Introduction to

Drilling
Engineering
Introduction to Drilling Engineering

Rationale
Why is it important for you to learn this material?
Knowing what geological formation contains petroleum and natural gas is only the first step of
many in oil and gas ventures. We must also know the legal description of the property in
question, know who owns the mineral rights on the property, obtain permission from the owners
for access, drilling rights and then for production. We must obtain the appropriate leases, access
rights and surface rights agreements from all respective parties and we must be aware of and
comply with all federal and provincial government and environmental regulations.

Learning Outcome
When you complete this module you will be able to ….
Discuss the ownership and leasing of mineral rights and the differing roles of petroleum
operators and contractors in drilling.

Learning Objectives
Here is what you will be able to do when you complete each objective.
1. Discuss the ownership of mineral rights and the various components that make up oil and gas
leases and surface rights agreements.

2. Discuss the role and responsibilities of the drilling engineering department within a
corporation as compared to a drilling contractor.

3. Identify the components of an oil and gas drilling contract and bid documents.
Performance Evaluation
To show you have mastered the material, here is what you will be asked to do.
1. Define terms identified with bold-italic font.

2. Discuss ownership of mineral rights and be able to describe petroleum and natural gas leases
and surface rights agreements.

3. Compare the role of the petroleum operating company to the role of a drilling contractor in
drilling activities.

4. Identify the differing types of petroleum and natural gas drilling contracts.

Introduction
There are many theories as to how petroleum first came to be but the two most popular ones are
the organic theory and the inorganic theory. Of the two, the organic theory is the more popular
theory of today. This theory states that carbon and hydrogen, required for the formation of oil
and gas, came from the early forms of life on earth. Millions of years ago, tiny marine animal
and plant life were in process of continually falling, in a slow steady stream, to the bottom of
shallow seas and oceans. Most were eaten or oxidized but a portion became entombed in the mud
on the seafloor. Once entombed in the clay, sand and silt, they decayed due to the presence of
bacteria, heat and pressure. Decay removed the oxygen from the trapped organic residues and the
remains gradually broke down into carbon and hydrogen. As the sediment accumulated, the
organically rich clay was squeezed into rich shales. Pressures and temperatures increased under
the weight of thousands of feet of sediment and oil was born. Petroleum was not formed in large
concentrations but, once formed, it migrated through permeable rock until it became trapped in
pools under nonporous rock.

The inorganic theory states that hydrocarbons were created deep in the earth as the earth was
formed. Inorganic scientists hold the view that petroleum is more often found by the large scale
features of the earth’s crust, like the mountain ranges and valleys, than by layers of sedimentary
rock. This view is having a resurgence today as technology improves and we learn more about
the earth’s beginnings.
OBJECTIVE 1: Mineral rights and Leases
When you complete this objective you will be able to…
Discuss the ownership of mineral rights and the various components that make up oil and gas
leases and surface rights agreements.

MINERAL RIGHTS
The first step in finding petroleum is to obtain the mineral rights i.e. the legal rights for the
minerals. In most countries, mineral wealth (including oil and natural gas) is owned by the
provincial, state or national government. Securing the rights to explore, drill and produce will
then differ from country to country.

Mineral estate is the term used in establishing ownership of the oil, gas and mineral deposits
within a specified area.

In the United States, 2/3 of onshore lands are in private ownership and the rights to oil, gas and
minerals are privately owned. The remaining onshore and offshore lands are publicly owned and
administered either by state or federal authorities. Companies bid for the right to drill in
concessions. The bid cost of the parcel and royalties/Taxes assessed by the federal and state
governments must be paid. The remaining monies make up the companies operating costs and
profit. [Concession type agreements]

In SEA and many other parts of the world the mineral rights are held by the government of the
country, foreign ownership is not allowed. In these areas production is allocated through:
Production Sharing Agreements (PSA): Under this type of agreement the
operating company pays for the right to explore and develop a “block” of land.
If commercial petroleum is found the operator will receive a percentage of the production
until exploration and development expenses have been recovered. One the initial capital
expenditure has been recovered the operators share of the production is generally
reduced. The PSA will be for a set length of time and when it expires the entire area will
revert back to the government.

Service Contracts (SC): Under this sort of agreement an operator is “hired” to manage
the resources and is paid an amount that has been agreed upon in the contract. The
operator does not own or share in the production but is paid to manage the operations. In
some cases the payment may be made in the form of production.
PETROLEUM AND NATURAL GAS LEASES
Only the titleholder of the land may grant the right to develop the petroleum and natural gas
resources and the instrument to grant these rights is called a lease, i.e. a petroleum and natural
gas lease.

For consideration (usually money) and for further consideration of receiving a share of
production (called a royalty), the mineral owner (lessor) will give exclusive rights to explore,
drill, develop and produce oil and gas to a petroleum company (the lessee). In return the lessee
develops the lease in a timely, environmentally friendly and prudent fashion.

