The Effect of Relationship Formation on Contract Duration and Performance in the International Offshore Drilling Industry

Abstract

This paper is aimed at analyzing the effects of forming relationships between oil and gas companies and drilling rigs owned by drilling companies. For this purpose, a panel data on 13240 contracts signed between 2000-2010 worldwide is used through employing a model with fixed effects and an instrumental variable for day-rates. Results show that repeated interaction between oil and gas companies and drilling rigs, does on one hand, increase the number of contracted projects in future contracts, and on the other hand, improve their drilling performance. Moreover, it is seen that the effects on the former are only captured by the first few interactions, and that they subside and vanish after the firms have contracted a couple of times. The effect on performance, however, remains consistent throughout the relationship.