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Capital Investment and Operational Decision Making in the Offshore Drilling Industry

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  • Mark Kaiser
  • Brian Snyder

Abstract

Drilling contractors new build or idle rigs based on market conditions and business strategies. In theory, contractors invest in new building when the expected net present value of adding a rig to the fleet is positive, and idle capacity when the costs of operation are expected to exceed the costs of idling. We developed models of capacity decision making in the offshore contract drilling industry and found that high combinations of day rates and utilization are required to justify new build investment and that idling capacity may be preferred even if daily operating costs exceed daily revenue.

Suggested Citation

  • Mark Kaiser & Brian Snyder, 2013. "Capital Investment and Operational Decision Making in the Offshore Drilling Industry," The Engineering Economist, Taylor & Francis Journals, vol. 58(1), pages 35-58.
    • Handle: RePEc:taf:uteexx:v:58:y:2013:i:1:p:35-58
    DOI: 10.1080/0013791X.2012.758331
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    Cited by:

    1. Shi‐Xiao Wang & Wen‐Min Lu & Shiu‐Wan Hung, 2020. "Industrial upgrading efficiency and free markets in emerging economies: A two‐stage meta‐frontier approach," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(6), pages 1084-1095, September.
    2. Ewing, Bradley T. & Thompson, Mark A., 2016. "The role of reserves and production in the market capitalization of oil and gas companies," Energy Policy, Elsevier, vol. 98(C), pages 576-581.

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