Gulf of Mexico rig operation is presently barely profitable. The area's SCORE is 31, compared with 53 for the North Sea, 56 for southeast Asia and 58 for West Africa. Roughly, drilling companies break even when at 25, they are profitable at 40, utilization rates are high and cash flow generous at 80, and speculative new-rig construction is common at 100. SCORE-an acronym for Summary of Current Offshore Rig Economics and devised by Houston-based driller GlobalSantaFe Corp.-represents the percentage of rig rates that would have allowed operators to build new rigs at the industry peak in 1980-81. Jon Marshall, GlobalSantaFe executive vice president and chief operating officer, says the Gulf number would normally rise to that of the rest of the world, or the number for the rest of the world would normally decline to the Gulf of Mexico level, but that's not happening immediately. North Sea jackup drilling-rig rates will remain strong in the near future, insulated from an invasion of excess rigs from the Gulf of Mexico by regulatory standards and harsh-weather requirements. Operator investments in the North Sea and other parts of the world are rising, while North American investments are falling. Some two-thirds of the money dedicated to worldwide upstream spending by major oil companies this year will be spent outside the U.S. That will draw Gulf of Mexico rigs to the rest of the world, he says. The normal migration of jackup rigs in this situation will be for U.S. rigs to make the easy move first to Trinidad and Tobago, then to West Africa, next to Southeast Asia and Australia and Asia, and finally to the North Sea. Floating rigs can move nearly anywhere, but the proximity of Brazil to the U.S. makes it a logical first stop in the migratory flow. "The North Sea probably will stay at the peak of the market," Marshall says. "It can cost $20 million to convert a [Gulf of Mexico] rig for the North Sea." Some rigs already have left the Gulf of Mexico for more robust markets, including the North Sea. Typically, the North Sea goes into a decline later than other parts of the world. It also recovers from a decline later. Another factor comes into play. Operators in deep water and in international markets tend to be larger with the staying power to budget into the future and plan projects that will take time to come onstream. Meanwhile, the shallow-water Gulf of Mexico rig count is driven by independents drilling for gas, and they normally set capital expenditures within their anticipated cash flows for the year. This year, those capital expenditures will fall as much as 20%. C. Stedman Garber Jr., GlobalSantaFe president, believes drilling activity in the U.S. could pick up in the second half of this year with a little help from the weather and the economy. Garber addressed peers at an International Association of Drilling Contractors luncheon. He concedes that winter would have to last "all the way into next July" to have any substantial impact on gas prices in the first half of the year. But an upturn in the economy and the residual impact of a decline in gas production during first-half 2002 could brighten the picture by year-end. "I subscribe to the knowledge that the longer drilling activity in the Gulf of Mexico is suppressed, the greater the resulting production decline will be and the sharper the snap back." -Don Lyle and Jodi Wetuski
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