It's easy to see the attractions of "bundling" services. By integrating contracts for equipment and services you can reduce suppliers and paperwork. In this way, fewer demands are made on your time, there is less paperwork, less debating over which tool caused the trip.

But bundled contracts can quickly become "bungled" if individual bottomhole assembly (BHA) components and their risks are not isolated. Everything hinges on achieving a balance between risk and reward.

Service companies have been saying for years that the scales have slipped the wrong way. As in the past, oil companies still own acreage and all the geological

or other problems it may have. Whether the reservoirs are hard-to-access, hard-to-locate or bounded by hard-to-drill formations, the challenges are inherited by the oil company. But yesterday's international oil companies (IOC) - national oil companies have mostly kept full internal R&D facilities - could grapple with the difficulties by using in-house research and development (R&D) "greenhouses." Shareholders didn't mind this. In fact, it was universally agreed that R&D investment was a way of maintaining a competitive edge. However, modern oil companies

do not have this resource.

Consolidation in the oil industry drove this change. Profits could be handsomely boosted by reducing expenditure in various things not least in-house R&D. So, today's IOC must look elsewhere. Here is where the service companies come in.

The service company's concern - read gripe, if you are an operator - is that although they solve an increasing number of operator "owned" problems, and run R&D facilities previously only undertaken by operators, rewards have remained constant over the years. Sure, rental or operating rates for equipment increase annually or have a premium according to location, but these are localized factors rather than a redistribution of reward based on risk acceptance and investment in research.

Everybody agrees that accessing and managing the reservoir are the most important and valuable activities for the operator. But nobody agrees about how to define and apply the true value of a particular activity. Mostly the industry does simple math. Costs plus margin equals price. However, this omits the true value delivered - or not - to the operator.

If you don't deliver, you get hit with the penalty - lower value invoice. Sounds neat in theory, but there are drawbacks. Standard drilling service contracts allow for separated BHA component risk. That's a grand way of saying if you're a bit (or other) company and some other downhole tool screws up, your final bit invoice won't be affected. And quite rightly so, why should it? If the bit is performing fine, but a trip is caused by another element in the BHA, the bit company won't lose out.

But in an integrated contract, this type of situation causes losses at an operating/meterage and at an overall performance level. Let's continue the example. Not only, does the bit company suffer a loss in revenue due to another BHA component's failure but there is also a lower overall performance for section drilled time. This invokes a penalty clause. And it is not so
easy to claim extenuating circumstances if all the equipment is supplied under a single company's service contract.

Things get even more complicated with the contracting of third party niche suppliers. If this equipment doesn't work properly, who bears responsibility? Worse still, what happens if this malfunctioning leads to a stuck fish or loss in hole (LIH)? On the note of LIH, it's worth straying to cover LIH. It can be said that LIH prices are high. Certainly, a tool that is new and has only seen a few hours downhole will always have a high price because this is a function of future revenue loss. Conversely, depreciation must be accounted for. If the tool had many hours utilization it should have a much lower value.

Let's get back to our stuck fish. It causes a sidetrack and a heavier than expected LIH invoice. Bang goes any incentive for the bit's good performance. Who bears the responsibility? Who pays? And if the authority for expenditure is exceeded who pays the difference?

These are tough questions and some might say somewhat extreme. However, they are based in reality. Let's say a major contractor is asked to rent a third party directional tool. The tool doesn't work properly and it causes downtime. Why should the directional company suffer for the choice of the oil company? It shouldn't. Worse scenario, it causes loss of directional control. Who would be responsible for directional control? It can't be the third party because it is not contracted in that capacity. That leaves everyone in a tough spot.

Although using a main contractor approach where a single company drills and completes the entire well is not yet commonplace, this is a trend that is growing. Therefore, the dilemma remains: how to share risk and reward between many different service components?

Perhaps spectrum pricing can help. The operator and main contractor set a performance target and price the work accordingly. If there is overachievement, all receive a proportion of the gain. Conversely, if a component company underachieves, it invoices less than the original price and takes a proportion of the loss. A spectrum price would reflect costs (R&D manufacturing, tool wear and tear, etc.) and some part of the value delivered to the client.

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