*Uche Val Obi, SAN, FCIARB with contributions from Izuchukwu Gideon Okpara, Simbiat Abubakar Okwilague and Lilian Chiwendu Adat.
The evolution that has taken place in the oil and gas mining and extraction industry over the years has been quite phenomenal. When mining and extraction in the oil and gas industry commenced, it was done manually. This later evolved to more sophisticated drilling rigs which soon gave way to Floating Production and Storage and Offloading (FPSO) vessels, and now to Floating Production Drilling Storage and Offloading (FPDSO) vessels. The resultant effect of the evolution that has taken place in the industry, inter alia, is the improved efficiency and massive enhancement in production, but this has not brought about a complete elimination of risks and liabilities as the industry continues to record damages to the environment, loss of equipment, loss of finances and loss of lives.
In this article, the Authours examine the legal obligations of the parties to a drilling contract under the European Union, United Kingdom and Nigerian Laws, and how these laws perceive, regulate and enforce risk allocation between the parties to a drilling contract. Risk in this regard was differentiated from other similar concepts like uncertainty, probability, and hazard, concepts that, though similar to risk and in many cases used interchangeably, have clear distinctions from risk as covered by the laws referred to.
Clearly, legal obligations in the oil and gas sector, particularly as regards risk managements and health and safety and environment, has continued to evolve as new technologies develop and the operational environment changes. For instance, the Piper Alpha, the Montara and the Macondo Golf of Mexico accidents have created new regimes in regulation in both the European Union and the United Kingdom. Although Nigeria has had its fair share of accidents, yet there is no such relationship between changes in operational environments and corresponding change in legal regimes.
The Authours have herein considered the different contractual risk allocation/management options for players in the industry including Indemnity, indemnity and hold harmless, mutual indemnity and mutual hold harmless, exclusion and exemptions, limitation of liability, liquidated damages, and insurance. Also considered by the Authours is the rationale for risk allocation such as industry practices, doctrines of tradition, best knowledge, clay feet, and accountability, as well as legal and economic considerations.
Oil and gas mining and extraction have evolved over the years from manual drilling from moored monohulls, jack - up and semi - submersible platforms to more sophisticated drilling rigs, and even now to modern more enhanced Floating Production and Storage and Offloading (FPSO) vessels. This latter has also evolved to Floating Production Drilling Storage and Offloading (FPDSO) vessels. All of these innovations have made drilling of crude oil and gas much easier, reduced costs and risks and improved efficiency. Commendable as these developments and improvement are, they have not been able to completely eliminate risks and liabilities as the industry has continued to record risks and liabilities from operations including damages to the environment, loss of equipment, loss of finance and loss of lives.
In order to properly manage exposure to some of these risks, drilling activities have diversified and segmented, allowing for specialization, where a party can take up a part, but critically essential component of the whole process, such as cementing, blowout preventers, casing and wellhead management, equipment supply, mud supply, and so on, including response services, catering, etc. This has also come with it a lot of advancement in drilling contracts in the bid to capture the technical and sophisticated relationships, responsibilities and liabilities which come with the several parties offering several services, as can be seen in the relationship in the Deepwater Horizon Rig off the Gulf of Mexico in the Macondo prospect owned jointly by BP (65%), Anadarko Petroleum (25%) and MOEX Offshore 2007 (10%), and operated by Transocean through a rig built by Hyundai Heavy Industries for Transocean. Halliburton provided specialist cementing services, while Cameron supplied the Blowout Preventer amongstseveral other services and subservices provided on the Macondo prospect. This shows a glimpse of drilling activities and contracts.
