Global Marine sees boom for 2001 offshore drilling

Industry analysts are predicting a 20% increase in upstream spending by oil and gas companies this year. However, Robert E. Rose, president and CEO of Houston-based Global Marine Inc., said Monday: �A real potential exists for spending greater than that,� with oil and gas prices at higher levels than previously anticipated.

Jan 15th, 2001

The new year is shaping up as a boom year for offshore drilling as oil and gas companies pour recent record cash flow back into exploration and development operations, the head of Global Marine Inc. said Monday.

Industry analysts are predicting a 20% increase in upstream spending by oil and gas companies this year, on top of a 19% hike in 2000. However, Robert E. Rose, president and CEO of Houston-based drilling contractor Global Marine, said: �A real potential exists for spending greater than that� with oil and gas prices being sustained at higher levels than previous anticipated.

At Global Marine's press conference on the outlook for the offshore drilling industry in the coming year, Rose scoffed at producers� claims that higher costs for rigs and other services could dampen their spending plans for 2001.

�Higher rig rates might hurt the marginal prospects, but not the good prospects,� he said.

�There�s no question that rigs and capital migrate to the prospects that are the best. Companies with the best prospects put the most money into them and attract the rigs,� said Rose.

During the industry�s down cycles when commodity prices are low and drilling demand declines, he said, it is the drilling contractors who push down rig rates while trying to under-bid each other for the fewer jobs. But in the up cycles when commodity prices are strong and drilling activity is high, it is the producers who bid up rig rates to make sure they secure a unit to drill their prospects, Rose said.

The last recovery period for the drilling industry in 1997 was cut short by a combination of factors, including the Asian economic crisis; the mistake by members of the Organization of Petroleum Exporting Countries in raising production too much; and the return of Iraq�s oil exports under the UN program.

�Those factors are not out there today,� said Rose. �If OPEC has learned discipline, as they seem to have done, there will be a longer recovery this time.�

This week OPEC members are expected to agree to reduce production by up to 2 million b/d.

In addition, Rose said, the �mega-major� oil and gas companies are expected to increase their upstream spending this year. The biggest integrated international oil companies virtually �sat out� 2000 with relatively little drilling activity, while most were digesting previous mergers��all but Royal Dutch/Shell, which was undergoing a reorganization,� said Rose.

Global Marine�s monthly Summary of Current Offshore Rig Economics (SCORE) increased in December by 3.7% from November levels and was up 49.7% from a year ago. That measurement of profitability of current rig rates compared to those at the 1980-1981 peak is based on cash operating costs for a rig plus $700/day for each $1 million invested.

That formula put day rates for the general population of working rigs in the Gulf of Mexico at 42.1% of their replacement costs during December, compared to a worldwide level of 37.2%. Jack up rigs� overall day rates amounted to 45.6% of their replacement costs during December, up 4.2% for the month. Day rates for semisubmersible rigs were at 27.9%, up 4% during December.

During the current upturn, Global Marine will �build cash, not rigs,� said Rose. He has no interest in building rigs on speculation, he told reporters.

�In my experience, it has always been a failed strategy to build on speculation because it adds capacity at a time when it�s not needed and will give inferior returns on your investment,� said Rose.

Moreover, he said, �There is little difference between operating costs and stacked costs on one of these complicated new deepwater rigs, because you have to keep it fully crewed for proper maintenance.�

Global Marine would consider building a rig on a specific order for a client with an adequate contract in hand to recoup construction costs, as they have done in the past.

Company officials said they are �constantly in discussions� with oil and gas operators about the prospects of building more rigs, particularly for deepwater development drilling. There is not yet any definite deal, however.

A large jack up rig capable of operating in harsh environments, built for $115 million and with operating expenses of $18,000/day, would require an initial contract with a rental rate of $120,000/day �because at some period it will be operating at break-even� as drilling activity cycles down again, Rose said.

Like others in the upstream service industry, Global Marine officials say the lack of properly trained and qualified personnel is their biggest problem. �The industry is coming into a period of many limitations, but the major problem will be people,� said Rose.

Like others in the offshore service industry, Global Marine is trying to provide key employees with better pay and more job security.

�For the first time in my career, contractors are getting to the point where they can afford to do that. In the past, they were afraid to keep people on the payroll during a downturn for fear of taking the company under,� Rose said. �Now we can weather a downturn.�

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