Does high oil price lead to increased
oilrig activity?
An empirical analysis
Guro Børnes Ringlund, Knut Einar Rosendahl
and Terje Skjerpen
Introduction
• Significant increase in the crude oil price last years
– What happens to investments in new oil fields outside
OPEC?
60
50
$ per barrel
40
30
20
10
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2
Motivation
• Oil production outside OPEC is inflexible in the
short run
– Full capacity utilisation – low operating costs – long
investment time
• Oil production is mainly affected by developing
new fields, and in the longer run by exploration
– Drilling new wells is more flexible than production, and can
therefore react more quickly to price changes etc.
3
Development of oil production since 1995
2.4
2.2
UK+Norway (prod.)
2.0
Price Brent Blend
USA (prod.)
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
4
Development of oil production and oilrig
activity since 1995
2.4
2.2
2.0
UK+Norway (oilrigs)
USA (oilrigs)
UK+Norway (prod.)
USA (prod.)
Price Brent Blend
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
5
Purpose:
• Analyse econometrically how oilrig activity is
affected by the oil price
– In different regions outside (core) OPEC
– In the short and long run
Literature:
• No similar studies exist
– Farzin (2001) estimates the relationship between oil price
and reserve additions from known fields in the US
– Iledare (1995) estimates the relationship between gas
price and gas drilling in West Virginia
– Mohn and Osmundsen (2006) estimates the relationship
between oil price and exploratory activity in Norway
• ”Rule of thumb” in the petroleum industry:
– Rig activity follows oil prices with a time lag of 6 months
6
Important factors and assumptions
• Profitability of drilling depends on future prices
– Assume adaptive price expectations
– Data on a monthly basis – prices are smoothed over x
number of months (different x tested for all regions)
 Smoothing makes it easier to catch up effects in the medium
to long run
• Oil rigs are not homogeneous
– Different regions will demand different sorts of rigs
 Offshore rigs are typically less flexible than onshore rigs
• Market conditions differ
– North America and the UK are more privatised and less
regulated than Norway and most developing countries
– Decision making takes longer time, and is more affected by
non-economic factors in countries with strong public
control
7
• Technological change affects rig activity in
various ways
– Reduces costs of drilling
– Reduces time of drilling
– Makes new areas easier accessible
• Resource situation is changed over time
– Increased development reduces the number of remaining
undeveloped fields
– Increased exploration increases the number of remaining
undeveloped fields
– Increased development increases the area’s infrastructure
• We introduce a stochastic time trend
– Catch up changes in technology and resource situation
etc. over time
• Slow adaptation to changed oil price due to:
– Slow adaptation in oil price expectations
– Rising marginal costs in the rig market in the short run
8
Data
• Data for oilrig activity :
– Monthly data from BakerHughes for all important countries
 Exception: Former Soviet Union and onshore China
– Use BakerHughes’ regional division
 Rig market is partly regional
 Rather few rigs in many countries
– Data for the period Jan.-95 to June-06 (from Aug.-87 for
the US)
• Price data:
– Petroleum Intelligence Weekly
 Converted to real prices by a US producer price index
• Some dummy variables are also utilized
9