Rock and a Hard Place

When the oil price was rocketing between 2002 and 2008, I was working for a small exploration and production company.

Our operations on the United Kingdom Continental Shelf ran into difficulties when our co-venture partner defaulted on a cash call for the abandonment of a well, and went bust. This left us having to pay the entire costs of the abandoning the well, although we had only a minority interest in the joint venture.

The Department of Trade and Industry told us to get the job done and gave us a deadline for doing it. The implicit but unmistakeable threat was that our aspirations on the UKCS were in jeopardy if we did not meet the deadline.

We were very fortunate to find a rig with a vacant slot, owned by one of the big rig owners. With the rig market extremely tight we had to pay top rates for it.

My concern was not with the rates, but with the terms. We had no bargaining position and the rig owner did not have to negotiate with us at all. They could impose whatever contract terms they wanted, no matter how unfair, take-it-or-leave-it.

Fortunately the rig owner’s commercial manager was a friend I had dealt with twice before in unrelated transactions for other clients. I rang him and expressed my concerns. He said he would discuss it with his colleagues and get back to me.

Two days later he called back. He said he had bad news and good news.

The bad news was that the negotiation would be based on his standard terms, and not ours, and we would have to pay the entire rig costs in advance into an escrow account.

The good news was that he was prepared to negotiate the other terms, and would treat us no differently from any other operator on the UKCS.

His proposed contract terms were not the monstrous and one-sided terms he could have imposed on us, but a reasonable starting point.

We went to meet him and his negotiating team in Aberdeen, where over the course of a day we finalized acceptable terms and signed the agreement.

Despite the vast capital expenditures involved, the commercial side of the upstream is a small community. You come across the same people, in different commercial situations, time and again.

I was grateful to my friend for his courtesy and restraint, and will remember it the next time we meet in the arena.