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A B E R D E E N B U S I N E S S S C H O O L

Master of Business Administration

INDIVIDUAL ASSIGNEMENT

Module 2014 / 2015: BSM578 - Oil and Gas Contract Law

Contractual risk in upstream oil and gas projects is of great importance to both

operators and contractors.

Critically evaluate this statement by examining an industry incident (such as the Deep Water

Horizon, Piper Alpha, etc.) where the issues of liabilities and indemnities gave rise to a

dispute between the operator and contractor.

Analyse the above, discuss and illustrate your answer with concrete examples and relevant

cases and sources.

Pedro Nóbrega – student number 1315223

21/12/2014

(3287 words, 27 pages)

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01. Introduction

This research paper aims to give a global view of the relationship between

operators and contractors in the Oil and Gas industry, more specifically on the

topic of contractual risk.

According to Johnston (1994, pp. 297), “Operator is defined by an Oil

company operating in a country under a production sharing contract, a service

contract or other type of contract on behalf of the host government for which it

receives either a share of production or a fee”.

Normally Oil and Gas companies turn to service companies to make most of

the work, including building and operating drilling facilities, providing not only

material and equipment, but also expertise and human resources. Also,

service companies have been fundamental in the evolution of the techniques,

by promoting horizontal drilling technical breakthroughs in oil and gas shale

extraction, for example.

Nevertheless the relationship between operator and services companies is full

of challenges, including some drawbacks, and through the times they have

engaged with one another towards common objectives, trying do achieve

deeper and more challenging explorations while charring risks and gains.

This paper will firstly give an insight into the industry, it will then analyze some

general contract issues, thirdly it will consider the Macondo accident and

finally it will include some considerations about risk management between

operators and contractors.

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02. Industry In the Oil and Gas industry there are several drilling and service companies,

and some of them quite impressive ones. For instance, Halliburton is

specialized in pipelines and project management, boasting an income of

nearly US$15 billion and 50,000 employees; Schlumberger specializes in

drilling and cementing, has an income of US$23 billion, 105,000 employees;

Transocean specializes in rig construction and services, has an annual

income of US$12 billion, 21,000 employees.

Mainly, these service companies can be separated in logging (borehole

evaluation, cement and casing evaluation, fluid sampling, production logging,

etc), drilling related (directional drilling, measurements, etc.), pumping

services (cementing, reservoir stimulation, fracturing and acidizing, etc.) and

well completions and productivity (production testing, reservoir monitoring and

control, etc.).

The contractual relationship between operators, contractors and sub-

contractors can be based in company forms (contractor and operator drafted)

or trade group forms (IADC, AIPN Model International Forms, LOGIC, etc.).

Nevertheless, company forms are one-sided, often resulting in contentious

negotiations, in a battle of forms where each part seeks to take advantage of

the situation by trying to impose its model. To solve this and to avoid long and

costly negotiations AIPN agreements and CRINE / LOGIC forms, having been

designed by specialized committees, try to consider the needs of both parties.

The objective is to have available a well-balanced form of a contract, and this

can be found in the models.

Nevertheless, lawyers tend to transform legal risk in business risk and for that

reason they must ponder the “what if” and “what can go wrong” issues.

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The service contracts are often classified according to the manner of

payment: daywork (contractor pay by day, generally without regard to

progress), footage (contract is paid by foot of hole drilled), turnkey/lump sum

(contractor paid for completed service or project), cost plus (contractor paid

for cost of service plus a profit) or risk service (contract paid by results). The

norm is the daywork contract, and even in the other models, daywork

provisions are commonly included to address special circumstances.

For instance, in the Deep Water Horizon exploration, BP rented the rig with

their specifications for 5 years and paid to Transocean nearly US$ 0.5 million

of a day-rate. Before the accident, BP had agreed in a renovation made by

Transocean that was going to cost US$ 1 billion, corresponding in an increase

in the day-rent of US$ 1 million.

