The current work provides the critical analysis of the article “Capital investment and operational decision making in the offshore drilling industry” prepared by Mark J. Kaiser and Brian Snyder. The emphasis will be made on the identification of key issues of the study. The decisions of the operational managers concerning stacking of rigs will be thoroughly analyzed for providing recommendations directed on the improvement of the outcomes of the futher investigations.
The analyzed article studied the matter of when to cold stack and active rig. The authors provided the calculations of the financial characteristicsk of jack-up that works in different conditions (fixed utilization and various utilization). The outcomes of the studies show that staking of such type of rigs is the best strategy, if adverse market conditions are expected for more that 500 days and the utilization rate is lower than 45 % with the expected day rate of USD 40,000, and lower than 35 % with the expected day rate of USD 30,000 (Kaiser, and Snyder, 2013). The figures were calculated in regard to the background of various assumptions. As per personal understanding, some of them are completely faithful, while the others do not cover the described matters and organizational decisions. In the current work, more detailed coverage of these topics on the background of information taken from various articles will be provided. It is necessary for analyzing the relevance of the outcomes obtained by Mark J. Kaiser and Brian Snyder.
The article provides general understanding of various types of rigs, their specification, rig activity states, current market status, and models of capacity management. Such information is necessary for the understanding of the relevance of studied topic and the methodology for the calculation of the most appropriate time of cold-stocking of active rig.
Mark J. Kaiser and Brian Snyder pointed out that the major reasons for transmition of rigs from the state of active maintenance (i.e. being under the contract) to the states of ready stack and even cold stack are the over-supply of rigs in the market (i.e. there is not enough demand to keep rigs in work) and lowering of the price on crude oil. Such factors form the situation when the exploitation of rigs becomes unprofitable. To be more detailed, the decision of cold-stocking of active rig is made when “the costs of stacking are less than the net cost of operating”. As a result, the situation may occur when the sum of deactivation costs, reactivation costs and operation maintenance costs during storage are lower than the diference between expected revenue and active operating costs (Kaiser, and Snyder, 2013). However, the authors did not pay any attention to the additional expenses, which should be coverade during the cold-stocking. The examples of such additional expenses are the following: harbor fees (at the place of cold stocking), insurance premiums, expenses on maintenance (for example, on spare parts and electricity) and various inspections of the classification society before cold-stocking and after it. Usually, rigs can be located for cold-stocking to dry docks, at ports, or at the places of other rigs location for saving costs, because several rigs may use a single power generation source (What you need to know about offshore rig stacking – For this cycle & beyond, 2015). The additional emphasis should be made on the expenses related to the certification of the rig by the classification society before its preservation. Such inspection is known as the baseline inspection (What you need to know about offshore rig stacking – For this cycle & beyond, 2015). It requires additional expenses on the determination of repairs that could be made during cold stocking, expenses on the work of classification society, and expenses on the performance of such repairs (on the labor and reservation materials). There exist an opinion that such expenses should be considered during the calculation of the most suitable time for cold-stocking of active rig.
Additionally, it should be noted that in the article “Capital investment and operational decision making in the offshore drilling industry” the authors thoroughly described the dependence of the operational expenses and cost of stacking on such characteristics as the class of the rig and its specification. However, they did not pay attention to the age of the rig, classification society, its location, and nationality of workers. All of such characteristics have the direct influence on the operational costs, and are relevant during the determination of the time of the rig preservation. For example, managers of active and cold stack rigs in different locations bear various expenses. The authors mentioned this feature when they described the discrepencies in day rates and utilization rates in various regions all over the world. However, they did not consider the specifications during performance of calculation and making outcomes. That is why their research may be considered unspecified.
