,, P 337 43

26

against all claims, losses, damages, costs (including legal costs), expenses and liabilities in respect of:

a) Loss of, damage to or destruction of any property of the other party and its subcontractors; b) Personal injury or death of any third party arising from, relating to or in connecting with performance of the contract c) any personal injury to or death of any employee, agents or invitees of the parties or its subcontractors however arising whether or not due to negligence (either in whole or in part) of the other party.45

Gordon states that the underlying legal principle of the mutual indemnity regime is that the parties are allocating (more properly, re-allocating) between themselves the risk of the occurrence of a particular type of loss.46 The idea is that an indemnity clause places the risk with the party who is best placed to deal with it, effectively making each party responsible for there own loss. Prima facia, the mutual indemnity sounds illogical.

However there are a

number of sound reasons for this commercial approach.

It means that each party insures against injury or damage to its own people and property, the value of which it knows best. Smaller contractors who could not afford the risks of working offshore if they might be held responsible for accidents to expensive platforms and equipment are able to compete for the business of operators. It means contractors do not have to have the levels of insurance that they would otherwise need, and

45 46

Adapted from Logic – Construction contract – accessed at http://www.logic-oil.com/construct2.pdf, Gordon, G & Paterson, J op.cit,, P 341

27

therefore keeps costs down. It also reduces litigation by creating a clear system of risk allocation that reduces costs for the industry.47 It is important that when drafting an indemnity clause to establish the contracting groups to the clause are correct, these are usually referred to as Company Group and Contractor Group and take into consideration a number LOGIC standard contracts48, discussed in

of different groups of individuals.

greater detail in chapter 3, define these as: "COMPANY

GROUP"

shall

mean

the

COMPANY,

its

CO-

VENTURERS, its and their respective AFFILIATES and its and their respective directors, officers and employees (including agency personnel),

but

shall

not

include

any

mean

the

member

of

the

CONTRACTOR GROUP.

"CONTRACTOR

GROUP"

shall

CONTRACTOR,

its

SUBCONTRACTORS, its and their AFFILIATES, its and their respective directors, officers and employees (including agency personnel), but shall not include any member of the COMPANY GROUP. “CONTRACTOR GROUP” shall also mean subcontractors (of any tier) of a SUBCONTRACTOR which are performing WORK offshore or at any fabrication yard or construction site, their AFFILIATES, their directors, officers and employees (including agency personnel).49

47

Warne, P , Contract indemnity clauses – keep a watchful eye on the case law, The press & Journal, Published: 01/02/2010, accessed at http://energy.pressandjournal.co.uk/Article.aspx/1572810#ixzz0mgROoXoI 48 Further discussion of LOGIC standard contracts can be found in chapter 3 49 http://www.logic-oil.com/marine2.pdf - last accessed 05/05/2010.

28

Although these definitions are broad, there may however be many different contractors working on an installation at anyone time, with very few of these having a direct contractual relationship. This regrettably allows in contractual gaps to appear within the indemnity chain outlined above. Therefore on July 1, 2002 the Industry Mutual Hold Harmless (IMHH) Scheme went live. The primary objective of the Scheme was to address the contractual gap, which has traditionally existed between contractors working on the UK Continental Shelf. The IMHH Scheme has evolved from popular demand in the industry for clarity in allocation of liabilities and consequent avoidance of overlapping insurance of identical risks.50 Sharp51 comments it is not intended that the IMHH Deed that participants sign takes precedence over existing or future contractual arrangements; its purpose is to address liability for property damage or personal injury where there is no contractual arrangement in force between the respective parties. Further discussion of IMHH can be found in Chapter 3. So far the practical application of indemnity clauses has been discussed, the focus now shall be on the position of such clauses at law. Gordon52 comments that the UK has no specific statutory controls in place for the use of indemnity clauses in oil and gas contracts.

This can be contrasted with the United

Stated of American oil industry whereby state legislature has passed oilfield anti-indemnity statutes in a number of states. In the UK indemnity regimes are not considered to be unfair, this is evident by virtue of the Unfair Contract Terms Act 1977 and case law. In Thompson v T 50

http://www.imhh.com/about.cfm - last accessed 01/05/2010 Sharp, D, (2007), Standard bulletin : Special edition – offshore, p.6 accessed at http://www.standardoffshore.com/docs/SB_Oct07_disclaimer.pdf on 01/05/2010. 52 Gordon, G & Paterson, J op.cit, P 352 51

29

Lohan plant hire53, the courts decided that indemnity clauses are not considered to be exclusion or limitation clauses as they transfer, rather than limit liabilities. As the indemnity regime applied within the oil and Gas industry does not follow the traditional rules of contract law and torte, it is essential that indemnity clauses are well drafted, that they do not lack clarity in regard to whom the risk is allocated and under what circumstances. An incorrectly or poorly drafted indemnity clause may be subject to traditional law and not industry expectation.

However Warner54 states that litigation on indemnity

clauses is not common. 2.4.2 – Consequential loss Following

on

from

indemnity

clause,

another

important

consideration in oil and gas contracts is Consequential loss.

clause

for

This can be

defined as loss suffered as an indirect result of breach of contract, the test for consequential loss was described in Hadley v Baxendale55. Within the Oil and Gas industry parties are keen to exclude this clause as it place can place excessive losses upon them. Gordon agrees with this concept but states that it is not always easy to ascertain which limb of the Hedley test a particular loss will fall into. Therefore as explained during the discussion of indemnity clauses it is essential that consequential loss clauses are carefully drafted. Gordon56 states that here has been some disagreement on what the best practise is when considering with consequential loss – should the definition of consequential loss contain a closed list or should there be a 53

1987 2 All ER 631 Warne, P , Contract indemnity clauses – keep a watchful eye on the case law, The press & Journal, Published: 01/02/2010, accessed at http://energy.pressandjournal.co.uk/Article.aspx/1572810#ixzz0mgROoXoI 55 (1854) 9 Ex 341. 56 Gordon, G & Paterson, J op.cit,, P 380 54

30

statement to say ‘ includes but not limited to’ the potential heads of loss items listed. Jennings57 favours the former approach on the basis of clarity, but the latter is the one most commonly used throughout the UK oil and Gas industry standard documentation. 2.4.3 – Limitation of Liability As previously discussed each party to a contract has responsibilities and obligations placed upon them – issues that each party will be liable for. Gordon explains that a limitation of liability clause seeks to limit a party’s liability not by reference to particular species of loss, but by reference to a total sum payable58. The limit on liability that is placed on a contract is largely dependant on the negotiations of the parties. The chosen figure is either stated as a lump sum figure or as proportion of the value of the contract.

The figure included

usually takes into consideration the insurance provisions in place, to ensure that neither party is unreasonably ‘out of pocket’. These liability caps are very common within Oil and gas industry contracts, especially where parties are not prepared to agree a mutual indemnity and/or consequential loss regime. Logic standard contract have the option to limit the liability to a certain figure, however specific areas of liability are not covered and should be dealt with in the special conditions of contract. From the discussions above it is clear that there is a potential for massive exposure to parties who enter into a contract that does not contain a suitable indemnity regime, or that does not exclude consequential loss, or alternatively 57

Jennings, A, (1999) FPSO agreements in David, M, Oil and Gas infrastructure and mid stream agreements (1999), Sweet & Maxwell at 210. 58 Gordon, G & Paterson, J op.cit, P 381

31

does not limit liability thus leaving one or more parties to the contract exposed to potentially large financial losses. This chapter has covered the concept of contract formation both generally and in respect of the Oil and Gas industry and concludes that the general principles must be applied in all Oil and Gas related contracts.

It then

discussed key contract clauses concerned with risk mitigation, with the key focus on indemnities and limitation of liability. There are other key contract clauses that should be given careful consideration when drafting a contract, however thee have not been included in this report. One way in which Oil and Gas companies can ensure that all the key clauses are covered by the contract is to use a standard form/ model contract such at LOGIC standard terms, which have been drafted by a committee representing operators and contractors within the UKCS oil and Gas industry. The use of model contract in general and Oil and Gas specific model contracts, such as LOGIC, are discussed in the next chapter.

32

Chapter 3 – Oil and Gas Model Contracts

3.1

Introduction

It has already been established that when drafting a contract that it is essential that the appropriate risk mitigation steps are taken as well as consideration given to a number of other key clauses. One way of ensuring that these key clauses are included is through the use of model contracts. These model contracts provide a sound basis on which to build a solid contract.

The use of model contracts shall be discussed in general terms before focusing in the standard forms of contracts that are currently in use within the UKCS Oil and Gas industry.

3.2

Introduction to model contracts

Everyday within the oil and gas industry millions of contractual transactions are concluded, therefore it is clear that the oil and gas industry stands to benefit significantly from standardization. Many of these contracts involve large sums of money, considerable risk, vast liabilities and many difficult issues. Consequently, depending on their complexity, they can often take months and sometimes years to negotiate, draft and sign. Therefore standardisation of model contracts can save months of management time in each and every negotiation.

In the past companies would create a set of contracts that represented their own

preferred

precedent.

Individual

one-on-one

negotiations

with

counterparties would result in these contracts being altered to the point where they were mutually agreeable. This process often took a long time and used a

33

significant amount of resources. It was not unusual that where two companies had previously reached consensus on a particular form of contract to govern a prior transaction, the negotiation process would often start over again each time a new agreement was required.

Over the years of contracting using the method outlined above, commercial and legal personnel in the industry finally started to recognise that there were a multitude of benefits in cooperating to develop model contracts that were consistently and regularly used by all.

Over the last several decades, the industry has taken this alternative approach and worked on a cooperative basis to develop and use various types of petroleum model contracts to gain the benefits of standardization and efficiency.

59

The concept of model contract goes by many different names, including ‘model form’, ‘model agreement’, ‘model form contracts’ to name a few, for the purpose of this study they shall be referred to as model contracts.

Generally speaking model contracts have been developed and endorsed by industry organisations on a cooperative basis to achieve wide industry acceptance and usage. Within the oil and gas industry model contracts are used by numerous parties, the most common type is that between oil companies.

