Last year at this time we were writing our annual Gulf of Mexico (GOM) report with great optimism. The industry had just come through a couple years of lean times and all the signs on the horizon seemed to point to a bright future.

Drill rig counts were up, shallow water pipelines were being installed, deepwater projects that had been on hold were being pushed forward, and the US Minerals Management Service (MMS) was busy approving large numbers of exploration and development plans. There was hope that the recovery was beginning and would last for a few years.

Now, as we look back, we see that, indeed, the recovery did start ­ on the whole, 2001 was good year for the underwater contracting industry. However, when we look at this year's GOM market indicators, we see they paint a completely different picture than last year's indicators.

The Effect of Price
The price of crude and natural gas always has some effect on the underwater contracting market and thus are primary indicators. Last year at this time, statistics from the International Energy Agency showed very low stockpiles of crude and natural gas, demand increasing at over one million barrels per day, increasing production, and high drill rig counts ­ all resulting in a stable and rising price. These were all positive signs for the Gulf of Mexico underwater contracting industry.

Now, 12 months later, we have the highest stockpile of product since 1999, demand increasing at only an estimated 100,000 barrels per day, natural gas production decreasing, crude oil production decreasing by 1.5 million barrels per day, and a low drill rig count, all factors resulting in an unstable and sinking price. These are not positive signs for the industry. The price of crude had been above $20 a barrel since August of 1999; shortly after the September 11, 2001, disaster it dropped below $20 a barrel. The price had already been falling before September 11, then the decreased demand in jet fuel after September 11 pushed the price below $20. While there has been a 40 percent decrease in crude oil prices, there has been a 70 percent drop in natural gas prices within the last year.

The lower unstable price of crude and natural gas will have a negative effect on the industry. There are a number of operators in the GOM that receive a high percentage of their revenues from natural gas. A high percentage of GOM gas production comes from platforms on the shelf in water depths less than 300 feet (91m).

Last year we saw a lot of new pipelines, platform upgrades, and development projects in shelf waters; these were needed to satisfy the increase in demand. These projects were the result of the high prices and good cash flow. This year, lower prices mean lower cash flow and less spending on infrastructure improvements.

Rig Counts and Utilization Rates
Last year our positive forecast for the industry was influenced by high rig counts and high vessel utilization rates. There were over 85 percent utilization rates on rigs and over 80 percent utilization rate on supply vessels. The prediction was that the high utilization rates would continue and there would be an increase of pipelines and platforms installed.

According to Dennis Marshall of Global Industries, that company saw a steady stream of pipeline bids coming in for the first two quarters of 2001. Since then, the number of bids has gone flat and very competitive. Coincidentally, the rig count and vessel utilization rates started falling after the second quarter of 2001 and have been on a sharp decline since, to around 65 percent utilization in mid-January 2002.

As utilization rates slip so do rig dayrates. For operators with aggressive drilling programs and cash reserves this is a blessing, as they are able to get more drilling for their money. Chevron appears to be pushing their drilling schedule up. Wells that were to be drilled in the third and fourth quarters are being pushed up to the first and second quarters to take advantage of competitive pricing.

The floater market, especially in the GOM, will be going through some critical times in the next two months. According to a report by ODS ­ Petrodata, 60 percent of the semis presently working in the GOM were to end their contracts by the end of February 2002 and have no further commitments. The next couple of months will set the tone for the GOM and the worldwide floater market for the next year, and will have an affect on the work in the deeper waters for the Gulf of Mexico underwater contractors.

According to a study by Simmons and Company, between January of 1999 and January 2001 the GOM saw a 90 percent increase in the number of rigs drilling for natural gas. This increase brought the number of rigs up to record numbers for the GOM. Even with record numbers of rigs drilling for gas, there was a three percent decline in gas production from 1999 to 2001.

Recognizing this decline and looking at forecasts that indicate natural gas demand to increase faster than crude demand over the next couple of years, the MMS has instituted some royalty relief programs to attempt to spur additional gas drilling on the shelf in the GOM.

Platform Installation and Abandonment Work
In 1999 there were 64 platforms installed in the GOM, the lowest number in a decade. Installations increased in 2000 to 94, then in 2001 to 123. Platform removals numbered 73 in 1999, increased to 118 in 2000, then decreased to 74 in 2001. The prediction for this year for installations, based on drill rig counts and price, is that the number will again decrease, especially in the third and fourth quarters. In the first and second quarters we should see projects that are left over from the high prices and high drilling rates of 2000 and 2001. The third and fourth quarters should show the effects of the decrease in drilling on the installation market.

The platform removal market in 2002 looks like it could be a bright spot in a negative overall market. The forecast that there will be a decrease in installations means that utilization rates will be down for lift vessels and construction vessels. That will translate into lower dayrates on equipment. Operators may take advantage of this to remove structures that have not been producing and are slated for removal.

In addition, this year the MMS has been looking closely at corrosion levels. Every year operators are required to perform Level I corrosion surveys and underwater cathodic protection surveys. The MMS has been writing up operators who have not addressed their splash zone corrosion in a number of years. These operators that have been deferring removals will now have to either paint or go ahead and remove the structures.

Platform Inspections A Boon to Diving Contractors
This is the year inspection divers have been looking forward to. In 1987 the MMS issued a requirement that all structures in the GOM must have a Level III survey performed on them before 2003. Naturally, most operators have waited as long as possible before spending the money to inspect their structures. There are already several bid packages on the tables for 30 and 40 platform inspection projects.

While the underwater platform inspection market is a bright spot for the industry, platform inspection projects usually do not have high profit margins. If there is a slowdown in construction work, platform inspection contracts will be highly competitive. Inspection jobs do provide companies the ability to keep their people working. And, if there is some depth pay involved, the right inspection job can be lucrative for divers.

The GOM Market Forecast
Our first indicator of the future is the price of crude and natural gas. We know where the price is today; the big question is where will it be in six months. According to the US Energy Information Agency, US demand is expected to increase in the next 12 months.

The US markets lead the world in consumption of oil. To remove stockpiles that have developed, we also need other world economies to rebound and increase their demand. On the supply side, OPEC has instituted production cuts for all its members. At present they seem to be working, but there is always that level of uncertainty on whether the OPEC cartel can stick together.

Adding another uncertainty to the market is Russia. They have been developing their infrastructure and have now become a major producer and exporter. Most analysts seem to believe that the price will remain relatively stable at or near the $20 mark.

Rig counts and utilization rates are down from last year. However, they are still up from 1998 and still well above the bottom that was experienced in 1991. With dayrates in the GOM dropping and some royalty relief from the MM., we feel that there will be a stabilization of the rates after the second quarter.

The platform inspection and platform abandonment markets should be very active this year. This will help put some vessels and personnel to work to fill the void left from a slowdown in platform installations and pipelines.

Not the Worst, Not the Best
Overall, the industry should start the year out with projects left over from 2001, so we should see a fairly active first quarter. We will probably see a slowdown in the second quarter as the backlog of work begins to disappear. It is also too early in the year, at that point, to begin the platform inspection and abandonment projects.

The third and fourth quarters should have an increase in activity with inspection and abandonment projects, and hopefully a stable price and an increasing rig count.