Analysis of commercial time based incentive model targeting efficiency in drilling rig contracts
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- Studentoppgaver (TN-ISØP) 
The most common form of rig contracts are day rate contracts, in which the oil company rents the rig for a stated rate for each day of the contract term. However, with the shift in negotiation power from rig companies to oil companies and the increased focus on cost among oil companies, well based contracts with incentive schemes rewarding time efficient performance have gained popularity. Designing such contracts presents new challenges for the oil companies. These are important to consider in order to get the desired effect – increased efficiency and lower cost. This thesis investigates challenges associated with determining the properties of a time based incentive model, how the model can be adjusted depending on various factors, and determining the target time. The thesis focuses on drilling contracts for semisubmersible rigs in a market similar to that seen in 2017, i.e. a market with low rig utilization. Based on studies of three rig contracts, interviews and discussions with Wintershall Norge AS, the challenges were first mapped. Analytical approaches were used to conclude on the most suitable shape of an incentive model for drilling rig compensation. Several factors that could influence the way compensation rates are adjusted were considered: the rig efficiency, the rig company’s OPEX and crew size, rate in subsequent contract, rig company’s market share, and size of the oil company. The results suggest to use a convex incentive model. Regarding the slope of the curve, the oil company could implement less generous incentives in cases when there is a higher rate in the subsequent contract and there is a newly started rig company. A large oil company with big market shares could have less generous incentives than smaller oil companies, and comparing rigs with different efficiencies, it is suggested to have a steeper slope for the less efficient. Due to the large time gap between the contract signing and the actual commencement date for the drilling operation, estimation of a fixed target time is very uncertain. This could prevent the desired drop in the rig company’s base rate. If a fixed target time is given and the oil company makes adjustments in the project reducing the expected project duration, there is a risk the rig company achieves a higher rate for the same level of performance. In cases when the oil company makes adjustments increasing the expected project duration, it is likely to result in costly renegotiations of the target time and/or rates. Otherwise, measures might be taken by the rig company to reduce its cost, which could negatively affect the progress in the drilling operation.
Master's thesis in Industrial economics