However in some countries government has developed model

59

Martin, TJ and Park JJ (2010)- Global petroleum industry model contracts revisited: higher, faster, stronger, Journal of World Energy Law & Business, Vol. 3, No. 1, p 6

34

contracts for production sharing agreements and are used to grant petroleum licences. Onorato60 believes

Despite some disagreement within the industry on the necessity of this element, a State is best served by having its own purpose-crafted contractual format from which to commence the negotiation of Petroleum Agreements.

3.3 Advantages and Disadvantages to the Use of Model Contracts The creation of model contracts involves a significant degree of effort by the organisation that develops and maintains the model. Therefore it is essential to establish what the benefits of such a model, and the benefits to those companies who choose to use it. Martin61 believes there to be many advantages and disadvantages to using model contracts.

Table 3.3 – A summary of the advantages and disadvantages of Model contracts

Advantages contracts Cost efficiency

of

Model

Speed Risk avoidance Higher quality contracts Wide Industry Understanding Improved Relationships Association Development

Disadvantages of Model contracts Relative Bargaining Power Use of Model contracts by under qualified users Model Paralysis Inappropriate use Flawed Models

One of the main advantages of model contracts it there ability to provide cost efficiency. There are significant savings of time and costs involved in the use

60

Onorato, W and Park JJ, (2001)World petroleum legislation: Frameworks that foster oil and gas development, 39(1) Alta L Rev 95, 70–126. 61 Martin, TJ and Park JJ Op.cit p 8-12

35

of model contracts.

Following on from this, another advantage of model

contracts is the speed at which transactions can be negotiated, completed and undertaken if the contract documents can be quickly agreed.

A further

advantage is risk avoidance, often due to the time constraint involved work commences before the contract has been concluded. Model contracts help to minimise this risk as the process of contract conclusion is reached at a quicker rate which means companies are exposed to less risk. It is also argued that because model contracts are developed by teams of industry experts, that most model contracts are generally better drafted than contracts that are produced by parties who are not using model contracts. Martin 62 then goes on to discuss the advantage of an industry wide understanding .Well-prepared model contracts that become widely used as the industry standard result in consistent treatment of similar transactions across the industry. Better understanding of the transactions typically results. With increased consistency and understanding, parties inherently reduce potential grounds for dispute and therefore, their litigation risk. This is supported by a developing body of academic and judicial interpretation of the model contracts being used. All of this reduces the cost and risk of doing business. By minimising the number of issues that need to be addressed, model contracts provide to the industry the ability to build and maintain strong counterparty relationships through abbreviated negotiation sessions that are focused on the key issues at stake. Many industry associations have built their reputation for usefulness in large part on the fact that they have brought together the best teams and created and maintained the best model contracts for the industry. There are also learning and educational opportunities associated with the creation of a model. Younger and less experienced participants in the drafting of a model contract will learn more in such drafting committees than by any other means.

62

Ibid

36

As well as there being a number of advantages to using model contracts, there are also a number of issues that industry associates should consider when deciding whether or not create and maintain new model contracts.

Martin63 explains one of the main disadvantages is relative bargaining power. The general approach to model contracts is that most associations that create an industry model seek to create a balanced and fair agreement that takes into account the interests of all parties to the model contract.

However, the real world is often different from this, with one party being stronger than the other, this leads to the stronger party will propose changes to the model to benefit itself.

Therefore to make the transaction work the

weaker party must accept this.

Another disadvantage of the model contracts

is that they are often used by people who are under qualified as there is a perception within some areas of the industry that little knowledge of contract negotiation is required due to the model contracts already having been agreed. A further disadvantage of model contracts is model paralysis which relates the foregoing, in basis terms one party will propose a change that is suitable and reasonable in the circumstances, but involves a departure from the provisions of the model. The counterparty will object to the change on the basis that the model contract is what the industry has agreed and should not be amended. Often within the oil and gas industry there is a tendency once a model contract has been agreed that parties try to make this model fit all every transaction, whether or not the model is actually suited to that type of transaction. Finally it is fair to say that some models may contain flaws. This is often because issues where not identified at creation or just simply because

63

Ibid

37

of the nature of the oil and gas industry where everything is continually changing.

Likewise there are some model contracts developed specifically

developed for different sectors and only reflect that sectors view point.

All the main advantages and disadvantaged have been discussed in turn, Martin64 believes

Overall, the advantages of model contracts far outweigh their disadvantages. Most of the disadvantages that are identified above can be avoided through proper use of the model contract. Therefore, it is clear that there are considerable benefits and the weaknesses can generally be avoided by skilled, knowledgeable users of model contracts.

From the foregoing it is clear there are a number of advantages and disadvantages of using model contracts. These model contracts play an important role within the UKCS Oil and Gas industry, some of which are discussed below.

3.4

Model contracts within the UK Oil and Gas industry

The UK gas industry over the last few decade has developed a number of model contracts to assist companies working within the industry.

Perhaps the most

widely used and well known are the CRINE contracts, recently superseded by LOGIC contracts.

3.4.1 Cost Reduction for a New Era (CRINE) The North Sea has traditionally been an expensive place to explore for and produce oil. This was because the province was born out of high oil prices from

64

Martin, TJ and Park JJ op.cit p12

38

the Middle East wars; cost was not a priority issue and the UK's main objective in the early days of the North Sea was self-sufficiency in oil. The bottom line was that various forms of inefficiency resulted in increased costs to industry. As a result of these inefficiencies, and the cratering of the oil price during the 1990's, a new initiative was born in 1992 - the Cost Reduction Initiative in the New Era (CRINE) 65.

The initiative was steered by a committee comprised of senior executives from all sectors of the UK offshore industry and its main objective was simply to find ways of reducing capital and operational costs on the UKCS. The CRINE report, published in late 1993, made several findings. One of the most fundamental of these was that an adversarial relationship existed between operators and contractors in the North Sea. In 1996 when it became clear that the whole industry supply chain must be engaged in finding new and innovative ways of reducing costs and working more efficiently, CRINE evolved into 'CRINE Network' - a body comprising representatives of all sides of industry including operators, contractors and suppliers of equipment. This marked the beginning of the creation and formulation of a series of new bodies and initiatives designed to reduce costs and promote the efficiency of the North Sea as an environment for doing business. There are currently over thirty initiatives that focus on areas key to the industry,

including

undeveloped

discoveries,

stimulation

of

exploration,

development of brown fields and technology and innovation. One of the major ways in which the CRINE initiative sought to reduce costs was through the fostering of a co-operative relationship between operators and contractors with the use of standard contracts. These were drafted by participants

65

CRINE (1999), Executive Summary, Oil and Gas Supply Chain, CRINE Network, London.

39

from all sides of industry and are used on a regular basis in the North Sea oil industry. The standardisation of many of the contracts used has greatly reduced the inefficiencies, which previously existed, although it should be noted that most operators and contractors have developed their own standard 'deviations' from the standard CRINE documents, and hence it is still necessary to engage in very detailed negotiations to conclude a contract.

The lack of standardisation prevailing prior to CRINE meant that the contract forms issued by the operators would normally be drafted in the operator's favour, anticipating and receiving lengthy qualifications from tendering contractors. The contractors, in turn, demanded more concessions than they expected the operators to agree to as 'negotiation' was expected. Clearly, the whole process required lengthy discussion and negotiation, as well as a significant amount of time as people from both sides were required to check and re-check all of the terms and conditions being negotiated on a contract-by-contract basis to ensure that they were not being left open to unexpected or unacceptable liabilities. It has been stated that the development of CRINE contracts was difficult and the attempt was almost abandoned due to a lack of agreement.

The Standard Contracts Committee which drafted the original model contracts and which was a part of CRINE and later CRINE Network is now a part of LOGIC ('Leading Oil and Gas Industry Competitiveness') -an industry funded body, lead by representatives from the Department of Trade and Industry (DTI) and trade associations (including the UK Offshore Operator's Association (UKOOA)66, the Offshore

Contractor's

Association

(OCA),

the

International

Maritime

Contractor's Association (IMCA), the International Association of Drilling Contractors (IADC), the Energy Industries Council (EIC) and the Well Services 66

Which has now been superseded by Oil and Gas UK (OGUK)

40

Contractors Association (WSCA)) which works with companies throughout the oil and gas industry to promote collaboration and competitiveness. 67

3.4.2 Leading Oil and Gas Industry Competitiveness – LOGIC LOGIC was created in 1999 by the government's Oil & Gas Industry Task Force (now PILOT) to stimulate supply chain collaboration and improve the competitiveness of the UK Continental Shelf. With initial funding from the DTI and the industry, LOGIC was the vehicle used for delivering workshops and seminars on supply chain management, in-company assessments, share fairs and collaboration on logistics, as well as managing a number of cross-industry projects such as Vantage POB, the Master Deed, Industry Mutual Hold Harmless Deeds and Industry Standard Contracts68. The model contracts only comprise those general terms and conditions where one could reasonably expect that different contracts between different parties concerning a similar subject matter might be similar. They basically provide a skeleton boilerplate framework, which parties can amend as appropriate and upon which they can include their special conditions to suit their particular needs. The broad consensus is that CRINE/LOGIC model contracts have resulted in significant gains in efficiency and reduction in costs - both financially and in terms of the hidden costs of regular confrontation between industry parties in contract negotiations. In 2000, approximately 70% of the contracts let on the UKCS are estimated to have used the Standard Contracts as their model. 69

67

ibid http://www.logic-oil.com/about.cfm - standard contracts, last accessed 2nd May 2010. 69 http://www.logic-oil.com/contracts.cfm - standard contracts, last accessed 2nd May 2010. 68

41

In the 2001 UKOOA survey of usage, over 95% of senior oil company

managers

said

they

supported

the

principles

of

Standard Contracts.70 The purpose of the model General Conditions of Contract is to provide a commonly known and understood foundation around which the Company and the Contractor can build their particular requirements.

This eliminates much of the effort historically spent reviewing, qualifying and reviewing qualifications to the many different sets of general conditions offered by the industry.

That time is now available to focus on developing

specific terms directly beneficial to the work to be done.71

However the contracts so not meet all the requirements of all companies and therefore time will often still be spent reviewing and qualifying the contracts, so bring them inline with specific company requirements.