The party who holds the lease and develops the site is called the operator.

A typical oil and gas lease contains the following:

1. The legal names, dates and signatures of the parties involved.

2. The exact legal description of the property involved.

3. The granting clause specifies the rights of both the company and the mineral owner by
naming the specific purpose of the venture and the privileges each party is awarded. The
company has the right to enter, explore, drill and produce.

4. The habendum clause establishes the term of the lessee’s interests. The first part usually
describes the term for exploration while the second describes the term for production.

5. The royalty clause specifies the royalty arrangements, i.e. an agreement to pay the owner of
the well a portion of the proceeds.

6. Drilling and delay rental clause specifies the penalties if the company does not complete the
well by the specified date in the habendum clause. This protects the owner if the company
decides to abandon the drilling site.

7. Obligations of producer clause obligates the lessee to follow through and explore and
produce the area named in the lease.

Summary
Objective one deals with the ownership of mineral estate, petroleum and natural gas leases and
surface rights agreements. Due process is key for petroleum development as one must know the
exact legal description of the property in question. Then legal can de drawn up for the
exploration and drilling process to continue.

Exercise 1
1. In a petroleum and natural gas lease which information should always be first and foremost?

2. Define the habendum clause of a petroleum and natural gas lease.

3. Outline the difference between a PSA and SC..

OBJECTIVE 2: Operator/Contractor
When you complete this objective you will be able to…
Discuss the role and responsibilities of the drilling engineering department within a corporation
as compared to a drilling contractor.

DRILLING ENGINEERING DEPARTMENT

Petroleum operating companies concentrate on exploring, developing and producing oil and gas
and generally do not own drilling rigs. They hire a drilling company that has the rigs, personnel
and auxiliary support services to do the job. They will set the specifications for the drilling
operation that the drilling contractor will have to carefully follow.

DRILLING CONTRACTOR

The drilling contractor owns the rig and employs the crews working on the rigs. Rig personnel
will usually work on a rotation schedule of time worked equals time off so that the rig site will
actually require two sets of supervisors and 3 complete crews.

The drilling contractor’s crew will normally consist of a toolpusher, a driller, an AD, a
derrickman, a motorman/pumpman, 2-3 roughnecks, and 2-3 roustabouts.

The toolpusher is the person-in-charge of the drill site. He is responsible for the operation and
performance of the rig and will ensure that the well is drilled according to the specifications
established by the operating company and appropriate government body.

The driller reports to the toolpusher and his role is to operate the rig and supervise the rest of the
rig crew.

The AD assist the driller and is generally responsible over seeing the roustabouts.

The motorman/pumpman looks after the engines and mud pumps

The derrickman monitors and records the condition of the drilling mud except when tripping
in/out of the hole. During trips he will control the top of the drillpipe from a platform (monkey
board) high in the derrick of the rig.

Roughnecks assist in tripping by controlling the bottom of the drill pipe on the rig floor. At other
times, they will maintain and repair rig tools and equipment.

Roustabouts provide general labour.

Summary
It is more cost effective for petroleum operating companies to focus on exploring, developing,
and producing oil and gas rather than own and operate drilling rigs. Drilling contractors are
already equipped with the necessary rigs, personnel and auxiliary support services to do the job.

Exercise 2
1. What is the principal role of the drilling contractor?

2. Who is the contractor’s top person on the drilling rig site?

3. What is the role of the derrickman on a drilling rig?

OBJECTIVE 3: Contracts
When you complete this objective you will be able to…
Identify the components of an oil and gas drilling contract and bid documents.

BID DOCUMENTS AND CONTRACTS

The oil and gas operating company will send out a bid proposal and contract to selected drilling
contract companies. The operator will then review the contractor’s bids and award the contract
based on evaluating the bid price, past performance, working relationship, technical competence
and safety/environmental records.

Once the contractor’s bid has been accepted, it is then signed by both parties and becomes a
binding contract. The contract is an agreement that specifies what both the contractor and
operator responsibilities in order to drilled the well according to the specifications. Items in the
contract include the well location, time period and date of drilling, well depth, diameter of the
hole/casing, drilling fluids to be used, equipment and services to be provided and payment
schedule.

There are four basic types of contracts:

1. Meterage
2. Daywork
3. Turnkey
4. Combination

In the meterage contract, the operator agrees to pay the drilling contractor for each meter of hole
drilled. i.e. dollars per meter drilled. In this type of contract the drilling contractor will assume a
larger risk since He may lose money if it is time-consuming for the rig to drill the well. However,
there will be clauses those conditions where the operator will be responsible for delays.