In addition, well service pricing tends to outpace changes in oil prices (in both

directions). In other words, as the price of oil goes up (as it did in 2010-2011),

demand for oil field services rises as well. The service companies earn money

by a high percentage use of their equipment and where its commonly said

that drilling companies need to be drilling all the time. Most importantly, this

characteristic adds a considerable challenge for IOC, since they have agreed

on work commitment to HG, based on estimates and not on real prices

(appendix 1).

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03. Contract Aspects

When facing a contract between operators and contractors several answers

need to be clarified, primarily based on work/well site concerns: how many

people will be involved (normally the operator will have one person, since the

work is done by the contractors), duration (hours, day, weeks to perform), how

many subcontractors are involved, how long they will stay on site, will the

activity be continuous and sequential, what tools/equipment/products will be

needed and become worn (more often than not the tools are more expensive

than the work), are they pollutant/radioactive/explosive, will the installations

be leased or sold to operator (the matters of ownership and responsibility).

Yet, the responsibility of transportation of men and equipment to and from the

worksite is an important detail when addressing costs and risks. The majority

of accidents happening or equipment being lost takes place during the

transportation and loading/unloading processes.

In sum, time is money, and a very well defined plan is crucial to the success

of the operation, and this must be specified in the contract.

According to Smith, (2010, pp. 653) “despite the variety of service contracts

available, any type of service contain provisions addressing the following

matters”:

- Technical specifications

- Provisions specifying which party is to furnish particular labour,

equipment, supplies, transportation, and room and board

- Payment and security of payment provisions

- Limited representations and warranties

- Suitability, quality of the tools

- Contractor´s status as “independent”

- Timely and untimely performance

- Remedies and breach

- Risk allocation, including a force majeure provision

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- Compliance provisions

- Dispute-resolution and choice of law provisions”.

However hardly ever will contractors give a fitness for purpose, so the

specifications are the operator’s responsibility (e.g. some equipment that is

suitable for only one kind of environmental context).

Normally lawyers allocate risk in the contracts with the help of risk

management departments, providing remedies in a case of a breach (despite

their difficulty) and putting in place a dispute resolution instrument (by court,

arbitration, etc.).

Yet, concerning well services warranties and remedies, usually operators and

contractors have different approaches and intentions. While contractors

generally may warrant specifications, good and workmanlike manner, accord

with industry custom and practice, absence of defects, they generally won´t

warrant fitness for purpose, correctness and accuracy of data (e.g. seismic or

log data), results and interpretations.

In this regard, potential contract remedies for breach are put in place: repair

(typical one), replace or re-perform, nonpayment for services and standard

parties’ provisions generally waive consequential and punitive damages.

But these remedies are logical only when considered between the two parties,

and not extendable to a third one.

Nevertheless, it is important to bear in mind that subcontractors and supplier

warranties should be transferable to the operator and the relationship of

warranties to overall liability caps.

(Appendix 2 and 3 – Insurances and Oil Spill)

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04. Macondo Oil Spill

BP Deepwater Horizon occurred on March 2010, and from BP point of view

(BP Report, p. 181), in this accident several things went wrong, including well

integrity being compromised (due to cement failure and mechanical barriers

failure), hydrocarbons entering the well bore undetected / well control lost

(due to pressure testing problems and response problems), hydrocarbons

ignited on platform (surface containment problems and fire and gas systems

problems), and complete failure in the emergency operations (Blowout

Prevent (BOP) failure).

BOP is the equipment of last resource - when you press it the equipment

below will be lost, and in the Macondo case it didn´t work the way it was

supposed to have worked.

The commission responsible for analyzing this accident reached the following

conclusions:

Source: BP Deepwater Horizon Accident Investigation Report

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BP was found guilty of gross negligence.

Several experts were surprised at this decision since in USA law it is typically

difficult to prove gross negligence (it takes a lot to find an entity accountable

for gross negligence). On top of that, in the Oil and Gas history only a few

companies were ever considered accountable for gross negligence.