There are currently eleven different standard contracts covering Construction, Marine Construction, Design, Mobile Drilling Rigs, Offshore Services, Onshore Services, Purchase Order Terms and Conditions, Supply of Major Items of Plant and Equipment, Well Services and Contracts and Sub-Contracts for Small / Medium Enterprises Services.

A brief description of each contract and under

what circumstance it is used can be found in Appendix A. These contracts have provided the Oil and Gas industry a basis on which to contract. However there are still certain areas within these model contracts that need further attention such as the risk mitigation clauses. As discussed in chapter 2, 70 71

the LOGIC indemnity clauses contain broad definitions of the

ibid http://www.logic-oil.com/contracts2.cfm - guidance notes , last accessed 26th April 2010.

42

parties covered by the contract, there may however be many different contractors working on an installation at anyone time, with very few of these having a direct contractual relationship. This regrettably allows in contractual gaps to appear within the indemnity chain outlined above. Therefore on July 1, 2002 the Industry Mutual Hold Harmless (IMHH) Scheme went live. The primary objective of the Scheme was to address the contractual gap, which has traditionally existed between contractors working on the UK Continental Shelf. 3.4.3 Industry Mutual Hold Harmless Scheme The IMHH Scheme has evolved from popular demand in the industry for clarity in allocation of liabilities and consequent avoidance of overlapping insurance of identical risks.72 A committee was established under the auspices of LOGIC to review the issue and propose a solution. The produced an industry mutual hold harmless deed (the “IMHH Deed”), allowing all offshore oil and gas industry contractors to sign up to a mutual hold harmless scheme (the “IMHH Scheme”). The IMHH Deed adopts mechanisms commonly used in the offshore oil and gas industry in the allocation of risk for personnel, property and consequential loss. As discussed above. There can be many contractors working alongside each other on a production facility at any one time. Unless the Operator specifically provides to the contrary, or the contractors make specific arrangements with each other on a case by case basis, such contractors will be third parties to each other as there is no contractual arrangement between them.

72

http://www.imhh.com/about.cfm - last accessed 03/05/2010

43

These third party contractors will be liable to each other for any injury and loss they cause through their negligence. With the high frequency of incidents and the drive to take action through the courts the cost to the industry of resolving these claims is assessed to be enormous. The primary objective of the IMHH Scheme is to address the contractual gap which traditionally exists between contractors working on the UKCS. For some time several Operators have implemented mutual hold harmless schemes as part of their normal contracting process, but these are tied to specific contracts for specific facilities. While this deals with a part of the problem it only accounts for a small proportion of the industry activity with many gaps remaining. It is also an exercise that is repeated with every contracting campaign. The IMHH Scheme is designed to be used by contractors only. It is envisaged that approximately 10073 contractors will be requested to sign up to the Scheme as core contractors to the Deed. However there are some Operators who have signed up to IMHH, this is evident form the questionnaire results in chapter 5. An important factor in the success of the scheme is Operator support and promotion of the scheme. The ultimate target is total contractor participation but the IMHH Scheme will be a success if it obtains support from the majority of contractors regularly providing services to the offshore oil and gas industry.

73

ibid

44

The principal liabilities addressed within the IMHH Deed are as follows 74: 1.

Personal injury, sickness, disease or death.

2.

Loss or damage to property.

3.

Consequential loss (as defined in the IMHH Deed). Risks being specifically excluded are:

1.

Those concerning loss or damage to property or consequential loss arising out of (i) the carriage of goods by sea; (ii) the provision of Emergency Response and Rescue Vessel(s) or services associated with them; and (iii) Heavy Lift Vessel(s).

2.

Any activities involving transport by air.

3.

The IMHH Deed will not take precedence over existing contractual arrangements,

nor

over

later

contractual

arrangements

between

participants. It operates between contractors where there is no other contractual arrangement in place between them, and contractors are also free to expressly apply the IMHH Deed, if they wish. Benefits of the IMHH can be summarised as follows75: 

Clarity in allocation of the key areas of risk.



Financial benefits from reduced legal fees and reduction on resource needs.



More effective management of key areas of risk.



Reduced time and confrontation negotiating contractual responsibility and indemnity matters.

74 75



Enabler to greater industry collaboration.



Potential for reduced insurance premiums.

http://www.imhh.com/about.cfm - last accessed 03/05/2010 http://www.imhh.com/benefits.cfm - last accessed 03/05/2010

45



Cost effective and efficient means of improved risk management for small and medium sized enterprises (SMEs).

It is believed that the industry as whole will make a significant financial saving from an effective implementation of the IMHH Scheme.

There may also be

benefit in reduced insurance premiums. The legal burden incurred by the oil and gas industry is also, to some extent, reflected in the insurance industry. Reduced claims and counter claims may lead to a reduced level of legal fees for insurers which would hopefully have a knock-on effect on insurance premiums. However, risks in the industry will not change: the IMHH Scheme is simply a method of allocating liability. The IMHH Scheme should reduce the need for “double insurance” but does not remove the need for insurance altogether76. From this discussion it is clear that the IMHH plays a crucial role in mitigating risk within the Oil and Gas industry, where there are no formal contracts in place. There are also a number of other model contracts within the UKCS oil and Gas industry, some of which are discussed below. 3.4.4 Additional Model Contracts within UK Oil and Gas industry Since the drafting of the CRINE/LOGIC model contracts, a series of standard agreements have been developed under the auspices of the Oil and Gas UK with the aim of improving working relationships between Licensees and streamlining commercial procedures.

3.4.4.1 First Point Assessment Limited Included within this is the use of First Point Assessment Limited (FPAL). FPAL was set up in 1996 to provide a one stop website where customers could review the

76

http://www.imhh.com/about.cfm - last accessed 03/05/2010

46

skills available in the market for any particular piece of work they required77. As well as being a supply chain database, FPAL is a key tool used by oil and gas purchasers to identify and select current and potential suppliers when awarding contracts.

One of the most recent tools available from FPAL are model ITT

templates. These templates are available to download for free for the purpose of simplifying the contracting process and providing an easier and faster way to produce, issue and respond to ITT/bid packages, there are templates for – drilling rigs,

marine

construction,

topside

support,

well

services

and

general

services.78The introduction of these model ITT’s from the findings in chapter 6, has not been well received with many companies not being aware of there existence, let a lone the benefits they could bring.

There have however been

other agreements which have been adopted into everyday practice much more successfully; two of these are discussed below.

3.4.4.2 UKCS Joint Operating Agreement Like all other aspects of the oil and gas industry it was recognised that there needed to be standardisation of these agreements. The first model JOA was developed in the US in 1956, Association of Petroleum Landsmen Model Form Operating Agreement Form 610. This model has since been revised but remains similar to the 1956 original. Styles79 states AAPL Form 610 was an influential model on the early UKCS JOAs which were introduced in the wake of the first licensing round in 1964. This was evident in the fifth licensing round where all JOA has to include the then State-owned British National Oil Corporation (BNOC) and the JOA had to be in terms acceptable to BNOC. BNOC took a model form JOA drafted by UKOOA a year earlier, adapted it to

77

http://www.fpal.com – last accessed 9th may 2010. Adapted from - http://www.fpal.com – last accessed 9th may 2010. 79 Gordon, G & Paterson, J op.cit p265 78

47

its needs and produced the “BNOC Proforma Joint Operating Agreement for Fifth Round Licences”.

This pro-forma JOA proves to be a workable document which secured widespread industry acceptance. Its legacy continues to be seen in UKCS JOAs to this day, long after the nationalised BNOC itself has ceased to exist.80

In 2002, in advance of the 20th Licensing round, a group of industry lawyers working under the support of UKOOA, produced the 20th round Draft JOA. this had proven to be an influential model, with the latest revision taking place in 2009.

The purpose of the UKCS Joint operating agreement is to provide a sound basis on which co-venturers can manage shared operations on their licence, from selection and duties of the operator to apportionment of rewards and liabilities. The 2009 update took place to ensure the JOA reflects current UKCS practice

and

to

ensure

consistency

with

the

industry

standard

Decommissioning Security Agreement (DSA) and the Energy Act 2008. Paul Dymond from UK oil and gas commented With input from a wide cross-section of industry, the model JOA has been updated to reflect new regulations and common practices

over

the

last

five

years

and

to

rectify

some

inconsistencies within earlier versions. We hope this helps parties

80

Gordon, G & Paterson, J op.cit p265

48

quickly establish the arrangements needed to underpin successful partnerships between co-venturers.81 Another example of a successful agreement was the Master Deed introduce for offshore licenses.

3.4.4.4 Master Deed The "Master Deed" was developed by Oil & Gas UK Progressing Partnership Working

Group

(PPWG),

BERR,

and

a

number

of

other

interested

organisations. It greatly expedites the transfer of UKCS offshore licence interests

and

other

agreements

relating

to

associated

assets

and

infrastructure. It also introduces a standard pre-emption regime to give confidence to incoming companies. The offshore oil industry has given the Master Deed broad support, nearly 260 companies holding more than 99% of licence interests have signed up already82. In the past deals were often significantly delayed by the need to get a range of signatures applied to many documents, even when all parties are content with it. The Master Deed creates a mechanism which simplifies the complex and time-consuming procedures which were previously involved in the sale and purchase of offshore licence interests in the UKCS. Under the Master Deed, licensees

have

appointed

UKCS

Administrator

Limited

to

act

as

an

administrator to the Master Deed and perform the execution of pro-forma documents. The use of pro-forma ensures that the documentation process is faster and less complex.

The main benefit of the master deed is that it

standardises the documentation process for UKCS transfers of license interests 81

Dymond, P, Oil & Gas UK presents suite of model agreements to improve industry efficiency, 16/02/2009, accessed at http://www.oilandgasuk.co.uk/news/news.cfm/newsid/379 on 1/5/2010 82 http://www.masterdeed.com/about.cfm - last accessed 03/05/2010

49

which in turn speeds up the transfer process significantly. This creates a more efficient commercial environment and encourages new entrants to invest in North Sea assets. Complex commercial and legal structures are no longer a barrier to entry for new entrants. There are also a number of other standard forms available within the UKCS oil and Gas industry but these have not been considered for the purposes of this paper.

