An analysis of the U.S. Gulf of Mexico market reveals large upside potential for growth over the next six years, in terms of installation of production facilities. Despite weaker overall market conditions experienced in 2002 for offshore-drilling companies, marine contractors and oil-service suppliers, orders for subsea equipment actually gained ground. The number of booked subsea trees declined in all market regions of the world except North America, which experienced a jump from 49 trees booked in 2001 to 71 booked in 2002. This year and beyond, the future of the subsea business looks just as bright, as more operators advance their projects and choose this method for producing their oil and gas. Quest Offshore's outlook for viable candidates for North American subsea development reveals 80 field projects being considered. These will need a range of 350 (base case) to 547 subsea trees to be delivered between 2003 and 2008. Capital expenditures for subsea hardware-comprising subsea trees, wellheads, controls, chokes and valves-are forecast to reach $2.6 billion for North America during the next six years on a normalized (strong) market case. The market has been very weak. Deepwater action A review of data from the Minerals Management Service reveals that of 809 wells drilled in the Gulf of Mexico in 2002 (a relatively weak year), a solid 20% were situated in more than 1,000 feet of water. There were 101 wells drilled in more than 3,000 feet of water. Many of these commercially viable deepwater and ultradeepwater discoveries will contribute to the pace of offshore-field developments, including new floating facilities, subsea tiebacks or a combination of the two. Our positive outlook is echoed by several industry players, including Bart Heijermans, vice president of deepwater project development for El Paso Energy Partners. He believes subsea tiebacks and multi-use floating platform facilities have a strong future in the Gulf of Mexico. Heijermans offered his insights during his recent keynote address at Quest Offshore's Marine Construction 2003 Conference & Risk Forum. He noted that the cost of deepwater platforms has significantly come down, effectively reducing the reserve threshold necessary for project sanctioning. As a result, a new generation of deepwater production platforms will likely be developed with a focus on re-use and relocation. These platforms will be specifically designed to develop smaller and more remote fields that have shorter reserve-life spans. The El Paso executive noted the current ratio of deepwater platforms to subsea tiebacks is one-to-one, but he expects a shift in favor of subsea tiebacks, as at least 50 subsea projects tied back to deepwater platforms come onstream within the next five years. Ultimately the ratio could reach one deepwater production platform per two subsea tieback projects. Suppliers' outlook Although the near-term market is clearly under some pressure, subsea suppliers look forward to the rest of 2003. They expect the market to show at least modest improvement, depending in part on higher rig utilization and oilfield infrastructure spending by operators. Cameron anticipates an increase in the number of trees ordered by Brazil's Petrobras and it expects ExxonMobil to render a decision on its Kizomba C project offshore Angola during the third or fourth quarter of 2003. According to Cameron, the value of the award could be $250- to $260 million. In a recent Cooper Cameron conference call, chief executive Sheldon Erikson indicated that the firm expects its subsea orders to rise 17% this year, with potential subsea revenue increases of approximately 33%, to $400 million from $300 million. Although FMC Technologies expects the market to continue to grow, the company does not anticipate a big rebound in the U.S. market just yet. The company expects Petrobras to be fairly active in Brazil's subsea marketplace. It also thinks that BP in the deepwater regions of the Gulf of Mexico and ExxonMobil in West Africa will also be active and may award some subsea contracts. Chairman Joe Netherland and FMC Technologies Energy Systems vice president Peter Kinnear revealed that FMC's expectations for new orders in 2003 are positive, with activity flat to up, with improving margins. They expect 15% to 20% unit growth in 2003. Information gleaned from Quest Offshore Resources' Quest Subsea-Data-Base reveals unprecedented growth in the global subsea market during the next decade. This market showed extraordinary growth in the 1990s, more than doubling to 1,092 subsea trees in use from 426 trees in the 1980s (measured in number of subsea trees delivered). Current indicators point to a tripling of the market in the new millennium with an estimated 3,550 trees to be delivered in this decade (2000 to around 2008). This will be comprised of about 808 trees installed, 563 trees under construction and the balance new orders. Quest predicts about 1,613 new orders for subsea trees globally during the next four years. This represents a potential annual average of about 400 new subsea tree orders, growing from a base level of 250 to 280 orders in 2003, with the potential for 400 to 500 new orders in 2005 and 2006. Weather challenges The number of booked subsea trees in 2002 declined in all non-North American regions-in some substantially. The number of trees booked in Asia-Pacific, the North Sea and Brazil/South America fell 58.82%, 38.79% and 68.49%, respectively. Following such a tough year, when the expected recovery in the global offshore industry did not materialize, most subsea suppliers posted good results. Cooper Cameron's Cameron division managed to increase its revenues in 2002 to $918.7 million, up $20.4 million from 2001 revenues. For in-bound orders and backlog, 2002 was a banner year. The division set a new record with $1.08 billion in orders-including nearly $437 million in subsea business, which also set a record for the highest subsea orders in a given year. Cameron's backlog grew an impressive 33% to $695.8 million. FMC Technologies' energy-systems division, comprised of energy-production systems and energy-processing systems, also managed to post improvements in 2002. It logged revenues of $1.34 billion, up 18.6% from 2001 revenues. The increase was due entirely to the production-systems business, which recorded 2002 revenues of $940.3 million, compared with $725.9 million the year before. The whole division's backlog stood at $932.5 million, up from a December 2001 backlog of $675.9 million. Dril-Quip's products group posted increased revenues for the nine months ended September 2002, of $135.6 million, up from $129.8 million during the same period in 2001. Although 2002 backlog figures were not yet available at press time, the company has posted increasing backlogs since 1999 when its backlog was $81 million. Since then, its backlog increased to $93 million in 2000 and $120 million in 2001. Aker Kvaerner posted a significant increase in its 2002 revenues related to subsea and oilfield products. Revenue from these groups nearly doubled, to $1.05 billion, compared with $544 million is 2001. The subsea and oilfield-products order reserve stood at $553.5 million. ABB's oil, gas and petrochemicals division (now a discontinued operation and on the auction block), logged a loss of $853 million. However, subsea equipment orders stood at $1.15 billion, a significant increase from 2001, primarily due to the North Sea activity. The subsea marketplace continues to shrink, with Cameron and FMC booking 77.7% of worldwide subsea tree orders in 2002. Cameron won 108 orders for subsea trees, accounting for 39.4% of market share. FMC snared 105 trees, accounting for 38.3% of all trees ordered. M Paul Hillegeist is president of Quest Offshore Resources Inc., a database and consulting firm in Houston. Quest Subsea-Data-Base is a trademark of Quest Offshore Resources.

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