Drilling contracts are contracts that allocate certain risks on a reciprocal basis which includes personal injury, damage to property, certain pollution risks and consequential damages, regardless of fault.1 Oil and gas exploration and production (E&P) is in all probability, the riskiest in terms of capital intensity, long payback period; technological dependence and a host of legal and environmental compliance requirements. Thus, a drilling contract is one of the most important contracts for an oil and gas operator. 2 Before a drilling contract is executed, there should be existing licence(s) authorising the exploration and production activities which will correctly spell out the specified acreage allocated for such drilling activities. In Nigeria, licences/leases were granted by the Minister of Petroleum repealed Petroleum Act who was empowered to grant Oil Exploration Licence (OEL), Oil Prospecting Licence (OPL) and Oil Mining Leases (OPL) to successful qualified applicants. The power to grant Petroleum Exploration Licence (PPL) and Petroleum Mining Lease (PML) is retained by the Minister of Petroleum in the Petroleum Industry Act (PIA). 3 However, the grant of Petroleum Exploration Licence (PEL) is now the responsibility of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC). 4
Drilling contracts are the crux of upstream operational agreements5 . Parties to these types of contracts are faced with great risks due to the extractive activities in the upstream sector of the oil and gas industry and the complexities of doing business in general6 . This can be accorded to the regulatory, compliance, operational and social requirements expected to be fulfilled by the parties7 . By the foregoing, parties to drilling contracts have had to rely on mechanisms for allocating risks in a bid to realize their individual contract objectives, while also ensuring that the risks assumed by the parties are well tailored to be managed by them, considering all relevant factors. 8
It is no secret that the oil and gas industry is volatile, capital intensive and replete with risks9 . Hence, contractual risks allocation is negotiated by the parties with the aim of apportioning the risks among the key players to the oil and gas contract10. Risks need to be predetermined, evaluated, and their consequences understood by parties to a contract; this is essential in managing risks successfully11 .
It should be noted that risk allocation is dependent on various factors, such as, the balance of power between the parties, prevailing market/economic conditions, and the affiliation of parties to drilling associations12. Furthermore, external factors such as the jurisdiction of choice of the parties and the jurisdiction to which the contract is subject to also needs to be considered when allocating risks in drilling contracts. 13 When allocating risks in an oil and gas contract, two fundamental rules must be considered. Firstly, risks should be allocated to parties best suited to manage them14. Secondly, risks should be allocated when appropriate to accomplish project objectives15
and complexities faced by parties in a contract in allocating risks between themselves as well as review existing legislative interventions in risk allocation.
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1. Opus Kinetic People Empowerment, 'Understanding Drilling Contracts' https://www.opuskinetic.com/2019/02/understanding-drillingcontracts/#:~:text=The%20drilling%20contract%20is%20one,damages)%2C%20regardless%20of%20fault.assessed 26 May 2022.
3. PIA 2021, s 3 (1) (g).
4. PIA 2021, s 71 (1).
5. Marietta Katheryn, 'Drilling Contracts - Avoiding Misunderstanding' (King & Spalding: Energy Newsletter, 13th February) https://www.kslaw.com/blog-posts/drilling-contracts-avoiding-misunderstanding-2 accessed 3 November 2021
6. Ofoegbu Kelechi, 'How Contractual Risk Allocation Provisions of Oil and Gas Contracts Have Been or May Be interpreted by an English Court – A Case Study of Some Model Offshore Drilling Rig Contracts Developed in the United Kingdom, Canada and the United States of America' (University of Dundee, June 2018) https://discovery.dundee.ac.uk/ws/portalfiles/portal/28644233/Thesis_8_September_2018_Clean_Copy_.pdf accessed 3 November 2021
9. S. C. Dike and Justice Ezechi Chigonu, 'Risk Allocation in the Oil and Gas Industry'  5(1) Journal of Private Law 171 – 197.
12. Ofoegbu Kelechi, 'How Contractual Risk Allocation Provisions of Oil and Gas Contracts Have Been or May Be interpreted by an English Court – A Case Study of Some Model Offshore Drilling Rig Contracts Developed in the United Kingdom, Canada and the United States of America' (University of Dundee, June 2018) https://discovery.dundee.ac.uk/ws/portalfiles/portal/28644233/Thesis_8_September_2018_Clean_Copy_.pdf accessed 3 November 2021.
14. S. C. Dike and Justice Ezechi Chigonu, 'Risk Allocation in the Oil and Gas Industry'  5(1) Journal of Private Law 171 – 197.
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