AVOID LOSING MONEY ON POORLY DRAFTED CONTRACTS

1. AVOID LOSING MONEY ON POORLY DRAFTED CONTRACTS Olga Labai Director

2. 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

3. 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

4. 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.

5. GOOD CONTRACTING PRACTICE Understanding legal aspects of contracts is crucial for company’s 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.

6. GOVERNING LAW JURISDICTION SMART DRAFTING Which law is material law of the contract Where contractual disputes get resolved

7. POOR DRAFTING EXAMPLE: $2.6m purchase order for valves English law & English courts & Arbitration in London

8. 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.

9. 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”.

10. 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.

11. POOR DRAFTING EXAMPLE $2.6m purchase order for valves Delivery Date: ASAP When is that?

12. 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.

13. 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”.

14. 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: 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.

15. 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)”

16. POOR DRAFTING LIQUIDATED DAMAGES PENALTIES

17. SMART DRAFTING The liquidated damages amount should be a ‘genuine pre-estimate’ of the client’s 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.

18. 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.

19. 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 A’s employees; Loss of, or damage to, Party A’s property; and/or Pollution emanating from Party A’s property. All notwithstanding that Party B’s 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.

20. 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”?

21. UNDERSTANDING INDEMNITIES Risk allocation tools, usually based on an ownership and employment Tools to avoid ambiguity regarding party’s 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

22. 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.

23. MACONDO CASE

24. CONTRACTOR ONE CONTRACTOR TWO INVITATION TO TENDER PRE- QUALIFICATION NEGOTIATIONS DUE DILIGENCE POOR DRAFTING SERVICE PROVIDO SERVICES GOODS WORKS

25. contractor (subcontractor 1) Q&A

26. “TRAINING SOLUTIONS EMPOWERING YOUR BUSINESS”