contract depth, Oil & Gas Glossary

What Is Contract Depth?

Contract depth (also called objective depth or well depth specification) is the total vertical depth (TVD) or measured depth (MD) stipulated in a drilling contract at which the drilling contractor's obligation to drill is fulfilled, beyond which any additional footage is subject to renegotiation, supplementary day rates, or a new work order; the contract depth defines the scope of the drilling program, the applicable rate structure (footage rate, daywork rate, or turnkey price), and the point at which the well is evaluated against the contractor's performance guarantee regarding casing points, formation evaluation runs, and rig acceptance criteria.

Key Takeaways

Contract depth is most commonly expressed as the total vertical depth (TVD) to the top of a named objective formation, a specified subsea depth, or a defined casing point, not simply as measured depth along a deviated wellpath.
In footage contracts, the drilling contractor bears all cost risk to contract depth and earns a fixed rate per foot drilled; the operator bears risk beyond contract depth at a negotiated day rate.
Turnkey drilling contracts, which fix the price for a completed well to contract depth, transfer maximum cost risk to the contractor, typically at a 15–25% premium over estimated daywork cost for the equivalent well.
In horizontal wells, the distinction between TVD and measured depth (MD) is critical: contract depth is almost always specified in TVD because MD can exceed TVD by 2,000–8,000 ft in extended-reach wells.
Force majeure clauses in IADC drilling contracts allow contractors to claim relief when contract depth cannot be reached due to subsurface conditions beyond the contractor's control, such as unforeseen hard rock, lost circulation zones, or wellbore instability.

Types of Drilling Contracts and How Contract Depth Applies

The three primary drilling contract structures each assign cost risk differently relative to contract depth. In a daywork contract — the most common structure in the offshore and deepwater sectors — the drilling contractor provides the rig and crew at a negotiated day rate, typically ranging from $15,000/day for land rigs to over $500,000/day for ultra-deepwater drillships in tight markets. The operator directs the work and bears all cost risk for time overruns. Contract depth in a daywork contract is primarily a scope-of-work definition: it identifies the formations to be drilled, the casing program to be run, and the evaluation program to be completed. Exceeding contract depth requires a change order or supplementary agreement, often at a different day rate if the additional drilling enters a different geological environment or requires different equipment.

In a footage contract, the drilling contractor is paid a fixed price per foot drilled to contract depth, bearing all time and cost risk up to that depth. If the well takes longer than planned due to bit problems, stuck pipe, or slow drilling in hard formations, the contractor absorbs those costs. The operator benefits from a predictable per-foot drilling cost, while the contractor profits if efficient techniques allow faster drilling. Footage contracts are more common on land wells in mature, well-characterized basins where lithology and drilling parameters are predictable. Contract depth in footage contracts is precisely defined because it determines the total contractor payment: a 10,000-ft footage contract at $50/ft yields $500,000 regardless of how long it takes. Disputes arise when the contractor cannot reach contract depth due to wellbore problems and claims additional compensation.

A turnkey contract commits the drilling contractor to deliver a completed well — drilled, cased, and cemented to contract depth — at a fixed total price. The contractor assumes all risks including formation evaluation, weather, equipment failure, and geological uncertainty. Turnkey prices are set 15–25% above the expected daywork equivalent to compensate the contractor for bearing this risk. Contract depth in a turnkey agreement is perhaps the most consequential definition: if the contractor encounters abnormally pressured zones, lost circulation, or hard rock that makes contract depth uneconomic to reach, there is no mechanism to recover costs without disputing the contract terms. This exposure makes contractors conservative in their turnkey bids, particularly in frontier or poorly characterized basins where subsurface risk is high.

