Things are looking up, at least a little, for offshore rigutilization, according to Duff & Phelps Credit Rating Co.(DCR). The firm says operating rates have increased steadily overthe past 12 months as drilling day rates for a shallow waterjack-up rig have risen from a low of $22,000 to current levels ofaround $50,000. Offshore rig utilization has also steadilyincreased from a low of 72% during the summer of 1999, to 81% inFebruary 2000. Oil prices are averaging better than $20/barrel andOPEC countries continue to adhere to new, reduced productionquotas, resulting in lower reported crude oil supplies. Also,according to Oil & Gas Journal, natural gas energy consumptionis projected to increase 8.4 % by 2002.

Yet utilization of the worldwide mobile offshore drilling fleetis only about 81%, compared to about 99% two years ago. The currentstate of offshore drilling activity is not a surprise, DCR said.Historically, there has always been a delay between commodity pricemovements and demand for offshore rigs. Instead of respondingimmediately to brief and highly uncertain changes in crude prices,major integrated oil companies have frequently elected to wait fora sustainable pricing range that will support an appropriate levelof spending.

This pattern can be altered by several factors. Some E&Pcompanies are utilizing increased cash flow from higher oil and gasprices to reduce debt levels and strengthen balance sheets Some arepostponing spending decisions until they complete reorganizationsor acquisitions. Some of the recent mergers that have taken placeare having a dampening effect on independent E&P companies’capital spending until the major E&P companies sell offnon-strategic properties.

Also, advances in seismic and drilling technology reduce thenumber of rigs that are required. Improved drill bits allow thesame amount of footage to be drilled with fewer rigs, and betterseismic data reduce the number of dry holes.

The drilling industry may have learned from mistakes of themid-1980s when the sector experienced speculative rig building,namely in the shallow water jackup market. Commodity prices droppedand a number of drilling companies had no contracts to support theover abundance of rigs. Most current construction projects, eithernew builds or conversions, for the deep-water market have beenundertaken only upon the signing of drilling contracts.

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