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From Sea to Shining Sea? : an econometric inquiry into the offshore mobile rig market

Alger, Harrison; Banyte, Justina
Master thesis
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URI
http://hdl.handle.net/11250/220781
Date
2014
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  • Master Thesis [3258]
Abstract
The mobile offshore development unit (MODU) market is unique in that the majority of the rig

fleet is owned by independent rig management firms and leased to oil and gas companies for

exploration and production. Managing a firm’s fleet is a complex profit maximization process by

which managers decide what rigs to keep active in search of contracts, temporarily idle or cold

stack, reactivate from cold stacking, upgrade, or sell. Despite the substantial financial

implications of these decisions, empirical research on the MODU market has been limited. We

therefore take advantage of a substantially larger dataset and utilize existing models as a starting

point to describe both the idling and rig day rates for active rigs. For idling behavior, the decision

to cold stack is presented using a real option framework. The contract day rate model is described

using a multiple linear regression. The purpose of this paper is to re-examine existing models and

to suggest additional factors driving both idling behavior and rig day rates. In general, these

decisions are seen as being driven by a rigs utility via observable and unobservable heterogeneity,

market conditions, as well as a firms’ size. In particular, lagged factor prices and rig utility

proxies such as rig moves across geographic regions are the best determinants of rig idling

options while most rig characteristics are otherwise mixed. After controlling for regional and time

effects, the main determinants of day rates are utilization rates and rig moves across regions.

Factor prices, on the other hand, have no significant effect on rig rates. Through a better

understanding of idling and contract day rate dynamics, our research is relevant to rig owning and

operating firms as well as the financial institutions that support them.

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