There is an argument over the fact that each of these failures, when taken in

isolation, is never enough motive for gross negligence, but the combinations

have put BP in a fragile situation since sequential simple acts of simple

negligence can lead to gross negligence. Yet, there are experts that defend

that these combinations of breaches must be judged in isolation and not in

combination, and this has resulted in a recent attempt by BP to get a different

court resolution. In addition BP appeal to conscious disregard of the facts,

since the company didn´t know about well integrity.

In sum, BP didn´t know but they didn´t test or follow Halliburton / Transocean

recommendations on cement requirements and spacers.

Recently it was found that BOP was repaired not by original equipment and

not by the original company, which implied losing the warranties of the job.

Human error was also present due to the misreading of the instructions.

In these sorts of accidents some direct costs (loss of rig, containment,

cleanup, lost oil, litigation costs and investigation) and some indirect ones

(loss of life / injuries, clean up, lost royalties/incomes, public reaction and

investor reaction) must be pointed out.

In the first place the contractual relationship between entities must be closely

analyzed:

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Source: BP Report

As far as USA government is concerned, BP, Andarko and Moex are the

entities accountable if something goes wrong with this exploration. So, in

theory, Andarko and Moex are as liable as BP.

JOA (Joint Operating Agreement) was signed between operator and non-

operator and this specific element now protects operator from negligence.

BP is the operator and makes several service contracts, Transocean, Smith,

Halliburton, Cameron and Weatherford being the main ones. Each of these

contracts will have several risk allocations, liabilities and indemnities.

An analysis will be made of the BP contracts, based on the service contracts

of IADC (International Association of Drilling Contractors) daywork onshore

contract.

According to the basic rules of the Oil and Gas Lease (OGL), BP, while the

operator, is responsible for Safety and Environment (including spill) and all the

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lessees (BP, Anadarko, Moex) are jointly and severally liable to USA for

breach of lease.

According to the basic rules of the JOA,  BP, Anadarko and Moex are liable for

all well costs, including spill costs, unless BP has been involved in “gross

negligence” or “willful misconduct”.

Each service contract established is different, but they do not contain robust

performance warranties (long expire), do contain no-fault indemnities for injury

and property damages and do make BP largely responsible for blowouts

(especially blowout control).

So BP is assuming a huge contractual responsibility. It´s important to notice

that the rig belongs to Transocean, and most of the workers are not BP

employees.

Drilling contract will be the focus since it is the activity involving the higher

risks.

According to Downey (2009)   “drilling rig contracts exist as most upstream oil

explorers and producers do not own rigs, rather they lease them from

independent rig owners. Rig contractors usually provide crews to operate the

equipment. “

The IADC contract states that (appendix 4):

- Operator is generally responsible. Contractors are generally working

under Operator directions

- Contractor is responsible for its equipment and employees and those of

its subcontractors but only indemnifies Operator and not Operator’s

other contractors

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- Operator responsible for its equipment and employees and those of its

other contractors but only indemnifies contractor and not contractor’s

subcontractors

In sum, if the contract signed between parties were the IADC form without

alterations BP would have to indemnify everybody and would not be allowed

to deflect to other contractors these considerable costs.

Yet, according to IADC model:

- Contractor responsible for surface equipment, except if equipment is

damaged due to unsound location or corrosive elements in hole or

additives

- Operator Responsible for In-hole equipment

- Operator responsible for their equipment

- Operator responsible for the hole

- Operator responsible for underground damage

Still in the IADC:

- Operator is responsible Materials Furnished by Operator (article 14.7)

- Operator is responsible for Liability for Wild Well (article 14.10)

- Contractor is responsible for direct pollution from its equipment and

supplies (14.11)

- Operator responsible for all other pollution/contamination, including

third parties (14.11)

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05. Importance of Risk Management As a rule in the Oil and Gas industry, risk assessment can be split in two

parts: control and finance, where control is made by avoiding, reducing or

eliminating problems (for instance through safety and security proceedings)

and finance is dealt with through transferring (better laws, fees), insuring or

assuming.

