Service Contracts - It's Good To Share!

A key finding in the Wood Report was the need to drive down costs and remove inefficiencies, particularly if the UKCS was to remain an attractive investment for exploration and production companies and lead to a sustainable recovery in production levels. In response to these challenges, the Maximising Economic Recovery Strategy ("MER Strategy") was developed and is now in force. In tandem, Oil & Gas UK has launched the Efficiency Task Force to improve the international competitiveness of the UKCS by encouraging greater cooperation among operators and the supply chain.

There are many action points that companies will be considering in order to drive efficiencies and reduce costs. One of which will be to focus more closely on contract sharing arrangements. Although the industry has a history of contract sharing, it was generally seen as periphery to operational strategy. The implementation of the MER Strategy will help to shift this focus, ensuring that it is more central to the strategic development and operation of each field and no longer in the margins.

Contract sharing arrangements can be implemented in a number of ways, each with their pros and cons which need to be considered on a case by case basis. They include the simple novation of an agreement at a strategic 'break point', a subletting arrangement, a consortium arrangement or by separate contracts with a sharing agreement.

Novation Agreements

Novation agreements transfer the rights and obligations under a contract to a third party and effectively, a new contract is entered into by the contractor and the third party. The original party is released and discharged from the contract and the third party assumes those rights and obligations under the contract.

Novation agreements are advantageous where the operator no longer requires the services and there are ongoing costs that are being incurred. It may be the case that there is another operator that requires the same service. The novation agreement will discharge the original operator's obligation to pay the costs under the contract and allows the third party operator to be able to use the services.

One noticeable disadvantage with a novation of the original contract is that if the original operator later decides they do require the services of the original service provider, a new contract must be formed with all the associated costs.

As with all things, clarity is required when dealing with contractual issues. A novation agreement...