Noah Patel
The oil and gas industry is a complex sector with many companies involved in the process of extracting, processing, and distributing oil and gas. Oil platforms, also known as oil rigs, are large structures used to extract and process oil and gas from beneath the seabed. While some oil companies may own their rigs, it is more common for them to rent or lease rigs from drilling contractors. This allows oil companies to focus on oil and gas production while leaving the technical aspects of drilling to specialized contractors. Owning rigs can provide additional revenue streams for oil companies, but it also requires significant capital investment and management of drilling operations. Ultimately, the decision to own or rent rigs depends on various strategic, financial, and operational factors within the dynamic landscape of the oil and gas industry.
| Characteristics | Values |
|---|---|
| Oil companies owning rigs | Oil companies owning rigs can help generate additional revenue |
| Buying rigs is more cost-effective than renting in the long term | |
| Rig prices have not risen as much as production costs | |
| Rig prices range from $14-$25 million | |
| Oil companies renting rigs | The land drilling market is primarily a rental market |
| Rig day rates range from $28,000-$35,000 | |
| Rig rental companies include Precision, Parker Drilling, Unit Corp, and Schramm |
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What You'll Learn
Oil companies often rent rigs from drilling contractors
While some oil companies may choose to purchase their rigs, the majority of the land drilling market operates as a rental market. This is because the cost of buying a rig can be significant, with basic rigs costing around $14-$15 million, and additional fittings adding another $5-$7 million. By renting rigs, oil companies can avoid the substantial upfront cost of purchasing their own equipment and instead pay for the services of drilling contractors as needed.
Drilling contractors play a crucial role in the oil and gas industry by providing the necessary equipment and expertise for drilling wells. They collaborate closely with E&P companies, who are responsible for seeking subsurface hydrocarbon resources and overseeing the well drilling process. E&P companies, or Exploration and Production companies, are involved in finding reservoirs and drilling oil and gas wells, and their revenue is directly tied to oil and gas production.
By renting rigs from drilling contractors, oil companies can maintain flexibility in their operations and avoid the burden of owning and maintaining their own fleet of rigs. This allows them to focus on their core competencies, such as resource exploration and production, while leveraging the specialized skills and resources offered by drilling contractors.
In summary, oil companies often rent rigs from drilling contractors, who provide essential services and equipment for the upstream segment of the oil and gas industry. This arrangement allows oil companies to access the necessary drilling infrastructure without incurring the high costs associated with purchasing and maintaining their own rigs.
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It is more cost-effective for oil companies to buy rigs than rent
Oil companies are increasingly buying rigs instead of renting them as it is a more cost-effective option. With the rise in onshore exploration costs due to higher daily rates for rigs and the expenses of fracking, buying rigs is a more financially prudent choice.
Analysts estimate that a company can recoup the $20 million cost of a rig within two years. FBR Capital Markets analyst Rehan Rashid affirms that "if you have the money to buy, it will be cheaper than renting." The daily rates for a land rig range from $28,000 to $35,000, and a basic rig costs $14-$15 million, with additional fittings adding another $5-$7 million. By owning their rigs, companies can avoid paying the high daily rates and save significant costs over time.
For example, Oasis Petroleum, which previously spent 30-40% of its well costs on pressure pumping, is transitioning to an in-house pressure pumping business. This decision will save the company $800,000 to $1 million per well, with a one-year payback on the $24 million investment in pressure pumping equipment.
Additionally, owning rigs can help oil and gas producers generate additional revenue through subcontracting when they have excess equipment. This side revenue stream can further enhance the cost-effectiveness of purchasing rigs instead of renting them.
Moreover, buying rigs provide companies with greater control over their drilling activity and help keep costs in check. With the unpredictable nature of exploration and production costs, owning rigs allows companies to mitigate the impact of fluctuating rig prices and ensure access to the necessary equipment.
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Oil companies can generate additional revenue by owning rigs
Oil companies that own rigs can sub-contract and create side revenue when they don't need the equipment. This is particularly beneficial for large companies that can keep a rig running for several years, as they can save costs by running their own rig instead of paying daily rates to a rig rental company. For example, Oasis Petroleum, which used to spend 30-40% of its entire well cost on pressure pumping, now has an in-house pressure pumping business in the pipeline, which is expected to save the company $800,000-$1 million per well.
