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Understanding rig rates

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Abstract

We examine the largest cost component in offshore development projects, drilling rates, which have been high in recent years. To our knowledge, rig rates have not been analysed empirically before in the economic literature. Using econometric analysis, we examine the effects of gas and oil prices, rig capacity utilisation, contract length and lead time, and rig-specific characteristics on Gulf of Mexico rig rates. Having access to a unique data set containing contract information, we are able to estimate how contract parameters crucial to the relative bargaining power between rig owners and oil and gas companies affects rig rates. Our econometric framework is a single equation random effects model, in which the systematic part of the equation is non-linear in the parameters. Such a model belongs to the class of non-linear mixed models, which has been heavily utilised in the biological sciences.

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  • Petter Osmundsen & Knut Einar Rosendahl & Terje Skjerpen, 2012. "Understanding rig rates," Discussion Papers 696, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:696
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    1. Ringlund, Guro Bornes & Rosendahl, Knut Einar & Skjerpen, Terje, 2008. "Does oilrig activity react to oil price changes An empirical investigation," Energy Economics, Elsevier, vol. 30(2), pages 371-396, March.
    2. Farzin, Y. H., 2001. "The impact of oil price on additions to US proven reserves," Resource and Energy Economics, Elsevier, vol. 23(3), pages 271-292, July.
    3. Iledare, Omowumi O., 1995. "Simulating the effect of economic and policy incentives on natural gas drilling and gross reserve additions," Resource and Energy Economics, Elsevier, vol. 17(3), pages 261-279, November.
    4. Aune, Finn Roar & Mohn, Klaus & Osmundsen, Petter & Rosendahl, Knut Einar, 2010. "Financial market pressure, tacit collusion and oil price formation," Energy Economics, Elsevier, vol. 32(2), pages 389-398, March.
    5. Ryan Kellogg, 2011. "Learning by Drilling: Interfirm Learning and Relationship Persistence in the Texas Oilpatch," The Quarterly Journal of Economics, Oxford University Press, vol. 126(4), pages 1961-2004.
    6. Modjtahedi, Bagher & Movassagh, Nahid, 2005. "Natural-gas futures: Bias, predictive performance, and the theory of storage," Energy Economics, Elsevier, vol. 27(4), pages 617-637, July.
    7. Osmundsen, Petter & Roll, Kristin Helen & Tveteras, Ragnar, 2012. "Drilling speed—the relevance of experience," Energy Economics, Elsevier, vol. 34(3), pages 786-794.
    8. Kenneth S. Corts, 2004. "The Effect of Repeated Interaction on Contract Choice: Evidence from Offshore Drilling," Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 230-260, April.
    9. Boyce, John R. & Nøstbakken, Linda, 2011. "Exploration and development of U.S. oil and gas fields, 1955-2002," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 891-908, June.
    10. Klaus Mohn, 2008. "Efforts and Efficiency in Oil Exploration: A Vector Error-Correction Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 53-78.
    11. Nguyen, Hang T. & Nabney, Ian T., 2010. "Short-term electricity demand and gas price forecasts using wavelet transforms and adaptive models," Energy, Elsevier, vol. 35(9), pages 3674-3685.
    12. Osmundsen, Petter & Roll, Kristin Helen & Tveterås , Ragnar, 2009. "Exploration drilling productivity at the Norwegian Shelf," UiS Working Papers in Economics and Finance 2009/34, University of Stavanger.
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    Cited by:

    1. Osmundsen, Petter, 2014. "Rig services and taxation," UiS Working Papers in Economics and Finance 2014/7, University of Stavanger.
    2. Petter Osmundsen, 2014. "Innovation in the Supply and Procurement of Rig Services," CESifo Working Paper Series 4961, CESifo Group Munich.
    3. repec:eee:eneeco:v:63:y:2017:i:c:p:213-226 is not listed on IDEAS
    4. Lars Lindholt, 2013. "The tug-of-war between resource depletion and technological change in the global oil industry 1981 - 2009," Discussion Papers 732, Statistics Norway, Research Department.

    More about this item

    Keywords

    Rig contracts; GoM rig rates; Panel data;

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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