The deepwater Gulf of Mexico is showing signs of life once again. "We've seen some modest improvement in activity in the deepwater Gulf so far this year, and it should continue to improve throughout the year," says Scott Gill, Houston-based oil services analyst, Simmons & Co. International. "Companies haven't started spending money yet, but it's just around the corner. I anticipate significant activity by next year." Indeed, companies never lost their zeal for the deepwater Gulf, but their long-term outlooks for crude oil prices certainly dampened enthusiasm. Attractive, high-quality prospects dot the deepwater, but the economics at prices below $15 per barrel didn't compel action. "Now there is a growing opinion by the E&P companies that crude prices will be $17 to $19 per barrel for the next several years," notes Gill. "As the E&P companies start moving their price forecasts up, their deepwater activity will increase. We haven't gotten far enough through the cycle yet for jumps in E&P spending to show up, but there are signs." Already, dayrates for some classes of deepwater rigs have risen modestly, he notes. "Certainly, the inquiry levels have picked up more robustly than the actual dayrates. But, we anticipate that the utilization of deepwater rigs will continue to rise this year, and that ultimately will drive up dayrates." "The deepwater is in the early stages of a recovery," agrees Andreas Vietor, Denver-based analyst with Stifel, Nicolaus & Co. Inc. "We've seen more contracting activity for semisubmersibles and deepwater units, but this has been more or less confined to the very high-specification units capable of drilling in water depths greater than 5,000 feet." A rig shortage is not yet on the horizon. Indeed, companies are still digesting the fruits of the newbuild programs they started last cycle. And, rates have a long way to go before additional new units could be justified. "For the drilling contractors to undertake construction of new ultradeepwater assets, they need dayrates in excess of $225,000 per day. That is more than twice today's spot rate for existing rigs," says Vietor. "Instead of announcements of newbuilds, we are anticipating a couple of conversions of old rigs this year," agrees Gill. "The prices still have to move up before companies commit to newbuilds, but we think we could see some of that next year." Lease sales are another indicator of deepwater interest. The Minerals Management Service Sale 175 in March of Central Gulf of Mexico tracts was a marked improvement over Sale 172, held a year prior. Then, bidders smarting from the effects of low oil prices pursued only a small percentage of the tracts offered, submitting high bids of just $171.6 million on 207 blocks. Of the 2,810 blocks offered in water depths greater than 800 meters, only 89 received bids. While not particularly robust, Sale 175 attracted $300.5 million in high bids. "The total money exposed was twice as much as it was in 1999 and total high bids were up roughly 75% versus 1999 levels," says Vietor. Approximately 34% of the tracts receiving bids were in ultradeep water, and these tracts accounted for $188.5 million of the high bids. "The total number of blocks receiving bids was up 30%, and the total number of blocks was roughly the same. The dollars spent were weighted heavily toward deepwater blocks," he notes. Geophysical activity is another telltale sign of industry interest. The seismic market in the Gulf of Mexico continues to be very soft. World Geophysical News reports that 17 crews were working the offshore U.S. in mid-March 2000, compared with 47 crews for the same period in 1999. Still, that statistic suggests that companies have big backlogs of prospects to drill, says Vietor. "Drilling levels have been anemic, so operators have a lot of prospects to work through." Unquestionably, the long view for the deepwater remains encouraging. Through last year, companies had found roughly 45 fields in the deepwater Gulf, and the size of the average find ranged between 140- and 150 million barrels of oil equivalent. "Operators are still having a tremendous amount of success in the deepwater," says Vietor. "If oil prices remain within the $22 to $28 band that OPEC has set, the deepwater will attract significant spending, especially from the majors. We've already seen asset sales by Unocal, Shell, Texaco and others in shallow waters; they are taking that money and plowing it back into their deepwater fields."