Understanding rig rate formation in the Gulf of Mexico

Abstract

We examine the largest cost component in offshore development projects, rig rates. High rig rates in recent years have restricted development of new oil and gas fields, as well as IOR projects and thus increased the cost for importing countries. Thus, it is important to understand developments in rig rates. Using econometric analysis, we examine the effects on jackup rig rates from gas and oil prices, rig capacity utilisation, contract length and lead time, and rig-specific characteristics like drilling depth capacities and rig classification. Having access to a unique data set from the Gulf of Mexico (GoM), 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. We find that increasing lead times and contract lengths enhance the bargaining power of the rig companies and are likely to be associated with higher rates for new contracts. Further, we find that gas prices are more important for jackup rig rates in the GoM area than oil prices — ten percent increase in gas prices leads to nine percent increase in rig rates in the long run, according to our results.