Nevertheless the Operator’s risk exposure is huge (gigantic investments), but

a strategy for reducing risk is allocating risk to other parties (this is more

difficult to do when oil prices are high, since service companies have more

work to do,  so having more bargaining power).

Yet, the Operator must maintain a consistent risk management strategy

throughout all related contracts (drilling contracts and other services).

It is important to notice that the drilling contract is the key driver, being an

essential contract for the Operator. Usually drilling contract provisions express

commercial terms, indemnities, risk allocation, responsibility, consequential

damages waiver and insurance provisions.

Before negotiating it is important to identify potential risks to contracting

parties and to third parties and to evaluate insurance coverage’s.

Only after these clarifications have been laid out is it efficient to negotiate an

efficient risk allocation.

During negotiations companies should avoid increasing their risk and overall

risks, avoiding intersecting responsibility for particular risks (otherwise

duplicate insurance may be needed) and should negotiate provisions that will

reduce possibility of litigation.

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In JOAs operators and non-operators need to be aligned, since you may be

the operator today, but otherwise tomorrow. In service agreement there is a

typical contract negotiation: “its just business”.

Concerning the transfer of risk, it should be borne in mind that indemnity, risk

provisions and details are critically important, and that one or two different

words in these long contracts, can make a huge difference.

It is important to be careful to avoid a battle of forms, by understanding the

company’s standard contract and counterparty’s standard or model contract.

Most prominently, an insolvent or borderline insolvent counterparty may

readily agree to unlimited legal and financial exposure.

On top of that some standard procedures (an minor possible events) need to

be negotiated up front by the operator (for instance – to negotiate a contract

to turn out a fire in a platform).

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06. Risk Management Methodology

According to indemnity terminology, the Indemnitor (assuming party,

assuming risk) defends and pays or reimburses, while the Indemnitee

(protected party) is defended and paid for or reimbursed.

Realistically speaking, one party’s protection is the other party’s burden, and

according to Smith (2010) indemnities can be drafted in various ways:

promise-based, fault-based, activity (time based) or status based.

In promise-based indemnities, the operator shall return all leased equipment

in good working order, excepting ordinary situations, and operator indemnifies

contractor for loss or damage.

In fault-based indemnities, the law is emphasized, where the assuming party

indemnifies for loss caused by its own negligence, which requires duplicate

insurance and can result in fact finding to identify who is at fault.

In activity- or time-based indemnities, a party indemnifies for loss assessed

upon activities or timing.

Most contracts are status or control based, where there is the allocating of

loss, regardless the cause, based in one real factor (each party takes

responsibility on their employees and equipment). The assuming party usually

agrees to defend and indemnify from claims arising out of work and

regardless of cause.

Status based indemnities, in theory, eliminate litigation between contracting

parties. But, in practice, litigation may result due to the magnitude of large

losses, poorly drafted risk allocation clauses or unforeseen issues.

Contracts based on status/control indemnities can be classified as simple or

mutual indemnity. Simple contracts (sometimes called craw-down or

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hardcore), imply that only one party (assuming party) indemnifies (protects)

the other party (protected party) for particular risks regarding property,

persons, or interests. Mutual Indemnity, often called “Knock for Knock”,

implies that both parties indemnify (protect) each other for similar risks (each

party is an assuming party and a protected party).

But reciprocal indemnities are often contractually unbalanced, as specific

contract language sometimes defines that one party offers more protection

than the other party offers. Reality shows us that most indemnities are

operationally unbalanced, since the operator usually has one person and

contractors have a number of them.

In the basic status-based indemnity, one party assumes the risk in property

(since it’s his own) and assumes the risk of the people under its control.

Thus the controlling part (Operator) is the assuming part, which indemnifies

the protected part regardless of cause for any harm to assuming parts

controlled people and property.

