Modelling and forecasting rig rates on the Norwegian Continental Shelf

Abstract We analyze rig rate formation of floaters operating on the Norwegian Continental Shelf. We first develop a simple bargaining model for rig markets. Then we examine empirically the most important drivers for rig rate formation in the period 1991q4 to 2016q1. We consider reduced form time series models and report conditional point and interval forecasts for rig rates in a reference case based on constant real oil price and with some increase in the capacity utilization. According to our results, rig rates increase very modestly in this reference case. We also consider alternative simulations, e.g., featuring a higher real crude oil price (in 2010 USD) gradually increasing to 100 USD per barrel in 2022q4. In this case, the rig rates become about 41 percent higher in 2022q4 than in the reference case. If in addition capacity utilization increases more rapidly, and to a higher level than in the reference simulation, the rig rate is 48 percent higher. In the last alternative simulation, we explore the effects of opening new Arctic areas for petroleum activity, in which case forecasted rig rates in 2022q4 are 26 percent higher than in the reference simulation.