Global Marine, Simmons Paint Dim GOM Drilling Picture

Global Marine's worldwide SCORE, or Summary of Current Offshore Rig Economics, for July 2001 dropped 0.3% from the previous month's SCORE as dayrates continued to decline, particularly in the Gulf of Mexico. Rapidly declining natural gas prices this year have had a dampening affect on drilling activity in the Gulf.

"The Gulf of Mexico SCORE edged down again this month as the slowdown in operator drilling activity forced contractors to further reduce dayrates," said Global Marine Chairman Bob Rose. "Countering this, however, SCORE continues to reflect much tighter rig markets in international sectors where oil companies have had to bid up dayrates in order to attract equipment."

Global Marine's SCORE compares the profitability of current mobile offshore drilling rig dayrates to the profitability of dayrates at the 1980-1981 peak of the offshore drilling cycle, when speculative new rig construction was common. In the 1980-1981 period when Global Marine's SCORE averaged 100%, new contract dayrates equaled the sum of daily cash operating costs plus $700 per day per million dollars invested.

Likewise, Simmons & Co. International is projecting that earnings for offshore contract drillers will be down 21% for the second half of this year largely in response to the "alarming decline" in day rates and utilization for jackup rigs in the Gulf of Mexico.

The reduced rig activity is partly a reflection of the lower natural gas prices, it agreed. "Our analysis shows that some prospects on the GOM Shelf are not economic at a $3/Mcf gas price based on Q2'01 well costs. This is not a broad statement on GOM Shelf propects, but several smaller 5 Bcf plays that were generating satisfactory returns six months ago in a $4/Mcf gas price environment are no longer economically viable," Simmons wrote in an August report.

Moreover, the Houston-based research company said that several producers spent as much as 50% to 70% of their 2001 drilling budgets during the first half of this year. "It follows that activity in the second half of the year would be down from the first half."

Even though commodity prices are "arguably healthier" than they were in the late 1990s, Simmons noted that the willingness of producers to spend has been dampened somewhat. "The fact that commodity prices have fallen precipitously over the past several months has generated some fear (substantiated by negative oil and natural gas inventory data) that prices will drop further."

But the actions of drilling contractors indicate that the slowdown in GOM drilling may be temporary, the company said. "Contract drillers are aggressively bidding down rates to keep assets working as opposed to stacking them. This signals their belief that the current softness in the GOM will be short-lived." But, it added, even a "'short-lived' problem can be excruciatingly painful as witnessed by the rapid deterioration in dayrates experienced over the past few months."

Given that the GOM jackup market is primarily a gas-driven market, "we have lowered our forecast for U.S. offshore drilling activity...by 9% for 2H'01 (second half of 2001)" to 148 rigs from the previously forecasted 163 rigs, Simmons said. But it expects GOM rig activity to rebound in 2002, increasing 7% from fourth quarter 2001 levels.

For the complete SCORE report go to: http://www.glm.com/invest/press_releases/082001sc.pdf .

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