In the daywork contract the operator agrees to pay the drilling contractor for each day the rig is
working. Daywork contracts will stipulate rates of pay based on rig activity. One rate will apply
during the drilling operation and another for standby with/without crew. The amount of
allowable mechanical down time will be specified and the contractor will not be paid for any
time in excess of this

In a turnkey contract the operator agrees to pay the drilling contractor a fixed amount for the
drilling and casing of the well to a specified depth.

In the combination agreements meterage and daywork contracts may be combined. (meterage to
a specified depth and daywork for unusual operations or beyond the agreed depth).

The following are examples of standard contracts, the IAODC is similar, with additional
information if the operation is to be off-shore.
Reprinted courtesy of the Canadian Association of Oilwell Drilling Contractors
Reprinted courtesy of the Canadian Association of Oilwell Drilling Contractors
Summary
Petroleum and natural gas companies (referred to as operators) will send out a bid proposal and
contract to selected drilling contract companies. The operator will then review the contractor’s
bids and award the contract based on selected criteria. There are four different types of drilling
contracts.

Exercise 3
1. What are the four basic types of contracts between an operator and a drilling contractor?

2. Describe a meter contract.

3. Describe a daywork contract.

4. Describe a turnkey contract.

5. Describe a combination contract.

Exercise 1 Answers

1. The legal names of the parties involved and a legal description of the property involved.

2. The habendum clause establishes the term of the lessee’s interests. The first part usually
describes the term for exploration while the second describes the term for production.

4. PSA: Provides for a share of the production from commercial fields. The operator normally
pays all costs of exploration and development (assumes all risks). Once recovery of
exploration and development costs has been achieved the percentage of production will
normally be reduced. At the end of the PSA term all rights revert back to the government.
SC: A n agreement where the operator is paid a fee for the management of the field and
facilities. May also include exploration activities. Usually requires no capital investment on
the part of the operator.

Exercise 2 Answers

1. The drilling contractor owns the rig and employs the crews working on the rigs.

2. The toolpusher is the person in charge of the drill site. He is responsible for the operation and
performance of the rig and to ensure that the well is drilled according to the specifications
established by the operating company.

3. The derrickman’s role is to monitor and record the condition of the drilling mud. During the
lowering/removal of the drillpipe, He will control the top of the drillpipe from a platform high
in the derrick of the rig.

Exercise 3 Answers

1. The four types of contracts are: meter, daywork, turnkey and combination.

2. In the meter contract, the operator agrees to pay the drilling contractor for each meter of hole
drilled, that is, dollars per meter drilled.

3. In the daywork contract, the operator agrees to pay the drilling contractor for each day for the
use of the rig and will stipulate rates of pay based on rig activity.

4. In the turnkey contract, the operator agrees to pay the drilling contractor a fixed amount upon
completion of the well.

5. In the combination agreements, meter and daywork contracts may be combined into the final
agreement.
Module Self-Test

1. Compare the more popular two theories (organic vs. inorganic) of petroleum
development.

2. Explain the term mineral estate.

3. Why don’t petroleum operating companies own drilling rigs?

4. What is purpose of the drilling bid proposal and contract?

5. Is the lowest bid the only criterion for awarding the contract?

6. What are some of the clauses in a typical drilling contract?

Module Self-Test Answers
1. The organic theory states that carbon and hydrogen, required for the formation of oil and gas,
came from the early forms of life on earth. Sedimentary life decayed due to the presence of
bacteria, heat and pressure and the remains gradually broke down into carbon and hydrogen.
Petroleum, once formed, migrated through permeable rock until it became trapped in pools
under nonporous rock.

The inorganic theory states that hydrocarbons were created deep in the earth as the earth was
formed.

2. Mineral estate refers to ownership of the oil, gas and mineral deposits within a specified area.

3. Petroleum operating companies concentrate on exploring, developing and producing oil and
gas and it is more cost effective to contract drilling activities to an outside drilling company
that has the rigs, personnel and auxiliary support services to do the job.

4. A drilling bid proposal and contract are the required documents to formally start the process
of drilling a well.

5. No! A contractor’s past performance, their safety and environmental record and their prior
working relationship with the petroleum company must also be taken into account.

6. Clauses in the contract include the well location, time period and date of drilling, well depth,
diameter of the hole, drilling fluids to be used, equipment and services to be provided and
payment schedule.
Assignment

1. Why is it important to establish the type of agreement before one starts a

drilling project?

2. Why would you request a meterage contract over a daywork contract?

3. What is the role of the company man on location?

4. Why is it important to have all the terms and conditions of a drilling contract
clearly defined prior to the start of operations?

5. Who is responsible for the day-to-day operation of the drilling rig?

6. What kind of production agreement do you think is best? {explain!}

References
Applied Drilling Engineering by A.T. Bourgoyne, M.E. Chenevert, K.K. Millheim, F.S. Young,
SPE Textbook Series Vol 2, 1991.