Risk Allocation in Oil and Gas Contracting

Abstract

In the past 150 years the O&G industry has evolved abruptly both in technological terms and in economic importance . The industry now drills in almost every environment and under extreme conditions. What was little more than mining for oil in the early 1850s is now a high-tech, high risk industry that differs from other industries because of the risks inherent in O&G exploration and production activities . The risks are present in all stages of the project’s life cycle, they can be political, technical, human or commercial. Furthermore, the industry drains massive amounts of capital and its economic importance cannot be minimized . During recent history, two major accident have shaken the industry and left an indelible mark. The Piper Alpha Accident in 1988 and the Deepwater Horizon oil spill of 2010 have reminded us that accidents are always possible and when they occur they have massive legal repercussions. Generally contracts are supposed to regulate legal relations between the parties . The O&G actors have developed a very complex contractual framework adapted to the inherent and characteristic risks of the industry. Contract risk allocation is a legal way to organize the relations between the parties if the risks occurs. This process is particularly difficult in an industry in which contracts are characterized by a multiplicity of parties engaged in complex projects, facing enormous financial losses and cross-indemnity claims. Consequently, the industry has developed contractual risk re-allocation policies to limit, partially or totally liabilities incurred . The most common contractual approach to deal with risk allocation in the O&G industry is to incorporate in the contact risk allocation clauses which mostly come in the form of an indemnity and hold harmless clause, an exclusion clause and, a limitation of liability clause .