OT43200 - Non-residents working on the UK continental shelf: transfer pricing: bareboat charter - day rates

The base for comparing fluctuations in the rig market is the operating day rate. This rate is highly sensitive to employment levels and if the rig utilisation level falls significantly the day rate is likely to tumble. Rates are also influenced by the prospect for future rig employment levels which in turn reflect the prospects for the oil price. In times of over supply, the following effects are seen:

• there may be no commercial reason for an oil company to pay a day rate higher than the rig owners direct operating costs to persuade a rig company to stay in business;
• the oil company has a choice of rigs and the lack of bargaining power of the operators push day rates downwards towards operating costs;
• the operator is unwilling to accept long term charters at low rates;
• the oil company hires as and when it has work available and may enter into a contract for the drilling of say one or two wells only;
• oil companies may sub-lease rigs held on long term charter thereby contributing further to the fall in rates;
• rigs move into other parts of the world.

In times of rig shortages, other effects can be observed:

• demand will drive up day rates
• expecting rates to rise further a drilling contractor may be unwilling to let at current rates
• oil companies will be concerned to gain rigs on contract quickly to avoid possible shortages and high rates
• to ensure availability the oil company may enter into long term contracts (say three to five years)
• rigs may be drafted into the UK Continental Shelf from other areas. (However not all rigs meet the higher specifications needed to work in the North Sea)
• new rigs are commissioned for building.