In addition to cost savings, owning rigs can provide oil companies with more control over their drilling activity and help them maintain consistent access to equipment. This is especially important given the tight rig market and the impact of equipment availability on drilling activities. By owning rigs, oil companies can also invest in ultra-deepwater rigs, which have higher returns and are in high demand.
Furthermore, owning rigs can help oil companies generate revenue through real-estate investment. Similar to renting out property, oil companies can build rigs for an upfront cost and then rent them out for a fixed monthly or daily fee. While there are operating costs associated with owning a rig, the potential for revenue generation is significant, especially for newer rigs with higher specifications.
Overall, owning rigs provides oil companies with the opportunity to reduce costs, streamline their operations, and generate additional revenue through subcontracting and real-estate investments.
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Oil companies rarely own the rigs they operate
Drilling contractors, or "drillers", own and operate the drilling rigs and provide them along with crews to the E&P companies. These contractors generally charge for their services based on the amount of time they work for the E&P company, and the day rates for a land rig can range from $28,000 to $35,000, depending on specifications. A basic rig with 1,500-1,700 horsepower costs $14-$15 million, with extra fittings adding another $5-$7 million.
While it is more common for E&P companies to rent rigs, some companies do choose to buy their own. This decision is driven by the desire to keep costs in check, as renting prices have increased due to strong demand for work in shale fields. By owning their own rigs, companies can also generate additional revenue by sub-contracting when they don't need the equipment. Analysts estimate that a company can recoup the $20 million cost of a rig within two years and save money in the long run by avoiding daily rental rates.
However, purchasing rigs is a significant investment, and E&P companies must have the financial means and drilling potential to make this decision. For companies that cannot afford to buy rigs, renting remains the primary option, and the rental market for rigs is well-served by drilling contractors.
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Drilling contractors lease rigs to oil companies for a day rate
Oil companies often lease rigs from drilling contractors for a day rate. This is because the actual drilling of wells is typically performed by a drilling company or drilling contractor that specialises in drilling operations and has the necessary equipment, personnel and expertise.
Drilling contractors own and operate most of the global drilling rig fleet. They provide all the required equipment and are paid a specified sum by the operator for each day that the rig is used. This daily rate accounts for approximately half of the daily expenditures. The daily rate may or may not include fuel, depending on the terms of the contract, and it does not include the costs of capital goods or special services.
Day-rate contracts are one of the more common contract types used in the oil and gas industry. In a day-rate contract, drilling engineers for the operating company design the well and plan all the equipment specifications. The operating company then leases the rig and its crew at a specified daily rate.
While some oil companies may choose to buy rigs instead of renting, this requires a significant upfront investment of $14-$15 million for a basic rig, with extra fittings adding another $5-$7 million. However, analysts say that a company can typically recoup the cost of a rig within two years.
Some of the largest rig contractors in the US market include Nabors Industries, Helmerich & Payne, and Patterson-UTI, which operates land-based drilling rigs in the continental US and western Canada.
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Frequently asked questions
Oil companies may choose to own or rent oil rigs depending on their financial capabilities and convenience. While owning rigs can help oil companies generate additional revenue, renting rigs is more convenient for companies that cannot afford to buy rigs or do not want to deal with the hassle of owning them.
Renting rigs allows oil companies to avoid the high costs of purchasing and maintaining rigs. It also provides flexibility in terms of contract duration, which can range from weeks to years. Additionally, renting rigs gives oil companies access to the latest technology and expertise offered by drilling contractors.
Owning rigs allows oil companies to have more control over their drilling operations and can be more cost-effective in the long run. It also enables them to generate additional revenue by subcontracting their rigs to other companies when not in use.
The decision to own or rent rigs depends on various factors, including the financial capabilities of the oil company, the availability of drilling contractors, the duration of the project, and the company's preference for control and flexibility. While owning rigs provides more control and potential revenue streams, renting rigs offers flexibility and access to specialised equipment and expertise.
