In the oil and gas industry, “contract operating” is frequently viewed as a silver bullet. Owners who don’t operate view it as a way to avoid overhead, while the Operators view it as a low-risk revenue stream. In theory, it will neatly bridge gaps in staffing, expertise, or appetite for operational exposure. However, without careful, experienced guidance, contract operating arrangements rarely function as either party expects, and mismatched expectations are a recurring source of disputes, frustration, and operational breakdowns.

At its core, Contract Operating Agreements or contract operating relationships are simple: one party agrees to operate oil and gas assets on behalf of another pursuant to a services agreement rather than under a traditional Joint Operating Agreement (“JOA”). The owner typically retains ownership of the working interest and economic exposure, while the contract operator handles day-to-day field operations for a fee. On paper, it looks clean and efficient. In the field, it almost never is.

One of the most common misconceptions held by owners is that Contract Operating Agreements allow them to retain full control over economics and decision-making while shedding operational responsibility. This belief often surfaces in negotiations, where the owner insists on extensive approval rights, detailed operational directives, and strict performance standards, while simultaneously expecting the Operator to absorb regulatory, safety, and completion risks. From the Operator’s perspective, this is like asking for the moon and the stars. The reality is that regulators, landowners, vendors, and employees care less about what your contract says when work is to be done, especially when pressure is applied. The party designated as “Operator” on permits, leases, and regulatory filings is the party regulators will look to when something goes wrong. Contract language may allocate risk between the parties, but it does not insulate the contract operator from real-world exposure. Expecting a contract operator to act purely as an agent while bearing operator-level liability is often a critical disconnect.

Another owner misconception is that contract operators should simply execute the Non-operator’s instructions, regardless of practicality, timing, or cost. In theory, this sounds reasonable, as after all, it is their well and their asset. In practice, oilfield operations are fluid, fast-moving, and heavily dependent on real-time judgment calls. Since the Operator doesn’t have an ownership stake, they will need access to funds before the work can commence. Field personnel cannot pause operations to seek written approval every time conditions change. Vendors will not wait for a committee decision when equipment is on location. Regulators will not excuse noncompliance because the Operator was waiting on the owner’s direction. Contract operating works only when the Operator is given meaningful discretion to operate, and that discretion often clashes with an owner’s desire for control.

When agreements attempt to micromanage operations through exhaustive scopes of work, approval matrices, and reporting requirements, they tend to create paralysis rather than accountability. The more a contract operator’s discretion is constrained, the less realistic it is to hold them to aggressive performance or cost targets.

Perhaps one of the most obvious hurdles to clear, fee negotiations are often another point where expectations diverge from operational reality. Non-operators often expect contract operating fees to resemble administrative costs, or be fixed, minimal, and largely divorced from risk. Operators, on the other hand, know that contract operating still requires experienced personnel, internal systems, insurance, compliance infrastructure, and management oversight. Problems also arise when fees are set too low to support the actual operational burden, leading Operators to cut corners, deprioritize assets, or rely on under-resourced teams. Contract operating is not passive income; it is active field management. If the economics do not support that reality, performance will suffer regardless of what the contract says. Under a standard JOA, the Operator is often the majority owner of the asset, so there is alignment with other non-operating owners. A contract operator is a cost center, and a flat fee doesn’t incentivize high performance.

Lastly, many Contract Operating Agreements shift nearly all liability to the Operator while limiting indemnities in ways that would never survive in a traditional JOA. This often reflects the belief that, because the owner isn’t shouldering operational responsibility, it shouldn’t bear operational risk. This is a significant departure from the JOA model, in which the Operator is first among equals from a risk perspective and shares virtually all liabilities pro rata with its working interest partners. This misalignment discourages capable Operators from taking on contract operating roles or drives them to price the risk into their fees. Conversely, it can create situations where Operators are contractually exposed beyond what their insurance or balance sheet can reasonably cover, increasing the likelihood of disputes or even bankruptcy when incidents occur. Indemnity schemes that ignore how oilfield risk is actually allocated and insured are a recipe for costly and damaging post-incident litigation.

The most successful Contract Operating Agreements are those where both parties recognize what contract operating is, and what it is not, and take care to clearly establish the parameters of risk and responsibility. Contract operations are not “fire and forget”; they are not a way to operate assets without trust; they are not a way to impose “full” Operator liability without Operator authority; and they are not a way to obtain first-class operations at bargain-basement pricing. Instead, contract operating works best when counterparties treat it as a long-term operational relationship requiring aligned incentives, realistic authority, and mutual understanding of risk. Agreements should reflect how operations actually occur in the field, not how deal teams wish they would occur in a conference room. Having skilled, experienced attorneys on your side to ensure your Contract Operating Agreements reflect those realities and meet your expectations is critical. RR&A has years of experience negotiating Contract Operating Agreements for both contract Operators and owners.

As oil and gas portfolios continue to change hands and leaner operating models become more common, contract operating will remain an important tool. But unless both parties recalibrate their expectations to match operational reality, contract operating runs the risk of generating more friction than efficiency.