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A Strategic Look at the Bigger Picture -Risk Allocation in Oil and Gas Operational Agreements

William W. Pugh, Strategic Risk Management For Natural Resources Companies and Their Advisors: Domestic and International Issues

Risk management for an oil and gas company is a very broad topic, and it is difficult to understand the nuances of each area of risk. However, it can be critically important to understand the general risks inherent in different facets of the company's business. The purpose of this paper is to provide an overview and general understanding of some of the most important risk management issues presented by “operational” agreements -- contracts used by oil and gas companies to get things done -- such as drilling contracts, master service agreements, vessel charters, flight service agreements, and construction contracts. The first parts of this paper will look at the issues from a general standpoint, and the risks related to specific contracts will be discussed thereafter.

Operational contracts typically involve a common workplace and a relatively high risk of bodily injury and loss or damage to property. Because of a common workplace and the potentially dangerous working environment, these contracts frequently interact, which makes it critical that the contractual risk allocation provisions in the different contracts are consistent. Otherwise, provisions that might work well in isolation may, when acting together, achieve the opposite of the desired result and leave the company facing significant unanticipated risks.

II. OVERVIEW OF RISK ALLOCATION IN OPERATIONAL C