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Incentive ideas for constructing Integrated Services Project -Lump Sum type well contracts
06 March 2017
Can you share some thoughts on different types of incentive idea for constructing any IPM/ integrated service project - Lump Sum  cost for the well type contracts?
6 answer(s)
jrsands
Consultant
Relentless Pursuit Of Perfection Ltd.
Total Posts: 4
Join Date: 15/04/13
Hari, don't underestimate the extra admin that a system meeting your outlined requirements would require. I have been involved in a very complex performance-related contracting system that was put in place during a severe downturn - the only time the operator could get contractors to agree to the system. In theory the contractors supplied goods & services at or near cost with regular monitoring meetings to demonstrate "savings to the operator through excellent contractor engineering" which would in theory trigger additional payments. The meetings were of course crucial but after the first quarter it was impossible to get ops people to attend as they 1) had other responsibilities and 2) found the meetings too adversarial. After 18 months none of the five contractors involved had received any additional remuneration and the operator finally went back to a more traditional pricing regime. Offshore, the IADC report completion became a battlefield as everyone tried to make sure they weren't noted against down time. 15 minutes of "circulate and condition mud" on the report could easily turn into 30 minutes of argument at the performance meeting.

So, what to do?

The best results will always come from building an enabling environment where the entire cast of people required to deliver the well are encouraged to contribute at all stages - planning, execution and washup. Make sure that the operator's goals for the project are clearly spelled out and help everyone to identify where they can help. Encourage everyone to do an excellent job and support them in any way they need. Get wellsite coaches out to offer independent guidance. Generally people will be motivated more by feeling part of a properly supported (and celebrated) team from day 1 than by the possibility of extra money on day 90.
Make sure you stress your performance expectations right at the tender stage. Clarify that you expect onshore coordinators & offshore/wellsite hands to attend regular workshops and let the contractor propose rates & conditions for attendance or dictate your own and let them roll it into their pricing. If you can afford to have subject matter experts in your office get them as they will be able to drive or help service providers as required based on knowledge of the real challenges they face.
I know that the challenges in instigating this regime aren't covered in engineering classes but make the effort and you will reap the benefits.
Hope that helps, John
JDDrouin
QA/QC Subsea Wellhead Specialist
SPREADAssociates
Total Posts: 87
Join Date: 06/05/09
Hari,

Entire books have been written about incentive programs, but at the least, you need to clarify what you mean by "lump sum", because (in my mind at least) "lump sum" is in opposition to virtually all the numbered points in your post.

There are multiple incentive- or DTL-type contracts (which is what it appears you're referring to), but the most successful I am aware of focus on the people working on the rig (including service contractors), not the companies involved.

And, the key to those types of incentive programs is clearly defining up front what the incentive benchmarks and controls are.  I.e. average section time is "x", so if you manage "x-10%", you'll get "cash in hand x amount", or if you manage "x-20%", you'll get "cash in hand y amount".

You'll be surprised how many improvements can be made by the people actually working on the rig when there's a real, cash-in-hand bonus involved.

Regards,

Dominic
Hari
engineer
Transocean
Total Posts: 17
Join Date: 03/07/12

Hi Harald,

Thanks, my response as mentioned below. Let me know your opinion, Views , Experience and suggestions please.

I am looking  incentives challenges, which should be in Operator's point of view.

To a large extent it is true that Service companies are always  focused only on their profit margins and are somehow due to highly competitive market are unable to walk in line with operators requirements and  perspectives.

In order to balance the uncertainty and create a win-win situation for the operator and the service provider, (which is a Must) there is a need to expand the basics structure of incentives beyond only focusing on the operational efficiency and achievements.

Also these suggestions are based on the need and Target to enhance/increase the oil Production BBLs/day at the earliest. i.e Drilling - Running Completion and putting more no. of wells on production.  

 Below are few observations and suggestions for discussion:

  1. Usually the concept is to award higher incentives for better operational efficiency and achievements and vice versa. 

  2. Operator should enhance the incentives appropriately or as best fit by allowing the Service Provider to regain the lost time and also carry the routine incentives. This could create a healthy atmosphere and motivation for service provider, as there is scope to undo the mistake and or catch up the profit margins.

