Strictly: Drilling and oil-field services Message Board

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Gold/Mining/Energy : Strictly: Drilling and oil-field services

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To: marc chatman who wrote (18742)	4/11/1998 10:36:00 PM
From: Douglas V. Fant	Read Replies (2) of 95453

marc chatman, You asked how "rig negotiations" work. More important is to understand the step before rig negotiations and that is assessment of a potentially drillable prospect. There are about 20 economic factors that go into an assessment of a prospect- and just one is drilling rates. A potential bidder will consider what royalty rate to offer the governing body; and if a national oil company is involved (often just poorboy shadow companies) how much of the national companies' costs to carry before he/she goes it on their own nickel; how many platforms will be necessary if successful in development; whether to barge or pipeline crude to shore; weather considerations in development; geopolitical factors; types of crude or natural gas that wil be produced; rates of production and markets; whether to build onsite processing facilities; presence of adjacent development, etc. All of these factors roll into one economic package. That is if you pay a little more to get a rig over to drill a prospect at a certain time, then you cut costs elsewhere in the project so that your total overall project costs and estimated rate of return remain the same. So to a certain degree rig rates are inelastic especially in international concessions- so long as you know what you will pay for the rig rate, then you can adjust other expected costs inorder to keep the entire project economic... As to actual rig negotiations they are always difficult for oil companies since you do not know beforehand whether you have a "dud" or a "barnbuster" for a project. That is you do not know whether to "lock in" a drilling rig for one or say three wells. That's why when options are not renewed on a drilling rig, do not just assume that demand for rigs is fading. It is just as likely that the first well drilled "condemned" the prospect as "uneconomic"... Workover Operations. Now in established operations that bring out a rig to do e.g., a workover job on an existing well will fight day rates more vigorously since that company is just focusing on that one job..... Sincerely, Doug F.

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