From the foregoing discussion it is clear that there are many advantages as well as disadvantages to the use of model The introduction of CRINE/LOGIC within the UKCS oil and Gas industry has brought with it a number of efficiencies in the way that contracts are drafted and negotiated.

These

efficiencies were gained through the standardisation of contract documents, saving with the aim to save time and money as they eliminate the need for lengthy contract negotiations.

However these standard contracts are not

without fault, as they do not allow for every eventuality.

It is always important to bear in mind is that although the entirety of the model contract it balanced the individual clauses are not. This is because on the trade off that went on in the drafting the suppliers won some arguments about the wording in some clauses and buyers won in others.

Hence the model contracts have the appearance

reasonable and tempered overall but in the detail there are many comprises and benefits to one party over the other. This is why special conditions are so widespread.83 Further discussion on special conditions is contained within chapter 6.

83

Senior Supply chain professional involved in drafting of Logic – information provided in response to questionnaire/ interview process

50

Chapter 4 –Research Methodology 4.1

Introduction

This chapter illustrates the research methodology undertaken to complete this study.

Identification of the particular research methods required, the

information and data gathering approaches to be used, and developing an action plan setting out the different stages and timescales of a study, are all important in demonstrating the process which will be followed to address the research aims and objectives, hypotheses or research questions.

Marchington84 states that methodology is about finding the most appropriate method of research to fit aims and projected outcomes. Hence, the methodology provides the sense of vision of where the analyst wants to go with the research. Methodology is important because, “the methods you use will significantly affect the answers you get”85. Based upon the research aim and objectives, consideration is given to the appropriate research strategy with justification as to why it was chosen.

The data collection technique is

presented along with discussion on how this framework was constructed from the gathered data in the literature review. 4.2

Research objectives

This study aims to evaluate the extent to which oil and gas companies use oil and gas industry standard contracts, whilst comparing the quantity and types of qualifications/ amendments to the standard templates. From the literature contained within chapters 2 and 3, it is clear that there is a multitude of 84

Marchington, M., and Wilkinson, A., (2003). People Management and Development. 2d Edition. London: CIPD 85

BLAXTER, L., HUGHES, C. and TIGHT, M., (2006). How to research. First ed. Berkshire: Open University Press.

51

information regarding general best practice for contract formation and the general use on oil and gas standard contracts. However there has a minimal amount of research conducted specific to the types of companies that use standard contracts and they types of qualifications/special conditions they add to the UKCS oil and gas industry standard contracts. Therefore, in order to achieve the aim, comparison of primary and secondary research is considered necessary. The objectives from the secondary research are as follows:



to critically analyse the use of Standard LOGIC contracts within the UK Oil and Gas industry;



to evaluate whether there is a trend as to what types of companies use LOGIC and the reasons for doing so;



an evaluation of those companies who choose not to use LOGIC and the reasons for this.



to identify and discuss alternative contracting methods used by various companies, in particular ConocoPhillips, who use a variety of bespoke contracts,

4.3

Primary and Secondary Research

For this study a combination of primary and secondary research was undertaken, each is discussed in turn below.

4.3.1 Secondary Research Secondary research involves processing data that has already been collected by previous researchers. It refers to consultation of previous studies and findings such as reports, press articles and previous market research projects in order to come to a conclusion.86

86

http://www.businessteacher.org.uk/markets/primary-secondary-market-research/ last accessed 2/05/2010

52

The literature reviewed has been utilised to define the concept, display elements and to demonstrate the importance of contracts within the UKCS oil and gas industry. Additional literature has been used to identify and provide details of current trends with regards to the use of model contract within the UKCS oil and gas industry.

The sources used to achieve this include text

books, academic research journals, industry trade journals, information from industry trade bodies and newspaper articles.

The literature review has allowed the author to formulate theoretical best practices in order to develop specific research questions for the primary research element of this study.

It is felt that this offers the study valuable

data with specific examples of how industry standard contracts are used and why.

The best practices are compared with the primary research analysis in

chapter 6. 4.3.2 Primary Research Primary data is collected for a particular purpose and is new information. This is conducted using some means of questioning usually via a survey or interviews, or the information can be gathered through observation. It is typically more time-consuming and expensive to collect than secondary data, and is often the second stage in a research project, following secondary research.

Preece87 states that primary research “involves the researcher in direct experience and observation of the real world”.

He suggests that primary

research shapes the body of a research project, and is almost always necessary for research to be viewed as credible.

87

Preece, R., 1994. Starting research. 1st Edition. London: Pinter Publishers, p. 80

53

Primary research data can be separated into two main categories: quantitative and qualitative data. Table 4.1 Fundamental differences qualitative research strategies88 Quantitative Principle orientation to the role of theory in Deductive; testing relation to research theory Epistemological orientation

between

Qualitative Inductive; of generation theory

Natural Science model, in particular positivism

Ontological Orientation Objectivism

In

summary

Qualitative

research

quantitative

and

of

Interpretivism Constructionism

explores

attitudes,

behaviour

and

experiences through such methods as interviews or focus groups. It attempts to get an in-depth opinion from participants. As it is attitudes, behaviour and experiences which are important, fewer people take part in the research, but the contact with these people tends to last a lot longer. Under the umbrella of qualitative research there are many different methodologies. Quantitative research generates statistics through the use of large-scale survey research, using methods such as questionnaires or structured interviews. If a market researcher has stopped you on the streets, or you have filled in a questionnaire which has arrived through the post, this falls under the umbrella of quantitative research. This type of research reaches many more people, but the contact with those people is much quicker than it is in qualitative research. Both types of research were exercised for this study.

Firstly quantitative

research by the way of a survey in the form of a questionnaire was carried

88

Bryman,A, (2004) Social Research Methods, 2nd Edition, Oxford University Press, P20

54

out. There are a number of advantages and disadvantages89 associated with undertaking a survey, these are listed below Advantages: • With an appropriate sample, surveys may aim at representation and provide generalised results. • Surveys can be relatively easy to administer, and need not require any fieldwork. • Surveys may be repeated in the future or in different settings to allow Comparisons to be made. • With a good response rate, surveys can provide a lot of data relatively quickly.

Disadvantages: • The data, in the form of tables, pie charts and statistics, become the main focus of the research report, with a loss of linkage to wider theories and issues. • The data provide snapshots of points in time rather than a focus on the underlying processes and changes. • The researcher is often not in a position to check first hand the understandings of the respondents to the questions asked. Issues of truthfulness and accuracy are thereby raised. • The survey relies on breadth rather than depth for its validity. This is a crucial issue for small-scale researchers.

On deciding to use a questionnaire90 for date gathering it was essential to

89

Blaxter L, Hughes c and Tight, M,(2006) How to research, 3rd edition, open university press, p79

90

Questionnaire attached in Appendix B

55

assess the reliability and validity of this technique. Bell and Opie91 define reliability as “the extent to which a test or procedure produces similar results under similar conditions and on different occasions”.

Validity is defined as

“whether an item or instrument measures or describes what it is supposed to measure or describe”92 However, they caution that how a research study is structured governs both the research findings which can, and cannot, be inferred. Therefore when choosing to use a questionnaire it was essential that it retrieved the most information it could without being cumbersome on the respondent completing it.

Therefore when generating the questionnaire a

combination of open and closed questions were asked. Open questions give respondents a greater freedom to answer the questions because they answer in a way that suits there interpretation93. Closed questions limit the number of possible answers to be given.94The main reason for combining the two types of questions was that open questions are a useful follow up to closed questions as they often give the rational behind the closed question.

Once the

questionnaire had been compiled, it was critical to the study that the correct respondents were identified.

This involved selecting the most appropriate

research sample. this is discussed in paragraph 4.4 below. Secondly qualitative research was undertaken by the way of interview. These interviews took the form of informal semi structured face to face interviews with the Procurement Manager UK and the North Sea Contracting Supervisor at ConocoPhillips UK Limited.

A semi structured interview is where,

91

BELL, J. and OPIE, C., (2002). Learning from research. 1st Edition, Buckingham: Open University Press. P245 92 BELL, J. and OPIE, C.op.cit P249 93 May, T (2001) Social Research, issues methods and processes, 3rd Edition, Oxford university press page 102 94 Ibid

56

Interviewer generally starts with some defined questioning plan, but pursue a more conversational style of interview that may see questions answered in an order more natural to the flow of conversation.95 This approach was used as author already new the interviewees and therefore felt this was the most suitable approach. The questionnaire discussed above was used as the basis of the interview. The purpose of the interview was to get more detailed answers for some of the open questions as well as any additional information where possible to assist with the study of contracting methods used at ConocoPhillips UK limited which is discussed in chapter 5. 4.4

Research Sample

There are numerous Oil and Gas operators, contractors and service companies within the local area. The timescale imposed meant that it was not possible to obtain survey responses for all these companies.

Therefore probability

sampling was used to ensure so that a representative cross section of companies was selected.

To certify that the companies selected where

classified correctly into Subsea Engineering companies, Subsea Companies, Operators, drilling companies and service companies, First Point Assessment Limited (FPAL) was used. FPAL was set up in 1996 to provide a one stop website where customers could review the skills available in the market for any particular piece of work they required96. Almost every contractor in the UK North Sea industry is registered on FPAL. FPAL has a number of work, services, tools/equipment and skills codes and when registering, a contractor chooses which codes it will register under. The codes are fairly detailed.

Once the

companies had been selected connection was made via email, the contact details were obtained from FPAL or via author’s business knowledge. 95 96

O’Leary, Z, (2004), The Essential Guide to doing research, Sage Publications, p164 http://www.fpal.com – last accessed 9th may 2010.

57

One the companies had been identified, the questionnaire was issued, via email, to persons working with the company’s contracts department, or supply chain department. This target group was selected to ensure comprehensive answers were received.

This rational was also applied when selecting the appropriate

personnel with whom to conduct interviews.

4.5

Data Analysis

In order for analysis the gathered data must be organised into a manageable format. This was completed manually by separating the data into sets. The information is segregated by company type, the broad heading used to do this were Subsea Engineering companies, Subsea Companies, Operators, Drilling Companies and Service Companies.