  3. Redefine the well delivery concept, there should be an approach to include a large element of multi-delivery agreements which will in turn improvise the well acceptance criteria and well delivery timings.

  • Multi-delivery agreements could mean benchmarks set in tabular form to avoid or eliminate the downhole problems in typical Formations. 

4) Need to set the benchmarks for drilling efficiency for each section through a dialogue between operator and Service Company.

5)On the basis of Operator company internal study and findings, if it is doable, provision can be made to allow service companies to recover the lost time amongst all the services provided by performing better in other specific services and reduce the total accumulated down time/ NPT.

  • Provision in the contract for service provider to regain or nullify the punishments, penalties, negative incentive for the previous wells.

  • Provision in the contract for service provider to regain or nullify the punishments, penalties, negative incentive for the previous hole sections.

    • i.e If service provider performs better in next well or in specific well in next section and regains the lost time, then punishments, penalties, negative incentive should be nullified or routine incentives to be offered for saving time.

  • For section wise incentives should be offered on percentage basis (Flexible compensation structures) or only if total actual time for a well is less than the planned time and all the job acceptance criteria is maintained.

  • Only in exceptionally outstanding performance the lost time / penalties can be completely nullified.

  • If formation or operating conditions differ from the assumptions, there should be provision in the contract to amend the benchmarks along the way. This must be agreed in writing between operating company and service provider before starting on the relevant well section.  

6) It is always questionable whether the incentives to improve deliveries are strong enough to outweigh the disadvantages. The service companies may have to shoulder the bigger risk of the innovative approach and the risk is bigger than the reward/incentives.

Provisions in the contract term should be motivational and appropriately balance to creating urge to rectify the failed solutions for specific downhole problems with present best possible procedures or with innovative and proven technologies in the market.

  • There should be preference and extra advantages to win the upcoming new contracts for such service providers. The terms in the contract should imply that developing better solutions may increase the contractor’s opportunities to win new contracts.

  •  For well-known major down hole problems, contractor and operator should share the gain and the loss.

  •  There should be a compensation system for which allows the contractors to introduce the new technology and share in the gains/ loss made jointly. That suggests various forms of profit sharing that could be achieved. 

Note: It is continues effort to set up huge amount of database. On the basis of strong database and excellent operational and interpretational skills can help to minimize the uncertainty and formulate the best terms in the interest of achieving the objective.

Best Regards,

Hari.

 

       

JasonP
President
Myspread Users
Total Posts: 2
Join Date: 17/11/16
For me, there has to be two parts. A safety side and a performance side. A lost time injury or a high potential near miss automatically loses or severely reduces the bonus pool (50%). It has to be this way.  On the performance side, I think you need the objectives and payouts on a phase by phase basis such that a big problem in the beginning of the well or in one phase does not lose the whole bonus. It re-incentivizes the crew for EACH hole section. I have seen bonuses for a 60 day well lost before spud due to problems with boats that didn't affect anything on the well.  I try and pay the bonus to the crew directly and not the companies since companies keep it. I paid in Walmart gift cards or similar in lieu of cash to get around obvious cash issues. I focus most on the rig crew and make every single person (cook to driller) get the same bonus. I set a minimum time frame on the rig to earn the bonus. And I have every person come to my office where they get a picture, a handshake, a thank you, and a photocopy of their ID proving they received it (for FCPA).  With all of this in place, my VERY strict compliance people were OK.  These are just some ideas. Hope this helps.


Harald
Drilling Supt
Amni Int'l PetDevCo
Total Posts: 23
Join Date: 13/09/07
There are a large number of SPE papers, which share the authors thoughts on the subject ... Answering the question is challenging because of the number of variables involved, which are not just from a technical nature but involves company's strategies. Are you looking at this from an operator's perspective or a service company? Although they both work towards achieving the same end product, their strategies and strategic decisions might differ.

Best regards,
Harald.
admin
Managing Director (rp-squared.com)
Relentless Pursuit Of Perfection Ltd.
Total Posts: 393
Join Date: 10/01/05
Hi Hari

I suspect that the lack of response is that this is a commercially-sensitive topic and people may be reluctant to divulge information.

One way that you could imptove your chances of getting response(s) would be to lay out some of the types of incentives that you have in mind and some of the pros and cons that you have already documented.

Best wishes

Dave
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