Capital Investment and Operational Decision Making in the Offshore Drilling Industry

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.