Moreover, it should be noted that the authors presented two models of capacity management in the analyzed article: fixed utilization and variable utilization (Kaiser, and Snyder, 2013). According to the first model, the rig is never cold stacked, while according to the second model, “the rig is cold stacked when market utilization falls below a given threshold and is brought back ready status when utilization exceeds the threshold” (Kaiser, and Snyder, 2013). In any case, such models were chosen because they are convenient for further calculations. However, it should be noted that the rig can not be exploited for 365 days a year during its lifetime. It is obvious, that some time should be spend on repairs and dry-docking for ther reuiqred cleaning and servicing, because rigs are influenced by micro and macro fouling, “especially considering that conventional biocidal antifoulants require flowing water to work” (Ferry, 2012). The frequency of dry-docking is determined by the classification society and the operator of the rig. Consequently, the exclusion of the time necessary for repairs from the calculations showed in the analyzed article decreases its relevance and accuracy.
One more thing that should be mentiond in the current work, is that the athors used different extent of sensitivity of breakeven days. For example, such figure is sensitive to changes in operating and capital costs. However, it is not sensitive to tax and discount rates, which can vary during some particular period of time. It can be assumed that the authors used such methodologies because the variations are difficult to predict. At the same time, absence of sensitivity of breakeven costs from the changes on the operational market decreases the reliability and relevance of the outcomes provided by Mark J. Kaiser and Brian Snyder.
In the article “Capital investment and operational decision making in the offshore drilling industry” the authors only mentioned the possibility that the rig can be relocated from one operational area to another during the periods of utilization lowering. Related challenges and expenses were not provided by Mark J. Kaiser and Brian Snyder in their description of such actions. It means that the authors did not consider and analyze all possible methodologies of management of the low utilization and decreasing of oil prices issue in some particular location, which can lead to cold stacking of the active rig. Even if the analyzed model did not involve the performance of relocation expenses calculations of the rig, such action should be also described for providing the comprehensive understanding of the ways for managing the issue of lowering demand on rig.
The studying of preservation matter for active rigs by using various on-line literature forms the background of the understanding that the authors of the article were completely right, while mentioning lowering of the demand and decreasing of oil prices as the major reasons of cold stacking. Their ideas are supported by Joseph Triepke (2015) in his work “Offshore cold stacking is a 2015 trend to watch: Ensco begin preparations.” However, the two given reasons are not exhaustive. For example, the managerial decision of preservation of the rig can be based on the necessity of shifting the cash flow of the company from financing of the rig to other projects. Such necessity may have various backgrounds. For example, it may be based on “a cyclical downturn in demand for a given rig type” (Offshore rig stats description, 2015). Various specific problems, like “a significant investment requirement for a marginal rig to continue operations, can also drive the decision to cold stack a rig” (Offshore rig stats description, 2015). Moreover, the fluctuation of oil prices in the market may force large off-shore operators to delay their mega projects and place their focus on shorter projects (Triepke, 2015). The consideration of such complex matter as cold stacking of the active rig should be performed with providing more comprehensive vision on various reasons of presentation. Absence of thorough description of reasons for cold stacking in the analyzed article shows that the authors did not study the analyzed matter precisely.
It is highly recommended to provide more thorough coverage of the topic of rig preservation for providing more relevant calculations and outcomes. The emphasis should be made on making the modeling situation closer to real-life conditions by more precise description of expenses, calculation of the time for actual rig operating, and consideration of additional causes for the necessity of rig preservations and ways of their management, like relocation. All such improvements would make the study closer to real-rile conditions and increase its relevance.
In conclusion, it should be mentioned that the current work gives thorough analysis of the article “Capital investment and operational decision making in the offshore drilling industry”. The article provides the broad understanding of the classes of the rigs and conditions in which they operate. The way of information presentation is coherent and understandable. The used formulas are well-explained and reliable. However, the essay also described various drawbacks of the analyzed study. The majority of the drawbacks relate to the necessity of more thorough depiction of the information concerning the reasons of preservation, the connected expenses, and the ability to relocate the rig. It is recommended to perform additional study of the covered topic and make it closer to real-life conditions.