Well service rigs, operating rigs, and commodity prices

ABSTRACT

This study examines the degree to which the deployment of well service rigs is responsive to changes in commodity prices and operating rigs in terms of long- and short-run estimates of elasticity. Well service rigs respond more to changes in natural gas rigs than oil rigs, and more to real oil prices than to real natural gas prices. In the shorter term, the findings document that the responses of well service rigs to changes in natural gas rigs and real oil prices are highly elastic, with no significant responses to changes in natural gas prices. The error correction model reveals that the change in well service rig usage adjusts to eliminate disequilibrium in the long-run relationship that exists between rigs and commodity prices. This research shows the important role that well service rigs play in the decisions of exploration and production (E&P) companies as they respond to changes in commodity prices.

KEYWORDS:

• Natural gas prices
• operating rigs
• time series analysis
• well service rigs

JEL CLASSIFICATIONS:

• Q35
• C01

Notes

¹ Rig count data are regularly reported by Baker Hughes (http://www.bakerhughes.com).

² Completion refers to all the work required to make the well ready for commercial production (Orban, 2006).

³ In the oil and gas industry, the term developed refers to wells that are drilled (Seba, 2008).

⁴ Work service rigs can be used to extend the economic limit of a well or to stimulate and enhance oil recovery. See Kaiser (2010) for a description of the economic limit analysis or ELA as it is used in the oil and gas industry.

⁵ A well service rig is generally contracted by a well owner (operator) with clauses that prohibit the well service rig from working in other places for some duration of time. Moreover, if the work-over rig is not actually being used during this time, the operator must pay the well service rig company a predetermined rate (less than the working rate) to keep the rig on call.