In theory the Operator is best able to manage risk of loss or damage to owned

or leased property through proper care and maintenance, property insurance

and business interruption insurance.

On the one hand, property risk is usually easier to negotiate than personnel

risk, depending on availability of affordable insurance, since property values

are readily determined.

On the other hand, personnel indemnities are more difficult to negotiate, since

it is difficult to determine the value of people. Relative risk depends on

particular probability of serious injury and the number of people each part has

at the work site at particular times and under particular circumstances.

Additionally, the employing party is best able to manage the risk of injury or

death of its own employees through limiting exposure, proper training and

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safety practices, worker's compensation insurance, employer’s liability

insurance, etc.

Third parties indemnities are even hardest to negotiate, since either party

doesn’t want to be responsible for third ones. It is important to note notice that

there are different kinds of third parties: firstly, entities that participate in the

exploration process and secondly the real external parties, like for instance

fishermen. It might be a default in the contract, but it should be referred to in

the negotiations.

It is important to notice some considerations about indemnities, negligence

and gross negligence that can establish a higher risk to each party individually

and collectively (Appendix 5).

In Deepwater Horizon Indemnity Claims Jan. 11, BP argued that it should not

be required to indemnify Halliburton from damages arising out of Halliburton’s

gross negligence. Halliburton wasn’t found to be gross negligent.

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07. Conclusion

Within the next decades, the Oil and Gas industry will face significant

opportunities and numerous challenges. IOCs will find it harder to access new

oil reserves and will need to turn to unconventional ways of exploring

resources (deepwater, artic, shale oil, shale gas, etc.), while trying to optimize

the investments already made. It is to be expected that the industry will be

pressed, in their financial an human resources capabilities, in order to meet

present and future consumers’ needs.

The business model has come under scrutiny after BP´s Macondo accident, in

the Gulf of Mexico, in 2010, and it is to be expected that as result of that

incident only large companies (operators and contractors) will be able to

handle the rising costs and risks.

Some experts have put considerable thought on the willingness of large and

small companies to work together, since the small ones may avoid projects

due to financial restrictions and potential liabilities.

Nevertheless, new practices and technologies will be put to practice in a

context where risk management will be essential to address business

opportunities, and success will naturally derive from them, through engaging

and spreading the risk of exploration in a responsible way.

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Bibliography and references

BP Deepwater Horizon Accident Investigation Report

BP Energy Outlook 2030 (version 2013)

Devereux, S. 1998. Pratical Well Planning and drilling Manual. 1st Edition.

Oklahoma. PennWell.

Downey, M. 2009. Oil 101, Woonden Table Press

Hilyard, J. 2012. The Oil and Gas Industry - A nontechnical guide. 1st Edition.

Oklahoma. PennWell.

Inkpen A.C., & Moffett M.H., 2011. The Global Oil and Gas Industry:

Management, Strategy and Finance, PennWell Books

Jacoby, D. 2012. Optimal Supply Chain Management in Oil, Gas and Power

Generation. 1st Edition. Oklahoma. PennWell

Johnston, D., 1994. International Petroleum Fiscal Systems and production

sharing contracts. PennWeel, Oklahoma

Gordon G., 2010. Oil and Gas Law: Current Practice & Emerging. Dundee

University Press

Rosenhal 2013. Integrated operations in the oil and gas industry:

sustainability and capability development

Smith E., 2010. International Petroleum Transactions, Third edition, Rocky

Mountain Mineral Law Foundation

Spring, M. 2009. Service, services and products: rethinking operations

strategy.

Yergin D., 2003. The Prize – The epic quest for oil, money and power, Free

Press, London

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Appendix 1 - Some references of industry costs

1 drilling bit - US$ 0.1 million

1 onshore well US$ 1 million

1 horizontal onshore well US$ 10 million

1 shallow water – US$ 50 million

1 deepwater – US$ 250 million).