The information that emerged from each question was then collated into a spreadsheet for all the closed questions in order to allow the fragments of data to be brought together into categories with shared properties. For the Open questions key points of each question were transcribed onto a word document as a quick reference guide for completing the research findings. Appendix C contains all results tables collected from the questionnaire.

4.6

Research Limitations

There are a number of possible research limitations to this study which are discussed as follows:



The main constraint on this study was time, which limited the period which could be allocated to data collection.

58



Follow up interviews could not be conducted on the questionnaire respondents within the available time frame.



Oil and Gas UK ran a one day workshop, called Model contractual Supply Chain Solutions on the 28th April 2010, but due to the cost of the workshop, work commitments and the timing on the course in respect to submission date, it was not possible to attend this workshop. Information about content of the course was requested but not obtained.

59

Chapter 5 – Case Study: Contracting Philosophy at ConocoPhillips UK Limited As discussed in earlier chapters, over the past few decades the UK government has introduced a number of Model contracts that can be used by Oil and Gas companies. The main advantages of these model contracts is that it saves time and money, as there is less time spent negotiating contact, which in turn saves money. However not all companies within the UKCS use model contract such as LOGIC.

One of the findings from the questionnaire

was that 3 of the respondent companies said they did not use industry standard contracts. ConocoPhillips UK Limited was one of these companies. A full discussion of the questionnaire results follows in chapter 6.

This chapter provides background information to the origins of ConocoPhillips and the activities in which they are involved. Thereafter this chapter reviews the contracting structures used at ConocoPhillips and the reasons for such a structure. It will also review why ConocoPhillips choose not to use Standard Contracting models such as LOGIC.

5.1

Background to ConocoPhillips

ConocoPhillips is an international, integrated energy company. It is the thirdlargest integrated energy company in the United States based on market capitalisation, as well as proved reserves and production of oil and natural gas, and the second-largest refiner in the United States. Worldwide, of nongovernment-controlled companies, ConocoPhillips is the seventh-largest holder of proved reserves and the fourth-largest refiner.

60

Headquartered in Houston, Texas, ConocoPhillips operates in more than 30 countries. As of 31 December 2009, the company had around 30,000 employees worldwide and assets of $153 billion97.

The company has four core activities worldwide 98: 1. Exploration and Production 2. Refining, marketing, supply and transportation 3. Natural Gas Gathering, processing and Marketing 4. Chemicals and plastics

In addition, the company is investing in several emerging businesses that provide current and future growth opportunities. These efforts include development of integrated power generation projects to support exploration and production and refining and marketing strategies and business objectives; carbons-to-liquids processes that convert carbon into a wide range of transportable products; and a variety of technology solutions.

ConocoPhillips’ upstream involvement in the United Kingdom began in September 1964 when acreage was awarded to the company in the first U.K. licensing round. In 1968, the Viking gas field was discovered and first gas was produced in 1972. Since then, the U.K. portfolio has grown to include additional operated assts, as well as interests in non-operated assets99.

In the central North Sea, the company is operator of, or has an interest in a number of fields including Britannia, Britannia Satellites (BritSats), J-Block, Jasmine and MacCulloch. 97

ConocoPhillips fact sheet – January 2010 Adapted from - http://www.conocophillips.com/EN/about/who_we_are/our_business/Pages/index.aspx last accessed 10 April 2010. 99 ConocoPhillips fact sheet – January 2010 98

61

In the southern North Sea, ConocoPhillips operates the Lincolnshire Offshore Gas Gathering System, the Viking transportation system, the Caister Murdoch transportation system and a portfolio of around 30 gas fields. The company also has non-operated interests in the southern North Sea and holds interests in the East Irish Sea.

Onshore, it owns the Rivers Terminal at Barrow-in-Furness and operates the Theddlethorpe gas terminal and the Teesside Oil terminal. It also holds a nonoperated interest in the Interconnector pipeline. Its downstream operations include the Humber Refinery and the Immingham Combined Heat and Power Plant and its marketing activities in the UK consist of JET branded retail sites, which are owned and operated by independent dealers.

5.2

Reasons why ConocoPhillips UK Limited do not use LOGIC

As part of the informal interviews conducted with, North Sea Contracting Supervisor and Procurement Manager UK at ConocoPhillips UK Limited they advised of the main reasons that ConocoPhillips do not currently use any LOGIC standard Contracts, these are detailed below.

Historically it has always been ConocoPhillips UK Limited company policy to only use its own Company standard terms and conditions, this was the case even before Conoco and Phillips merged in August 2002. On several different occasions ConocoPhillips UK Limited have investigated if there would be any benefit of adopting some of the LOGIC standard contracts, however on review it has always been decided that the LOGIC standard terms would need to be heavily qualified to cover the specific needs of the company, therefore it would not be in the Companies best interest, as this would lead to longer and more costly negotiations.

62

One of the main areas in which ConocoPhillips UK Limited would qualify LOGIC if they were to use it in its current form would be risk allocation, the importance of which was disused in general terms in Chapter 2. These clauses in particular are a problem for ConocoPhillips because corporate rules means that ConocoPhillips UK Limited has 2 definitions of Company Group,

Company Group in the context of “Big Family” means the company contracting for goods/services, the company’s affiliates who are involved in the project for which the goods/services are being provided/performed, company’s covertures’, company’s other contractors (except for the contractor providing the goods/services) and subcontractors, and the employees, officers, directors and agents of all of the foregoing.

Company Group in the context of “Small Family” means the parties referred to above EXCLUDING the company’s other contractors

and

subcontractors.

contractors/subcontractors

are

true

ConocoPhillips’s third

parties

in

other a

SF

indemnity regime.100 The choice of which definition of Company Group is to be used is determined by where the work is to be performed and the interaction between the contractor and other contractors who might be on a different indemnity regime. Another key factor in why ConocoPhillips UK Limited do not use LOGIC is because the company is controlled centrally out of Huston. This has a major impact on the Contracting philosophy adopted within ConocoPhillips in the UK. 100

Adapted form ConocoPhillips internal training documentation.

63

As LOGIC is only a UK wide initiative the US management do not recognise the significance of the standard contracts. The contract templates that are used by ConocoPhillips UK Limited are highly influenced by the US. This is to ensure consistency across the entire company and not just on a country by country basis. A third factor is that the current contract templates that are used at ConocoPhillips UK Limited service the needs of the company adequately. At present ConocoPhillips UK Limited uses 12 different contract templates for work conducted within the UKCS. ConocoPhillips management believe that they have the right volume of contract and that the meet the requirements of the company. Each of the ConocoPhillips contract documents are based on the companies “fifteen corporate clauses”, these are set my management in the US and all contracts must contain these clauses and the prescribed provisions within them.

64

The fifteen corporate clauses are as follows; 1.

Ethics and conflicts of interest

2.

Confidentiality

3.

Patent infringement

4.

Ownership of Supplier Developments

5.

Applicable Law

6.

Laws, Rules and Regulations

7.

Liens and Claims

8.

Audit

9.

Force Majeure

10. Risk Structure 11. Insurance 12. Taxes 13. Assignments 14. Dispute Resolution 15. U.S Export Control Compliance

Although the fifteen corporate clauses are placed upon all regions and there subsequent business units by Head of office in USA, these clauses are region specific and are maintained locally to ensure they are always up to date with any changes in regional legislation.

Each of the contracts currently in use at ConocoPhillips UK Limited are discussed in turn below.

65

5.3

Standard Contracts at ConocoPhillips UK Limited

As already stated ConocoPhillips UK Limited do not use Industry standard contracts provided by LOGIC, instead they have a suite of contracts that they utilise to conduct there business, these contracts are as follows – Table 5.3: ConocoPhillips UK Limited contract Templates

TEMPLATE

REFERENCE

Master Services Agreement

MSA (Major)

Master Services Agreement

MSA (Minor)

Aviation Services Agreement

AVA

Time Charter Party

TCP

Research & Development Agreement

REA

Personnel Services Agreement

PSA

Drilling Rig Agreement

DRA

Engineering

Procurement

Construction

Installation EPCIC

Commissioning Agreement (or some variant of) Transportation and Installation Agreement

TIA

Materials Frame Agreement

MFA

Purchase Order (materials and services)

PO

Confidentiality Agreement

CONA

As detailed in the table above ConocoPhillips UK Limited have 12 standard contracts that they use. The contract template used for each agreement is determined by the nature of the work involved.

A brief description and

summary of when each contact is used is detailed below.

66

The

MSA

(Major)

is

one

ConocoPhillips UK Limited.

of

the

most

commonly

used

contracts

at

The MSA (Major) is used when the intent its to

establish general terms and conditions for the future procurement of medium to high value or risk, ad-hoc or recurring services and/or the purchase or rental of goods, which do not fall within the guidelines applicable to a Master Services Agreement (Minor), a Material Frame Agreement or Purchase Order which are described below. When creating this type of contract, it is essential to ensure a detailed description of the goods and services to be supplied, with call-offs through Purchase Orders are included. The Purchase Order should only need to include details of the schedule for performance of the work, the location for performance/delivery of the Work, any additional rates and prices and any additional deliverables expected.

Although the MSA (Major) details the conditions and a detailed description of the goods and services to be provided, commitment to this work is not concluded until a PO has been issued, by signing the contract there is no commitment granted.

A MSA (Major) should not be placed for a period in excess of 10 years, including all option periods.

The Master Services Agreement (Minor) is used to establish general terms and conditions for the future procurement of ad-hoc or recurring low risk services and/or the purchase or rental of goods, which do not fall within the guidelines applicable to a Purchase Order. However this type of contract should not be used for offshore well operations or marine related work, regardless of value

67

or duration.

This is because this template does not contain the appropriate

level of risk allocation and relevant insurance provisions among other things.

The MSA (Minor) must include a detailed description of the goods and services to be supplied, with call-offs through Purchase Orders. The Purchase Order should only need to include details of the schedule for performance of the work, the location for performance/delivery of the Work, any additional rates and prices and any additional deliverables expected. The MSA (Minor) should not be placed for a period in excess of 5 years including all option periods.