Fast Facts: Contract Depth

TVD vs. MD: Contract depth in horizontal wells is almost always specified in TVD; MD can exceed TVD by 5,000–10,000 ft on extended-reach wells
Typical land daywork rate: $15,000–$45,000/day for shallow to mid-range land rigs in North America (2024)
Offshore deepwater day rate: $300,000–$600,000/day for 6th-generation deepwater drillships (2024 market)
Footage contract rate: $20–$100/ft depending on expected formation difficulty and rig type
IADC standard contract: The IADC Drilling Contract (Form 2 for land, Form 3 for offshore) includes standard clauses for contract depth definition, force majeure, and daywork rates beyond contract depth
Turnkey premium: Typically 15–25% above estimated daywork cost for equivalent well
Measured depth definition: Total path length along the wellbore centerline from rotary table to bottom; always greater than or equal to TVD
Force majeure depth clause: Contractor may terminate footage obligations if penetration rate falls below 2 ft/hr in formation not anticipated by operator's well prognosis

Drilling Contract Tip:

When negotiating contract depth in a deviated or horizontal well program, always specify both the TVD target and the maximum permissible measured depth at contract depth. In extended-reach wells targeting a reservoir at 8,000 ft TVD with a 10,000 ft lateral, measured depth at total depth can exceed 25,000 ft — a figure that drives bit selection, casing design, tubular torque limits, and rig hoisting capacity far beyond what TVD alone implies. A contract depth stated only in TVD without an MD cap can expose the operator to unexpected contractor claims for additional equipment or compensation when the wellpath geometry proves more demanding than anticipated.

Contract depth is also referred to as:

Objective depth — the depth at which the geological objective (target formation) is expected to be encountered, often used interchangeably with contract depth in well prognosis documents
Well depth specification — the formal engineering document defining the required depth, casing program, and formation evaluation requirements that govern the drilling contract scope
Total depth (TD) objective — the planned total depth of the well as defined in the authority for expenditure (AFE) and incorporated by reference into the drilling contract
Contractor depth obligation — legal terminology used in contract dispute contexts to describe the footage or turnkey obligation up to the defined depth

Frequently Asked Questions About Contract Depth

What happens if a drilling contractor cannot reach contract depth?

The outcome depends on the contract type and the reason for failure. In a daywork contract, failure to reach contract depth is generally an operator risk — the contractor is compensated for time spent regardless of depth reached, and the operator decides whether to attempt further drilling, plug and abandon, or sidetrack. In a footage or turnkey contract, the contractor's obligation is depth-based, so failure to reach contract depth triggers negotiation over what was done and whether force majeure applies. Most IADC contracts include a "hard rock" or "unusual subsurface conditions" clause that allows the contractor to convert to a daywork rate if penetration falls below a defined threshold, protecting the contractor from unlimited exposure to unforeseen geology.

How is contract depth defined for a horizontal well?

In a horizontal well, contract depth is typically defined as the TVD to the top of the target formation (the kickoff point or landing zone), combined with a separate specification for the horizontal lateral length in measured depth. The two sections — the vertical build section and the horizontal lateral — may be governed by different rate structures within the same contract: the build section might be on footage contract while the lateral is on daywork, reflecting the higher uncertainty in steering and completion time for the horizontal portion. Some contracts specify a "measured depth at TVD" value to cap the permitted wellpath tortuosity.

What is the daywork rate "beyond contract depth" and why does it differ?

Most drilling contracts specify a separate day rate for drilling beyond contract depth (also called the "beyond contract depth rate" or "BCD rate"), which differs from the standard operating day rate for two reasons. First, the contractor may need to use different bit types, heavier mud weights, or enhanced BHA configurations to deal with deeper, higher-pressure, or harder formations not anticipated in the original contract. Second, the rig may be working in a higher-risk environment requiring additional safety equipment or enhanced compensation for personnel. BCD rates are negotiated at contract execution and are typically 10–20% above the standard operating day rate for offshore contracts and 5–15% above for land contracts.

Why Contract Depth Matters in Oil and Gas

Contract depth is the single most important boundary condition in any drilling contract because it defines the financial exposure of both parties. For operators, the contract depth clause determines the total well cost — misdefining it (for example, specifying measured depth when TVD was intended) on a long-reach horizontal well can add millions of dollars in contractor claims. For drilling contractors, the contract depth and associated rate structure determine whether a well is profitable: a footage contractor that encounters unexpectedly hard limestone 500 ft above contract depth can face weeks of slow drilling at its own cost. As global drilling programs move to more complex well architectures — extended-reach wells, deep offshore, multilateral wells in tight reservoirs — clear, precise contract depth definitions backed by current formation evaluation data have become essential risk management tools for both sides of the drilling contract.

Contract Depth: Drilling Contract Obligations and Scope of Work