UiS Working Papers in Economics and Finance,
University of Stavanger

Abstract: We examine the largest cost component in offshore development projects, drilling rates, which have been high over the last years. To our knowledge, rig rates have not been analysed empirically before in the economic literature. By econometric analysis we examine the effects on Gulf of Mexico rig rates of gas and oil prices, rig capacity utilization, contract length and lead time, and rig specific characteristics. 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 affect 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. The non-linearity is due to representing the effects of gas and oil prices by a CES price aggregate. Such a model belongs to the class of non-linear mixed models which has been heavily utilized within the biological sciences.

Keywords: Rig rates; Oil and gas drilling; Panel data

JEL-codes: C18; C23; Q40

34 pages, May 8, 2012

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