Day rate (oil drilling)
Categories: Derivatives, Accounting
The Academy Award winning film There Will Be Blood had the burgeoning US oil industry at the start of the 20th Century as its setting. While the plot concerns the ruthlessness of its main character, Daniel Day-Lewis’ Daniel Plainview, as he takes a Rockefelleresque approach towards swindling landowners out of their oil rights, little is mentioned about how he managed his costs and overhead to become an oil tycoon. Maybe he was too focused on other characters’ milkshakes to pay attention, but in real life, he would have had his hands too full for him to cause the mischief depicted in the movie.
In order to make a profit from oil, drilling, extraction, storage, and transportation to refineries are all important steps that can cripple the supply chain and cashflow if one or more are faced with sudden hurdles or unexpected costs. Oil wells, which provide both drilling and extraction functions, are essential to an oil business. However, the day rate, which is the daily, contractually fixed term cost of operation of the drilling contractor’s fee, personnel costs, and other hardware and incidentals related to each well’s functions, is equivalent to half the cost for each well, and can eat up profits if oil demand drops while the day rate contract is still in effect.