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Appendix 2 - Insurance

2001 - the world changes in regard to risk management, due to terrorism

(World Trade Center episode) and to oil and gas industry accidents (Macondo

accident and capsized Petrobas Platform).

In 2005, in the Golf of Mexico there were severe damages for insurance

companies in the wake of the Katrina and Rita hurricanes.

2008 was another bad year in the Golf of México (Ike and Gustav).

In those years the insurance companies lost considerable money, and as a

result premiums skyrocketed: for some hurricane areas there were increases

of as much as 400% and coverage became dramatically limited.

As a global consequence the risks of the Oil and Gas industry increased due

to the fact that insurance companies are nowadays more strict and introduce

more limitations in the contract.

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Appendix 3 - Oil Spills

The following world’s largest oil spills can be pointed out:

1) Arabian Gulf Spills, Persian Gulf 1991, 520 million gallons, acts of war

2) Deepwater Horizon, GoM, USA 2010, est. 205 million gallons, well

3) Ixtoc I, GoM Mexico 1979 , 140 million gallons, well

4) Atlantic Empress, Trinidad and Tobago 1979, 90 million gallons, tanker

5) Fergana Valley/Mingbulak, Uzbekistan 1992, 88 million gallons, well

6) ABT Summer, 700 n.m. from Angola 1991, 82 million gallons, tanker

7) Nowruz Field Platform, Persian Gulf 1983, 80 million gallons, well

8) Castillo de Bellver, Saldanha Bay, South Africa 1983, 79 million gallon,

tanker

9) Amoco Cadiz, Brittany, France 1978, 69 million gallons, tanker

10) MT Haven, Mediterranean Sea near Italy, 1991, 45 million gallons, tanker

Most of these accidents have changed the industry forever.

The Santa Barbara Spill, which ocurred in 1969, is now the third largest (after

the Exxon Valdez and Deepwater Horizon) and led to a moratorium on

offshore oil drilling, which helped fuel environmental movement of 1960s and

70s.

In 1982, the Ocean Ranger accident (1982), in the Canadian Atlantic, a semi

– submersible drilling for Mobil, sank killing all 84 crewmembers. This

accident let to much tougher Canadian safety regulations.

In 1988, the Piper Alpha spill, in the North Sea (UK), where a platform

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operated by Occidental was destroyed by explosion and fire, killed 167,

leaving 59 survivors. This led to much tougher UK safety regulations and

resulted in important UK judicial decisions on indemnity law.

In 1989, there was the Exxon Valdez Oil Spill, in Alaska, where a tanker

struck Bligh Reef, spilling nearly 11 million gallons. This led to an oil pollution

act (1990).

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Appendix 4 – IADC details

- Operator is normally responsible. Contractors are generally working under

Operator directions

The Preamble states that:

“Except for such obligations and liabilities specifically assumed by

Contractor, Operator shall be solely responsible and assumes

liability for all consequences of operations by both parties while on

a Daywork Basis, including results and all other risks or liabilities

incurred in or incident to such operations.”

- Contractor is responsible for its equipment and employees and those of its

subcontractors but only indemnifies operator and not Operator’s other

contractors

14.8:

“Contractor's Indemnification of Operator: Contractor shall release

Operator of any liability for, and shall protect, defend and indemnify

Operator from and against all claims, demands, and causes of

action of every kind and character, without limit and without regard

to the cause or causes thereof or the negligence of any party or

parties, arising in connection herewith in favor of Contractor's

employees or Contractor's subcontractors of any tier - inclusive of

any agent or consultant engaged by Contractor - or their

employees, or Contractor's invitees, on account of bodily injury,

death or damage to property. ...”

