Monday, June 30, 2014

drilling payment

When I plan subcontracts, there are generally two ways that I prefer to pay for the work: by the unit of x produced, or by time spent. For drilling, most of the time, I prefer to pay by the foot rather than a day rate.

The footage rate is a performance basis. If the driller brings equipment prone to break down or encounters problems with the geology and can't go as fast as he'd planned, then the drilling company is on the hook for that extra time. This carries more risk for the drilling company, so their cost proposal is likely to be on the high side. However, if I have lots of information about the local geology and quirks of the site (for example, if we've already put in a couple of boreholes) and we have a pre-bid meeting, then the drilling company has less risk and will provide a more reasonable footage rate.

If a crew is being paid by the day, then there's less incentive for them to be as efficient as possible, and if they have equipment breakdowns or obvious periods when they're not productive, then I need to have a reckoning regarding how much of that time I'm willing to pay. However, if the work involves a lot of not drilling (they're required to decontaminate the drill rig with toothbrushes, they need to haul all their equipment and investigation-derived waste back to the staging area every night, etc.) then paying by the day does make sense. The drillers would need to have a wildly inflated footage rate to account for all that extra work.

I have zero interest in paying for stuff on a time and materials basis: today the driller used 2.5 bags of sand on this monitoring well, 3 bags of sand on that well, 2 rolls of teflon tape, 3 well caps, 3 well locks, 15 protective casings because they were all installed at once... It's a good way to make things overly complicated, and I don't really care what items were used, as long as the work was done safely and to our standards.

In the past, I've used a mix of payment items (mobilization fee, footage rate for each type of drilling, standby for delays that I cause). If it's a big job with multiple rigs, it's really best to go through and determine how much of each item on a daily basis. Otherwise, the accounting gets... difficult. And generally, the driller has his own items which I don't care about because they'll get rolled into the final invoice back at the office. But as I've gotten older, I've tried to minimize the number of items so that I have the level of accounting I need but the person watching the rig doesn't spend ages trying to figure out what we'll pay for.

On the surface, the intricacies of subcontracts appear overly nitpicky and not all that interesting. But since I've been stuck with massive cost overruns, invoices that bear no resemblance to reality, and heated arguments in the field about who paid for what... it pays to get this stuff right. And it doesn't take all that much effort to do so - you just need to consider what the end goal of the project is and how the subcontract helps or doesn't help that goal.


Chuck Magee said...

Never, ever, ever get into a contract that has a minimum meterage or early termination penalty if it means you can't fire the drill crew. In my very first drilling program our CEO signed a contract with a half millionish penalty for drilling less than 5000 meters. Our manager fire the drillers for being unsafe and incompetent, but he wasn't allowed to because the company couldn't afford it (it would have been a double digit percentage of the startup's cash on hand). So even after we learned everything we needed to know after 1500 meters, and their boss refused to waive the fee, and our boss refused to pay it, so we sat around sweltering in the desert for weeks watching them break shit until their crew accumulated too many injuries to man their rig. It was a fucking nightmare.

Short Geologist said...

Yikes! I've never seen a contract with required minimums, probably for that reason. I haven't kicked firms off-site (I have kicked off individual drillers) but I've definitely blacklisted firms after the job was done.

Chuck Magee said...

One difference might be that this was the "Boom of the century" (until the bigger boom three years later, of course), and they were trying to organize something at short notice. I seem to recall them saying that it was the only rig they could find that was willing to deploy to our very remote (250 km from Alice Springs, 4000 km from Perth home base) site. So in hind sight, it is unsurprizing that we ended up with the dregs of the business.

Hopefully environmental remediation has a more responsible culture than speculative resource exploration.