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Odi Case Paper

In: Business and Management

Submitted By anackh
Words 5059
Pages 21
Offshore Drilling Incorporated
Introduction On April 1, 1998, John Dolittle received a call he feared would be coming. His client, Linda Sprague, the President of Petroleum Exploration and Production Corporation (PEPCO), wanted to default on PEPCO’s contract with John’s company, Offshore Drilling Incorporated (ODI). Sprague gave two weeks notice until the papers would be filed. ODI is an offshore drilling contractor that provides mobile drilling rigs, as well as the expertise and personnel to drill the wells on behalf of exploration and production (E&P) companies. John’s client, PEPCO, was one such company. ODI had developed and was operating a rig for PEPCO, and the contract specified that PEPCO would pay ODI a fixed fee, or “day rate” for each day ODI spent on site drilling for oil with the rig. The day rate specified in the contract between PEPCO and ODI translated into roughly $105,000 per day. When the 39-month contract was first signed, in December of 1995, the price of oil was roughly $19 per barrel, and this left PEPCO with a healthy profit. Since the beginning of December of 1997, however, the spot price of oil had dropped about 20%, from about $19.00 to less than $15.00 per barrel. (See Exhibit 1.) When the price of oil drops below the cost of production, E&P companies typically halt production and exploration, and this was one option that PEPCO was considering. In this case, PEPCO would default on its contract with ODI, and this might lead the two companies into costly and protracted litigation. An alternative that Sprague proposed to John was for ODI to share some of the losses with PEPCO. The contract would be rewritten so that the day rate PEPCO paid to ODI would be tied to the price of oil. John knew that the effect of this type of contract would be far reaching for ODI. More than just sharing PEPCO’s current losses, the contract would also have

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