The Aviation Service Agreement is only used for the procurement of helicopter and fixed-wing transportation services.

An Aviation Services Agreement

should not be placed for a period in excess of 10 years, including all option periods.

A time charter party agreement will be used to establish general terms and conditions with a vessel owner for the hire of marine vessels (e.g. platform supply vessels, multi role vessels and emergency response and recovery vessels).

The TCP is a frame agreement with call-offs through a Charter

Agreement. The Charter Agreement will contain details relating to the specific vessel hire, start date, end date, day rate, etc. As future requirements arise, additional Charter Agreements may be added, subject to there being a valid TCP in place with that vessel owner.

A TCP or Charter Agreement should not be placed for a period in excess of 10 years, including all option periods.

68

There are industry standard contracts for Time charter parties, however as with LOGIC standard contracts, ConocoPhillips UK Limited do not utilise these, and instead have there own version, albeit that ConocoPhillips UK Limited TCP closely reflect what is in the industry standard agreements.

There

are

two

types

of

Research

and

development

contracts

that

ConocoPhillips UK Limited use. These are a single party agreement to be used for the procurement of R&D services from a single Contractor and a multi party agreement which is used for procurement of joint R&D projects between ConocoPhillips UK Limited, other companies and a University/Institute.

A REA should not be placed for a period in excess of 5 years, including all option periods.

The Personnel Services Agreement is important to ConocoPhillips UK Limited are they have a number of Contactor personnel that work for them.

A

Personnel Services Agreement is used for all temporary personnel hired in through an agency or equivalent. This is important as this type of contract is very different form a contract of employment that would be issued to all staff personnel.

A PSA should not be placed for a period in excess of 10 years, including all option periods.

69

A Drill Rig agreement is used for hire of drilling rigs and associated services. A DRA should not be placed for a period in excess of 10 years, including all option periods.

Engineering,

Procurement,

Construction,

Installation

and

Commissioning

An EPCIC agreement is used for the procurement of some or all of the following:

Engineering,

Commissioning services.

Procurement,

Construction,

Installation

and

This type of agreement must contain a detailed

scope of work, schedules for performance of work and compensation provisions. In addition the execution plan, key personnel, progress reporting and subcontractors must be clearly identified and form part of the contract.

Each EPCIC contract will be for a specific project and therefore the duration of the agreement will be agreed on a case by case basis.

The Transportation and Installation Agreement is used for the transportation and installation offshore of jackets, piles, topsides, bridge support structures, interconnection bridges, subsea production systems or other similar items.

The TIA must contain a detailed scope of work, schedules for performance of the work and compensation provisions, together with the execution plan and interface responsibilities.

A TIA should not be placed for a period in excess of 5 years, including all option periods.

70

Materials Frame Agreements are used for repetitive procurement of low risk, low value materials e.g. personal protective equipment, gaskets, stationery, etc. and may also include services, where the service element is related to the supply of the materials and is a minor part of the overall contract value. However this type of contract cannot be used for offshore well operations materials regardless of value.

THE MFA must contain a detailed description of the goods and services to be supplied, with call-offs through Purchase Orders. The Purchase Order should only need to include details of the schedule for performance of the work, the delivery/performance location, any additional rates and prices and any specific deliverables expected.

A MFA should not be placed for a period in excess of 10 years, including all option periods.

Purchase order are used by ConocoPhillips UK Limited for ad-hoc procurement of low risk, low value services and materials that is not covered by an existing MFA or MSA.

Purchase order Terms and Conditions may be used for minor

offshore services (e.g. repair of snooker table, coffee machine or other like adhoc services), which are demonstrably low risk, as well as low risk onshore services. This type of agreement cannot be used for offshore well operations or marine related work, regardless of value. They must contain a scope of work and compensation provisions, which clearly specifies the nature and price of the materials or services to be provided. There are no time constraints on this type of contract due to the nature of the goods and service being provided under them.

71

A Confidentiality agreement is used whenever ConocoPhillips UK Limited will share ConocoPhillips UK Limited proprietary or sensitive information with an individual or external company (e.g. seismic data, research and development data, business sensitive information, etc.).

5.4

The future of Contracting at ConocoPhillips UK Limited

From the findings of this study it is clear that ConocoPhillips UK Limited are currently part of a minority that do not use LOGIC standard contracts. This is evident from the questionnaire results in chapter 6. The results show that from the companies that responded to the questionnaire that only 9% if do not use LOGIC standard contracts. The reasons given by these other companies are very similar to those discussed above, namely that corporate templates are to be used at all times.

Due to the nature of the UK Oil and Gas industry operations have continually adapted to the challenges presented by price volatility, maturity, evolving regulation and changing perceptions within society.

With this in mind

ConocoPhillips UK Limited will continually need to review its contracts. On discussion ConocoPhillips UK Limited acknowledge that there are advantages to using industry standard contracts. However for ConocoPhillips UK Limited to change there processes of contracting to use these standard contracts would require permission from their Head Office in USA. This is not likely to be achieved as it would mean that ConocoPhillips UK Limited would be using different contract than the rest of the ConocoPhillips Group. In addition there would be a large financial impact to implement the Industry standard contract, all personnel working with the contracts would need to be trained in the use of LOGIC

contracts.

Nonetheless

it

was

72

suggested

that

in

the

future

ConocoPhillips UK Limited may look again at LOGIC as a method of contracting, or as a minimum incorporate some of the key issues of LOGIC where ever possible.

However it is unlikely that ConocoPhillips UK Limited

would adopt LOGIC in its current form, but they may consider it if LOGIC was updated.

73

Chapter 6 – Questionnaire results 6.1

Introduction

This chapter presents the findings of the primary research that were carried out for this study.

This chapter is split into 3 main section to reflect the

sections used within the questionnaire, these are-

1. Demographic profiling of UKCS Oil and Gas Industry Companies involved in the study; 2. Analysis of the use of LOGIC standard contracts within UKCS oil and Gas industry; 3. Analysis of the use of additional government standard models

The presentation of the findings will ultimately assist in the achievement of the aim and objectives set out at the beginning of this study. 

to critically analyse the use of Standard LOGIC contracts within the UK Oil and Gas industry;



to evaluate whether there is a trend as to what types of companies use LOGIC and the reasons for doing so;



an evaluation of those companies who choose not to use LOGIC and the reasons for this.



to identify and discuss alternative contracting methods used by various companies, in particular ConocoPhillips, who use a variety of bespoke contracts,

6.2

Demographic Results

A selection of UKCS oil and gas companies were targeted as part of this research dissertation. They were sampled from a listings found within FPAL as discussed in chapter 4. Procurement/Supply Chain Managers were selected for

74

completion of the questionnaire because it was felt they would hold the most knowledge of the topic in hand.

The response to the questionnaire was

reasonably good with a 55% response rate. Babbie101 believes that a response rate of 50 percent is adequate for analysis and reporting. A response rate of 60 percent is good; a response rate of 70 percent is very good.

Question 1 The length of time the operator had been involved in the UKCS Oil and Gas industry was the introductory demographic profile question to be analysed, as shown in figure 6.1:

Figure 6.1: Time involved within the UKCS oil and gas industry

25 20 15 No. of Companies 10 5 0 0-6 years

7-12 years

13-18 years

19 years +

Duration in years

Figure 6.1 identifies that the respondents to the questionnaire ranged from being relatively new to the industry through to being long term established players.

101

This data allows us to compare and contrast the contracting

Babbie, E,(2001) The practice of Social Research, 9th Edition, Wadsworth p 256

75

strategies and methodologies used by a variety of companies at varying degrees of maturity and experience with the UK Oil and Gas industry.

Question 2 In addition, the second important demographic area to be analysed was the value of the organisation’s annual turnover. The aim of this was to attempt to draw out any connecting between the rate of annul turnover and if this influenced the contracting strategy used. The purpose was to see if there was any connection between, new companies which currently have a relatively low turnover and if they used standard contracts as a method to save money. The results are shown in figure 6.2.

Figure 6.2: Companies average annual turnover

30 25 20 No. of 15 Companies 10 5 0 £0-3M

£4-10M

£11-25m

over £26m

Annual Turnover

The analysis showed that for the majority of respondents there annual turnover was at the higher end of the scale. Although it is felt that there is a comprehensive cross section of responses gained, this could also be regarded as a limitation to this study as we are unable to compare the views of those

76

with a much smaller turnover, who may have different commercial restraint placed upon them. However, the time limitations placed upon this study did not allow for further investigation in this area.

6.3

The Use of LOGIC contracts

The next section of the questionnaire was designed to analyse the use of LOGIC standard contracts. 91% of the respondents answered yes they do use LOGIC at least one of the standard contracts; the majority of the 91% use more than one of the standard contracts. This is positive insofar that a large number of companies use LOGIC; however it was stated by LOGIC102 that over 95% of senior oil company managers said they supported the principles of Standard Contracts. The findings in this study do not support this, although company managers may be in support of the principle of standard contracts, in practice the amount of companies actually using it is less.

For the purposes of the questionnaire analyses the respondents were grouped by industry sector, the categories used were Subsea Engineering companies, Subsea Companies, Oil and Gas Operators, Drilling companies and Service companies.

Question 3 The aim of this question was to analysis if there was a trend between the types of companies and the use of LOGIC contracts. The results of which are shown in Table 6.1.

102

http://www.logic-oil.com/contracts.cfm - last accessed 7th May 2010

77

Table 6.1 Use of Logic across industry Sectors.

Companies that use LOGIC Companies that do not use LOGIC

Subsea Engineering Company

Subsea Company

Operator

Drilling Company

Service Company

Total

5

6

10

3

6

30

0

1

2

0

0

3

From table 6.1 shows the use of LOGIC contracts across the different industry sectors.

Of the companies that do not use LOGIC, 67% of these are

operators. The remaining 33% are subsea companies. When asked why the companies chose not to use LOGIC contracts, Question 10 and what alternative contracting structure they do use, Question 11, the responses were very similar. The responses were as follows; all the companies’ operators and subsea companies alike had suites of terms and conditions that they use instead. One operator stated that their terms and conditions were very similar to LOGIC with some extra provisions added. The Subsea company stated that there was a reluctance within there company to use LOGIC as there was not a uniformed use of them within the industry and until this changed they would continue to use there own suite of contract. One of the operators identified in this question was ConocoPhillips UK limited, who’s reasons for not using LOGIC standard contract have been discussed already in Chapter 5.

