Mobile offshore drilling rig newbuild and replacement cost functions
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Mobile offshore drilling rig newbuild and replacement cost functions Mark J. Kaiser* and Brian Snyder Center for Energy Studies, Louisiana State University, Energy Coast & Environment Building, Nicholson Drive Extension, Baton Rouge, LA 70803, USA. E-mail: [email protected] *Corresponding author.
A b s t r a c t Mobile offshore drilling rigs are used to drill, complete and workover wellbores in marine environments. The fleet that exists today consists of a wide variety of vessels built to various specifications over the past three decades, and because they operate in harsh, corrosive environments, they wear out structurally and require periodic maintenance. Rig designs have evolved with changes in operating requirements and new technology and rigs are frequently modified and upgraded, depending upon market conditions, operator preferences and other factors. The construction and replacement costs of offshore rigs are often used for management planning, financial valuation and insurance analysis, and because of the wide variety of designs, specifications and upgrades, cost estimates vary widely. In this article, generalized newbuild and replacement cost functions are derived based on rig class, age and upgrade status, water depth, and other factors using market data for 111 rigs under construction and 466 rigs in operation. Factors that influence newbuild and replacement cost are described along with a summary of the model results and limitations of the analysis. Maritime Economics & Logistics (2010) 12, 392–429. doi:10.1057/mel.2010.14
Keywords: offshore drilling rigs; construction cost; cost functions
Introduction Mobile offshore drilling units (MODUs) are marine vessels equipped with a drilling rig and all related equipment and support systems to drill holes under r 2010 Macmillan Publishers Ltd. 1479-2931 Maritime Economics & Logistics Vol. 12, 4, 392–429 www.palgrave-journals.com/mel/
Mobile offshore drilling rig newbuild and replacement cost functions
the seabed to find or produce hydrocarbons. MODUs are long-lived, capital intensive assets that are built under a variety of designs and specifications, and because they are constructed almost entirely out of steel and work in harsh, corrosive environments, they wear out structurally and require periodic maintenance. Eventually, all rigs are converted to an alternative use, retired from the fleet or scrapped. Newbuild costs are the costs to build a new unit while replacement cost (also called asset replacement value) is an estimate of the cost to rebuild an existing unit under current market conditions with new property of comparable material and quality used at the same location for the same purpose (Galaty et al, 2002). Rig construction (newbuild) and replacement costs are frequently required in corporate planning, financial valuation and risk management analysis, and because of the variety of designs, specifications and upgrades, cost estimates tend to exhibit a large variance between and within classes. The replacement value concept was adopted early in th
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