During the past 10 years, return on capital employed has been poor for the eight largest offshore drilling companies. But all that may soon change, according to a research report by Standard & Poor's. Although an industry upturn in 1998 and 2001 would have yielded superior returns for investors in the offshore-drilling sector, longer-term investors wouldn't have faired nearly as well during the past decade, the study says. During that period, "offshore drillers as a group destroyed value on a risk-adjusted basis," says S&P analyst John Kartsonas. He notes that GlobalSantaFe and Ensco International exhibited the highest returns on capital employed for the period while Transocean was the worst performer. "Despite these past results, however, we believe the [offshore-drilling] group should perform well from this point forward," the analyst predicts. "Fundamentals continue to be very strong, with oil prices approaching record levels and global [rig] demand high. "As demand continues to increase and supplies become scarcer and more difficult to develop, the demand for offshore drilling should continue to increase." Kartonas believes the sector is at the beginning of a major cycle that is going to last for a longer period than previous cycles-and should provide greater returns for existing shareholders who have a long-term investment horizon and the patience to wait. In a recent presentation to investors, Jon Marshall, president and chief executive officer for Houston-based Global SantaFe, echoed these sentiments. A key indicator of the demand for hydrocarbons is growth in gross domestic product (GDP), and the 1985-2003 period saw a compound annual growth rate in GDP of about 2.5% in the 14 industrialized nations and a 3.4% growth in GDP in the emerging economies, he says. "Going forward, GDP growth will continue to be good in both sectors, particularly in the emerging-market countries like China, which are going to grow faster than the more mature economies." As a result of this growth, Marshall sees worldwide energy use rising 2.2% per year, from 204 million barrels of oil equivalent per day in 2003 to 265 million per day in 2015. Crude oil consumption, he says, is expected to grow 1.8% annually, from 79 million barrels per day in 2003 to 98 million daily barrels in 2015. "When coupled with an estimated 5% annual depletion rate in existing oil production, this means that over the next 12 years the industry is going to have to figure out how to come up with 56 million barrels per day of new oil production." On the natural gas side, he sees worldwide demand growing 3.1% per year, from 273 billion cubic feet (Bcf) per day in 2003 to 393 Bcf daily in 2015. "Again factoring in a modest 5% depletion rate in existing gas fields, this means the industry needs to come up with another 245 Bcf per day of new gas production." Says Marshall, "All this is going to take a lot of investment by the industry-much of it in the offshore arena where significant reserves can be found." Carl F. Thorne, chairman and chief executive officer for Ensco International in Dallas, agrees that supply/demand fundamentals will ultimately dictate greater offshore drilling levels. "There are clear signals emerging that stronger economic activity worldwide is fueling increased energy consumption, with demand growth particularly strong in developing countries such as India and China." Meanwhile, he notes that the current global production-capacity cushion is only 2.5 million barrels per day-about half what it was three years ago. Says Thorne, "With world oil demand growing by 1.5 million barrels per day, that cushion could quickly evaporate-particularly when one factors in current depletion rates." The Ensco head notes that 70% of today's oil production comes from fields discovered more than 30 years ago, and that production decline rates in many of these fields is becoming of increasing concern.