Those companies that responded saying they do utilise the LOGIC contracts were asked a series of questions to get a more in-depth analyses for the reason they do this.

78

Question 4 The purpose of this question was to establish the commonalities between sectors and the types of contracts they use.

It was also to establish the

frequency at which each contract was used. The result of this are shown in table 6.2.

Table 6.2 – Type of Contract used by industry sector

Subsea Engineering Company

Subsea Company

Operator

Drilling Company

Service Company

Construction Edition 2

1

1

3

0

1

Design Edition 2 Marine Construction Edition 2 Mobile Drilling Rigs Edition 1

0

0

4

0

1

1

5

10

1

2

0

0

9

2

0

3

1

7

1

4

5

4

9

0

5

Purchase Order Terms & Conditions (Short Form) Edition 2 Services (On- and Offshore) Edition 2 Supply of Major Items of Plant and Equipment Edition 2

4

1

9

1

3

Well Services Edition 2

2

1

7

1

2

SME Services Edition 1

2

1

3

0

0

Subcontract for Services Edition 1

1

0

2

0

0

SME

From table 6.2 it is clear that every LOGIC contract is used by at least on sector. With 40% of the LOGIC contracts are used across all sectors.

This

result is positive insofar as there appears to be progress towards PILOTS aim of ‘standardisation’ which has been discussed earlier in this study.

Question 5 The aim in this question was to establish what the companies that use LOGIC perceive to be the advantages of standard contracts and compare these to the advantages outlined by Martin in chapter 3.

79

Due to the nature of this type of

question,

a

number

of

different

answers

were

received

and

overall

generalisations were made. This concurs with O’Leary who states103,

Respondents can offer any information/express any opinions they wish…….open questions can generate rich and candid data, but it can be data that is difficult to code and analyse.

These generalisations include that the use of LOGIC contracts saves time as it limited the negotiations required to conclude the terms and conditions, as both parties to the contract are generally familiar with the content and format of the contract, this in turn save the companies money. These findings correspond with the aims of LOGIC which are ‘to simplify the industry’s procedures and to save costs104’. They also concur with the findings of Martin105, who states cost savings as one of the main benefits of model contracts. In addition one new entrant operator stated that the use of standard contracts saves them from having to develop their own contracts – hence saving time and money.

Questions 6, 7 and 8. Due to the close connection of these questions, they shall be dealt with together. From the proceeding questions it is clear that the respondents as a majority are in favour of the LOGIC contracts, however when asked if they qualify the LOGIC contracts, all respondents said that they did. The degree to which people added additional clauses or amended the standard clauses varied dramatically.

Some respondents made as few as 1change, where as others

made at many as 50 qualifications, the number of qualifications made is

103

O’Leary, Z, (2004), The Essential Guide to doing research, Sage Publications, p159 http://www.logic-oil.co,/contracts.cfm - last accessed 8th May 2010 105 Martin, TJ and Park JJ op.cit.p8-12 104

80

dependant on the type of company and the type of goods/service being undertaken. When asked the rational behind these qualifications, there were a number

of

similar

responses.

The

most

common

response

was

that

respondents qualified the standard contracts to make them compliant within internal company requirements and procedures. This was closely followed by the comment that the Standard contracts are generic and do not cover all scenarios therefore respondent need to add qualifications to overcome this. Many of the respondents commented that the reason they qualify the standard contracts is because they do not contain adequate levels of risk mitigation, namely the indemnities clauses, the importance of which was discussed in chapter 3.

One of the most concerning comments was made by a Drilling

company, who stated that they qualify the Mobile drill rig contract because it is not in line with current legislation, this is because it has not been updated since 1997. When asked if there were going to be any updates to any of the standard contracts, LOGIC’s response was “There are no plans at present to update the suite of contracts”106 this means that companies will continue to qualify contracts to bridge the gaps in the legislation and risk mitigation clauses.

Question 9 None of the respondents who use LOGIC contract use the standard templates without adding additional qualifications. It is therefore clear that LOGIC’s aim of standardisation has not been fully achieved.

This said the use of the

standard contracts as basis of negotiation has standardised a number of processes, however the fact that each company using the templates adds a number of qualifications, highlight the fact that a standard contract will never be achieved, unless updated on a regular basis. 106

Email correspondence with Ross McKenzie, Solicitor & Business Advisor LOGIC/Oil & Gas UK - dated 25th February 2010.

81

6.4

Additional Standard Governmental Models

The final section of the questionnaire was designed to analyse the use of additional government initiatives. This section looks at the use of FPAL model ITT’s and Industry Mutual Hold Harmless (IMHH) scheme.

Questions 12,13 and 14. This section looks at how many respondents use the model ITT and the reasons for using them and the reasons why they are not used.

All of the companies that do not use LOGIC also stated that they do not use FPAL standard ITTS. From the remaining respondents only 37% of them said that they used the FPAL model ITT’s. The reasons given for there use is similar to that for the use of standard contract.

The use of the model ITT’s saves

companies time and money, as they do not need to draft the documents, the companies receiving these documents are familiar with the format and content, allowing a quicker turn around of tenders and tender evaluation. The new entrant operator identified earlier was in favour of these documents as it saves them time, as they are not required to create there own documents. These findings concur with the UK Upstream Supply chain Management Network107 aims to,



Simplify the contracting process



Provide and easier and faster way to produce, issue and respond to ITT/bid packages.

However the majority of respondents, 63%, do not use the FPAL ITT’s. There a number of different reasons for this, 5 respondents stated that they do not

107

http://www.achilles.com/en/PFAL/ITT-Templates - last accessed 8th May 2010

82

tender and therefore do not need to use the industry standard ITT documents. There were 2 respondents that said they were not familiar with the Model ITT’s. The most common response was that the companies already had there own company standard ITT’s or e-sourcing tools which company procedure stated they must utilise. This said there were 2 respondents that said, despite having internal company ITT’s they were currently reviewing the standard documents and may consider using them in the future.

Question 15 This question looks at the number of respondents that are currently signed up to the Industry Mutual Hold Harmless scheme. The results show that 63% of the respondents have signed up to IMHH. For those companies that are not signatories to IMMH, 73% of these are Operators with the remaining 27% drilling companies. As a general rule operators do not usually sign up to IMHH as it is designed for and signed by the contracting sector. This is backed by Gordon108 who states,

Although operators played a substantial part in brining it into being, the IMHH Deed is designed for, and signed by, the Contracting sector. It is not well suited to operator-to-operator situations and given that the operator sits at the top of the contractual pyramid, operators should already be in a direct or at least indirect contractual relationship with anyone who steps onto there platform for commercial purposes, and therefore in a position to negotiate whatever contractual risk allocation regime to parties to those contracts choose.

108

Gordon, G & Paterson, J op.cit.P 375

83

It is clear form the results of the questionnaire that model contracts are widely used within the UK Oil and Gas Industry. The results from the study have identified areas within the LOGIC standard contracts where there are failings or gaps within the standard models. This is evident by the fact that 100% of the companies who were identified as using LOGIC, said that they qualified the contracts, often with as many as 50 qualifications. Admittedly many of these qualifications are due to company specific requirements, nonetheless some fundamental issues have been uncovered, such at out of date legislation and inadequate risk mitigation.

The findings also show that other governmental models, such as the model ITT’s are not so widely used, this is partially because of lack of knowledge of them; this is something which needs to be addressed.

84

Chapter 7 – Conclusion and Recommendations 7.1

Introduction

The aim of this paper was to evaluate the extent to which industry standard contracts are used within the UK oil and Gas industry, whilst comparing the variation of there application between companies and the alternatives to these standard models. With the ultimate aim to answer the question, Oil and Gas industry contracts – is there such a thing?

It was then necessary to analyse the basic contracting principles, highlighting the risks that exist within this process and identifying key contract clauses, with the main focus on risk mitigation both in general terms and in relation to the UKCS Oil and Gas. In order to examine and critically assess the UK oil and Gas industry standard contracts, it was necessary to analyse the general concept of model contracts by examining the main advantages and disadvantages of doing so. It was also necessary to examine the different model contracts and governmental initiatives that exist with the UKCS oil and gas industry and how these are received and implemented by various companies working within the UK Oil and Gas industry.

This analysis and review enables some conclusions to be drawn and recommendations to be made, which may provide solutions to some of the issues raised by the analysis of the contract processes and use of model contracts but also address the issues raised by the results if the questionnaire.

85

7.2 Conclusions 1. Analysis of case law and legislation clearly show that the law provides protection to the contracting parties, but may also penalise a party due to their carelessness.

The important issue that has been identified is

that parties should ensure to take full advantage of the protection they are given. This involves the parties to the contract being aware of how the law works and its effects.

2. There are a number of key clauses that need to be considered when drafting a contract.

Focusing on risk mitigation, and in particular

indemnities, this study has established that the law allows such clauses to stand, due to the interpretation of an indemnity clause being a way of re-allocating liability, rather than excluding it.

However the law is

very clear that such clauses should be drafted clearly, otherwise the basic law principle of the party who breaches is liable will apply. With in Oil and Gas contact the indemnity clauses are usually mutual indemnity clauses, which places the risk with the party who is best placed to deal with it, effectively making each party responsible for there own loss. The key point is that regardless of the type of indemnity clause used, as long as it is correctly drafted it will stand up in court.

3. On review of model contracts, and in particular LOGIC standard contracts a number of advantages were identified via the literature review and from the results of the questionnaire. It can be concluded that the use of LOGIC contracts saves time as it limited the negotiations required to conclude the terms and conditions, as both parties to the contract are generally familiar with the content and format of the contract, this in turn save the companies money. This may explain why

86

91% of the respondents utilise the LOGIC contracts.

