Worldwide offshore drilling activity climbed significantly during August, two recent surveys indicate, with major oils finally increasing their E&P spending, Wall Street oil analysts say. "With commodity prices where they are and cash flows what they are, it's about what you would expect," says Kenneth I. Sill, Houston-based oilfield-services analyst for Credit Suisse First Boston. "Essentially, major international oil companies finally are starting to spend money. The U.S. natural gas market has driven the cyclical improvement up to now. But the international majors, which work more offshore and overseas, have begun to increase their exploration and production." G. Allen Brooks of CIBC World Markets in Houston says, "Major oil companies usually tend to be slowest to start spending money after prices increase. They also are more internationally focused. So higher overseas offshore rig counts and dayrates reflect more spending by the majors. With commodity prices where they are, I would expect the growth trend to continue." Worldwide offshore rig utilization reached 85% by the end of August, according to Mark S. Urness, who follows drilling contractors for Salomon Smith Barney in New York. "We believe utilization will exceed 90% in 2001, putting sharp upward pressure on dayrates for virtually all rig types in all regions," he says. Results of the investment banking firm's midyear update to its E&P spending survey show that worldwide upstream expenditures will rise by 18.6% this year. "With 68% of respondents planning increases for next year as well, it appears 2001 will be another year of robust growth. That reinforces our thesis that the industry is entering a multiyear growth phase," says Urness. "In addition, many major oil companies are shifting emphasis to production growth from cost reduction. This bodes well for future upstream capital expenditure growth." The increased offshore activity is being translated into higher dayrates. Global Marine Inc. reports that its worldwide SCORE (Summary of Current Offshore Rig Economics) jumped 6.6% in August from July-the monthly survey's largest increase in nearly eight years. "The sharp increase in August is supported by improvements in every major market," Global Marine chairman and president Bob Rose adds. "We are encouraged to see that increasing international activity, particularly in West Africa and the North Sea, is translating into higher dayrate fixtures for these regions." The SCORE report followed Baker Hughes Inc.'s international rig count, which showed 371 offshore units at work worldwide during August, nearly 5.7% more than in July and 37.4% more than in August 1999. The biggest year-to-year increase occurred in the United States, where the Houston service and supply company found 159 offshore rigs making hole in August, 59% more than a year earlier. But the region's month-to-month increase was modest-only two more units than July. Latin America was a different story. Baker Hughes found 46 rigs working offshore there during August, 21% more than in July and 24% more than a year earlier. "Brazil has contracted for more rigs. It also opened its market to international oil companies," Sill says. "So it's not surprising that offshore activity there is increasing. But I expect it to take off more there next year." "This trend has been under way for some time, and I expect it to continue," Brooks says. "As utilization increases, dayrates start to respond, which the SCORE reflects. That's a function of profitability. The Gulf of Mexico was the first market to turn up last year. Then we saw signs of West Africa and the North Sea start to pick up, first with contracts early this year and now with rigs going to work. "So dayrates, instead of inching up, are starting to jump, which is the sign of a tight market." -Nick Snow
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