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AVOID LOSING MONEY

ON POORLY DRAFTED
Olga Labai
CONTRACTS Director
INTRODUCTION

Oil and Gas Consultants is a training consultancy


comprising professionals experienced in various
sectors of international oil and gas.

We provide a wide spectrum of training programs,


business consultancy and contract management
services to our clients.

www.ogc.works
EXPERIENCE - OPERATOR

Sakhalin-2 Project
Sakhalin Energy
Investment Company Ltd.
(Gazprom, Shell, Mitsui, Mitsubishi)
182,4 million tons of oil
633,6 billion cubic meters of gas
First specialised port in Russia
3 offshore platforms
Onshore Processing Facility
800 km pipelines oil and gas
30 thousand people involved
EXPERIENCE MAJOR
CONTRACTOR

Weatherford Iraq (Kurdistan and Federal Iraq)


operations (estimated annual revenue more than USD 1
billion);
Broad range of oilfield services, including drilling;
Focused on improvement of processes related to
revenue-generating contracts;
Major clients of Weatherford include biggest oil and gas
businesses conducting operations in Iraq.
GOOD CONTRACTING PRACTICE

Understanding legal aspects of contracts is crucial for


companys contracting practice and will allow:

a reduction in potential pitfalls in contractual


relationships;
your organisation's exposure to risk be minimised;
potential pitfalls in contractual relationships to be
avoided.
SMART DRAFTING

GOVERNING LAW JURISDICTION

Which law is Where contractual


material law disputes get
of the contract resolved
POOR DRAFTING
EXAMPLE:

$2.6m purchase order for valves

English law & English courts


& Arbitration in London
POOR DRAFTING

SOW is incomplete, not detailed, not reflecting true needs of the


procuring party.

Time lines are not clearly set.

Responsibilities of the parties are not clear.


POOR DRAFTING
EXAMPLE
Attachment A Technical Specification / Scope of Supply

The Production Facility treats the crude oil arriving from [NAME] well by using H2S
scavenger.
[FIELD NAME] crude oil is classified as a sour one in which the H2S concentration in the liquid
phase has been measured between 800-1300 part per million (ppm) .To meet the international
exporting specification, the Crude H2S concentration shall be reduced to 10 ppm. Therefore the
crude oil shall be scavenged with a suitable chemical scavenger. Sulphanox 800 is selected to be
supplied by [SUPPLIER].
Transportation: 1 m3 IBC is preferred otherwise 220 liter drum is also accepted.
Lead time of the first shipment: four (4) weeks after receiving the official Purchase order. Rest of
the shipment: within 24 hours after receiving the official Purchase order.
SMART DRAFTING
Scope of Work:
detailed;
measurable;
tangible deliverables;
good connection with the pricing schedule.

Delivery Schedule:
every phase is linked to specific deliverables;
overall timelines for delivery of SoW.
POOR DRAFTING
EXAMPLE

$2.6m purchase order for valves

Delivery Date: ASAP

When is that?
POOR DRAFTING

Example: inventory section is absent in integrated drilling contract

$4m in materials/equipment got lost at the storage phase

Yes, I am responsible for everything you gave me, client, but what
exactly did you give me again..?

SOLUTION: contract amendment with clear and transparent


inventory/storage accountabilities and documentation substantiating
transfer of materials/equipment.
POOR DRAFTING
Warranty clause:

If the Work or any part thereof is defective in that it fails to conform to such
requirements, Contractor shall perform, at its expense, such remediation as may be
necessary to correct any such defects in the Work brought to Contractor's attention in
writing by Company within one (1) year from completion of the Work or from
completion of the discrete segment which includes the portion of the Work in question,
whichever is earlier. Contractor shall commence such remedial work promptly after
receipt of Company's notice and continue such remedial work in an efficient and timely
manner until it is completed.
SMART DRAFTING

Warranty - an express or implied term in a contract collateral to the


main purpose, such as an undertaking that goods contracted to be sold
shall meet specified requirements as to quality, etc.
Warranty clause:
1)Scope of warranty standards;
2) Remedies if warranty obligation in not met;
3) Term of the warranty;
4) Exclusiveness provision;
5) Limitations of the warranty;
6) Tests and inspection.
POOR DRAFTING

Limit of liability (LOL) does not exclude


indemnity obligations

"The Contractor's maximum aggregate


liability towards Company pursuant to
entering into this Contract or arising as a
result of the breach of any of the terms
herein shall be limited to a sum not
exceeding $200,000 (two hundred thousand
United Sates Dollars)
POOR DRAFTING

LIQUIDATED
DAMAGES PENALTIES
SMART DRAFTING
The liquidated damages amount should be a genuine pre-estimate of the clients
anticipated loss;
A copy of the calculation sheet should be kept on file as a contemporary note of the
estimate;
Document any negotiations which led to the agreed amount;
Document the calculations in the contract or in correspondence;
Ensure that the amount does not amount to a penalty by reference to tests in Dunlop;
If sectional completion is required apportion liquidated damages between the
sections;
Make provision in the contract for a reduction of liquidated damages in the event of
partial possession;
Never insert nil as this will result in no entitlement to damages as a result of delay.
POOR DRAFTING

Indemnities are not reciprocal;

Risk allocation clauses do not address all potential risks;

For drilling contracts indemnity section contains Lost in hole


provisions, which are then reviewed by lawyers.
UNDERSTANDING INDEMNITIES

What are knock for knock indemnities?

In Legal Terms:
Party A (e.g., an operator) indemnifies Party B (e.g., a drilling
contractor) against claims, losses, damages, etc. arising from:
Death of, or personal injury to, Party As employees;
Loss of, or damage to, Party As property; and/or
Pollution emanating from Party As property.
All notwithstanding that Party Bs negligence may have caused or
contributed to the death, personal injury, loss, damage, or
pollution in question.

Party B provides the same protection to Party A.


UNDERSTANDING INDEMNITIES

In Simplified Legal Terms:


Party A will cover losses to its people and property no
matter the cause. B does the same.

Question: What people?

Question: Whose property?

Question: No matter the cause?


UNDERSTANDING INDEMNITIES

Risk allocation tools, usually based on an ownership and


employment

Tools to avoid ambiguity regarding partys liability

Tools to place liability in the hands of the party in the


best position to handle the situation

Tools to avoid future disputes regarding liabilities

Tools to simplify enforcement of insurance obligations


MACONDO CASE

On April 20, 2010, the


Deepwater Horizon
mobile offshore drilling
unit exploded, killing 11
people, injuring dozens,
and discharging millions
of gallons of oil into the
Gulf of Mexico over the
course of 87 days.
MACONDO CASE
POOR DRAFTING

INVITATION
TO TENDER
CONTRACTOR
TWO
DUE DILIGENCE

CONTRACTOR
ONE

PROVIDO
PRE-

SERVICE
QUALIFICATION

SERVICES
NEGOTIATIONS GOODS
WORKS
Q&A
contractor
(subcontractor 1)
TRAINING SOLUTIONS
EMPOWERING YOUR
BUSINESS