However the

respondent made it clear that some aspects of the LOGIC contracts need improvement, certain key aspects are missing from the contracts and some of the legislation contained within the contracts is out of date which leads all of the respondents adding in qualification. The key point here is that although the LOGIC contracts are a good basis for building a contract, no respondents use the contracts ‘off the shelf’, they all add qualifications, which in turn means that there is in fact no such thing as an industry standard contract.

7.3

Recommendations

1. Introduction of revised Standard contracts In order to address the issue of out of date legislation within some of the model contracts, a review of the current LOGIC contracts should be undertaken.

In addition to reviewing the contracts for any changes in

legislation, it may be advisable to review the common qualifications that companies make to the standard contracts, and where possible include these in the revised editions. This would result in less time being spent reviewing and negotiating the current contracts. Revision of the standard contracts may also encourage some companies who do not currently use the model contracts to re-consider using them.

2. Education process. As part of the questionnaire it was identified that some companies where not aware of the FPAL model ITT’s. It would therefore be advisable for a formal

education

process

to

be

introduced.

This

may

consist

of

presentations and or workshops to show companies the benefits of using them. The recommended training should provide companies with practical

87

examples of how the documents should be completed and reviewed. There should also be follow-up session if and when any changes are made to the model ITTs.

3. ConocoPhillips UK Limited contracts aligned with LOGIC Although ConocoPhillips UK Limited has a suite of contracts which it uses to conduct is work and for the reasons discussed previously does not use LOGIC.

It may be beneficial for ConocoPhillips UK limited to review its

current contracts and bring them more in line with LOGIC. By doing this time and money could be saved as negotiating contracts should become quicker and easier as parties with whom they are contracting, may be more familiar with the content of there contracts, if they are similar to LOGIC. It may also be beneficial for ConocoPhillips UK Limited to investigate the use of FPAL model ITT’s for their tendering needs, this too could save time and money as the preparation of documentation will be reduced, and the other parties may be familiar with the ITT documents and therefore may be in a position to respond more quickly.

There are other recommendations that can be made, however if the above recommendations were followed it would provide a basic framework for improving the efficiency of model contracts within the UK Oil and Gas industry. Once this framework was implemented further initiatives can be introduced to provide continuous improvement.

Overall it can be concluded upon critical analysis of model contracts within the UK Oil and Gas industry that these models are performing well, but with the introduction of current legislation and education initiative in the use of these models the goal of a ‘standard contract’ may be reached.

88

Appendix A Summary of LOGIC Standard Contracts

Title Construction Edition 2

Details This contains the General Conditions of Contract for Construction Edition 2, Guidance Notes and a Sample Form of Agreement.

Design Edition 2

This contains the General Conditions of Contract for Design Edition 2, Guidance Notes and a Sample Form of Agreement. This contains the General Conditions of Contract for Marine Construction Edition 2 and a Sample Form of Agreement.

Marine Construction Edition 2

Mobile Drilling Rigs Edition 1

This contains the General Conditions of Contract for Mobile Drilling Rigs and a Sample Form of Agreement.

Purchase Order Terms & Conditions (Short Form) Edition 2 Services (On- and Offshore) Edition 2

This contains the Purchase Order Terms & Conditions (Short Form) and Guidance Notes. This contains the General Conditions of Contract for On- and Off-shore Services Edition 2, Guidance Notes and a Sample Form of Agreement. This replaces separate onshore and offshore contracts. This contains the General Conditions of Contract for SME Services, Guidance Notes and a Sample Form of Agreement and is largely based on On- and Off-shore Services This contains the General Conditions of Sub-Contract for SME Services, Guidance Notes and a Sample Form of Agreement and is largely based on On- and Off-shore Services This contains the General Conditions of Contract for Supply of Major Items of Plant Equipment, Guidance Notes and a Sample Form of Agreement. This contains the General Conditions of Contract for Well Services, Guidance Notes and a Sample Form of Agreement.

SME Services Edition 1

Subcontract for SME Services Edition 1

Supply of Major Items of Plant and Equipment Edition 2 Well Services Edition 2

89

Intended Application(s) Major fabrication works; topside installations and hookup; significant topside modifications; construction services contracts for topsides work and similar. Design contracts generally (but excluding well design). Pipelaying; offshore installation; subsea construction; inspection repair and maintenance using diving and other support vessels. With appropriate amendments, also suitable for other contracting arrangements (e.g. EPIC/EPFI). The provision of mobile drilling units on day work.

Procurement transactions involving high volume, low value, or low technical risk. A wide range of offshore and onshore services.

A wide range of services provided by SMEs.

A wide range of services provided by SMEs when acting as sub-contractors. The purchase of complex capital plant and equipment such as gas turbines, compressors and pumps. Service contracts associated with well engineering work.

Appendix B Questionnaire

Job Title:

____________________ (for analysis purposes only)

Company: ____________________ (for analysis purposes only)

Your time to complete the following questionnaire which is being conducted as part of my LLM Oil and Gas Law research dissertation is much appreciated. The purpose of this study is to measure the current use of Industry Standard contracts within various companies who work within the UKCS oil and gas industry. Responses from this questionnaire will be kept strictly confidential, neither the names of interviewees nor their respective organisations will be identified in the dissertation report. 1.

What length of time has your company been involved within the UKCS Oil and Gas industry? 0-6 yrs

2.

7-12 yrs 

13-18yrs 

19 yrs+ 

What is your company’s average annual turnover? £0-£3m

3.





£4m-£10m 

£11m-£25 

Over £26m 

Does your company use LOGIC standard contracts? Yes



No



(if no, go to question 10)

90

4.

Which of the following contracts does your company use? 

Construction Edition 2





Design Edition 2





Marine Construction Edition 2





Mobile Drilling Rigs Edition 1





Purchase Order Terms & Conditions (Short Form) Edition 2 



Services (On- and Off-shore) Edition 2



Supply of Major Items of Plant and Equipment Edition 2



Well Services Edition 2





SME Services Edition 1





Subcontract for SME Services Edition 1



 

5.

What do you/your company see as the advantages of using LOGIC?

6.

Do you qualify/amend/add special conditions to the above contracts? Yes

7.



No



(if no, go to question 9)

Why do you qualify/amend/add special conditions to the contracts and not use them in their original form? And what are the benefits of this?

8.

Does your company have a list of common qualifications/amendments/special conditions that you always apply when using LOGIC, and if so how approximately how many?

9.

Why do you choose not to add any qualifications/amendments/special conditions?

91

10.

Why does your company not use LOGIC Standard contracts?

11.

What contracting structure do you use instead? What are the advantages of this structure?

12.

Does your company use FPAL Model ITT documents? Yes

13.



No



(if no, go to question 14)

Why does your company use the model ITT’s? What are the advantages to your company?

14.

Why does your company not use the model ITT’s?

15.

Is your Company a signatory to Industry Mutual Hold Harmless (IMHH)? Yes

16.



No



Would you be willing to provide further information via interview if required?

92

Yes



No



If you have any additional comments you wish to make on the above topics please make them below.

93

Appendix C Questionnaire Results

Question 1 – Length of Time Company involved in UKCS 0-6 years Number of Companies Number of Companies

7-12 years

13-18 years

19 years +

Total

2

6

3

22

33

6%

19%

9%

66%

100%

Question 2 – Company’s average annual Turn over £0-3M

£4-10M

Number of Companies Number of Companies

£11-25m

Over £26m

Total

0

0

3

30

33

0%

0%

9%

91%

100%

Question 3 – Does your company use Logic? Subsea Engineering Company Companies that use LOGIC Companies that do not use LOGIC

Subsea Company

Operator

Drilling Company

Service Company

Total

5

6

10

3

6

30

0

1

2

0

0

3

Question 4 – Which LOGIC Contracts do you use? Subsea Engineering Company

Subsea Company

Operator

Drilling Company

Service Company

Construction Edition 2

1

1

3

0

1

Design Edition 2 Marine Construction Edition 2 Mobile Drilling Rigs Edition 1

0

0

4

0

1

1

5

10

1

2

0

0

9

2

0

3

1

7

1

4

5

4

9

0

5

Purchase Order Terms & Conditions (Short Form) Edition 2 Services (On- and Offshore) Edition 2 Supply of Major Items of Plant and Equipment Edition 2

4

1

9

1

3

Well Services Edition 2

2

1

7

1

2

SME Services Edition 1

2

1

3

0

0

Subcontract for SME Services Edition 1

1

0

2

0

0

94

Question 6 – Does your company qualify/amend LOGIC Contracts? Subsea Engineering Company Companies that qualify LOGIC Companies that do not qualify LOGIC

Subsea Company

Operator

Drilling Company

Service Company

Total

5

6

10

3

6

30

0

0

0

0

0

0

Question 12 – Does your company use FPAL Model ITT’s? Subsea Engineering Company Companies that use FPAL Model ITT's Companies that do not FPAL Model ITT's

Subsea Company

Operator

Drilling Company

Service Company

Total

0

1

7

0

3

11

5

6

5

3

3

22

Question 15 – Is your Company a Signatory to IMHH? Subsea Engineering Company Companies that are Signatories to IMHH Companies that not Signatories to IMHH

Subsea Company

Operator

Drilling Company

Service Company

Total

5

7

4

0

6

22

0

0

8

3

0

11

95

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99

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Websites http://www.achilles.com/en/PFAL/ITT-Template http://www.businessteacher.org.uk/markets/primary-secondary-marketresearch/ http://www.conocophillips.com/EN/about/who_we_are/our_business/Pages/in dex.aspx http://www.emagister.co.uk/shared/uploads_courses/files_projects_2/106_oil _dubai_web.PDF http://www.fpal.com http://www.imhh.com/about.cfm http://www.imhh.com/benefits.cfm http://www.logic-oil.com/about.cfm http://www.logic-oil.com/construct2.pdf http://www.logic-oil.com/marine2.pdf http://www.masterdeed.com/about.cfm http://www.oilandgasuk.co.uk/knowledge_centre.cfm http://www.oilandgasuk.co.uk/knowledgecentre/supplychain.cfm http://www.oilnergy.com/1obrent.htm#since88 http://www.pilottaskforce.co.uk/data/aboutpilot.cfm http://www.pilottaskforce.co.uk/data/phistory.cfm

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