Stacking the deck: Idling and reactivation of capacity in offshore drilling

Abstract

Independent drilling contractors own all offshore drilling rigs, which they lease to oil and gas companies for use in their pursuit of their exploration and development plans. Oil and gas companies' demand for these rigs can vary quickly and dramatically in response to changes in the world market for oil and natural gas. As a result, drilling contractors often try to manage excess capacity by idling rigs (known in the industry as "stacking" a rig), reactivating them when demand recovers. This paper examines these decisions over the course of a price cycle in 1998-2000 to investigate the role of firm and rig heterogeneity in determining drillers' decisions about idling and reactivating capacity. © 2008 Blackwell Publishing.