- Operator responsible for its equipment and employees and those of its

other contractors but only indemnifies contractor and not contractor’s

subcontractors

14.9:

“Operator's Indemnification of Contractor: Operator shall release

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Contractor of any liability for, and shall protect, defend and

indemnify Contractor from and against all claims, demands, and

causes of action of every kind and character, without limit and

without regard to the cause or causes thereof or the negligence of

any party or parties, arising in connection herewith in favor of

Operator's employees or Operator's contractors of any tier

(inclusive of any agent, consultant or subcontractor engaged by

Operator) or their employees, or Operator's invitees, other than

those parties identified in Subparagraph 14.8 on account of bodily

injury, death or damage to property...”

- Contractor responsible for surface equipment, except if equipment is

damaged due to unsound location or corrosive elements in hole or additives

14.1:

“Contractor's Surface Equipment: Contractor shall assume liability

at all times for damage to or destruction of Contractor's surface

equipment, regardless of when or how such damage or destruction

occurs, and Contractor shall release Operator of any liability for any

such loss, except loss or damage under the provisions of

Paragraph 10 [sound location] or Subparagraph 14.3. [H2S, CO2,

or other corrosive elements that enter the drilling fluids from

subsurface formations or the use of corrosive or abrasive additives

in the drilling fluids.”

- Operator Responsible for In-hole equipment

14.2:

“Contractor's In‐Hole Equipment: Operator shall assume liability

at all times for damage to or destruction of Contractor's in‐hole

equipment, including, but not limited to, drill pipe, drill collars, and

tool joints…”

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- Operator responsible for their equipment

14.4:

“Operator's Equipment: Operator shall assume liability at all times

for damage to or destruction of Operator's or its co-ventures', co‐

lessees' or joint owners' equipment, including, but not limited to,

casing, tubing, well head equipment, and platform if applicable,

regardless of when or how such damage or destruction occurs, and

Operator shall release Contractor of any liability for any such loss

or damage.”

- Operator responsible for the hole

14.5:

“The Hole: In the event the hole should be lost or damaged,

Operator shall be solely responsible for such damage to or loss of

the hole, including the casing therein. Operator shall release

Contractor and its suppliers, contractors and subcontractors of any

tier of any liability for damage to or loss of the hole, and shall

protect, defend and indemnify Contractor and its suppliers,

contractors and subcontractors of any tier from and against any

and all claims, liability, and expense relating to such damage to or

loss of the hole.”

- Operator responsible for underground damage

14.6:

“Underground Damage: Operator shall release Contractor and its

suppliers, contractors and subcontractors of any tier of any liability

for, and shall protect, defend and indemnify Contractor and its

suppliers, contractors and subcontractors of any tier from and

against any and all claims, liability, and expense resulting from

operations under this Contract on account of injury to, destruction

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of, or loss or impairment of any property right in or to oil, gas, or

other mineral substance or water, if at the time of the act or

omission causing such injury, destruction, loss, or impairment, said

substance had not been reduced to physical possession above the

surface of the earth, and for any loss or damage to any formation,

strata, or reservoir beneath the surface of the earth.”)

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Appendix 5 - Basic indemnity drafting considerations IADC contracts

Indemnify and defend against all claims, means

“... all claims, damages (excluding punitive or exemplary damages),

liabilities, losses, demands, liens, encumbrances, causes of action

of any kind (including, without limitation, actions in rem or in

personam), obligations, costs, judgments, interest, and awards

(including, without limitation, legal counsel fees and costs of

litigation if awarded as part of a judgment in favor of the Person

asserting the Claim) whether created by law, contract, tort,

voluntary settlement, or otherwise ....”

“Negligence” means:

“...any sole or concurrent negligent act or omission, fault (including,

without limitation, pre‐existing conditions), strict liability, breach of

duty or warranty (statutory or otherwise), product liability, defect

(whether patent, latent, or pre-existing) of any property, equipment

or materials, unseaworthiness, and unairworthiness unless

specifically otherwise stated, and shall include passive as well as

active Negligence, excluding gross negligence or willful

misconduct”

Gross negligence

“Gross negligence" is usually left to fault, along with "intentional or willful

misconduct".