A combination of continued high commodity prices and an increasing number of new discoveries could create a surge of field development plans next year, followed by major contract awards to marine contractors. "The potential scope of work could exceed deepwater marine construction capacity by 2002," says Geoff B. Kieburtz, who follows oil and gas stocks for Salomon Smith Barney Inc. in New York. "Rapidly accelerating demand and limited new capacity could set the stage for robust earnings growth for deepwater-focused construction contractors." More than 180 fields in more than 1,500 feet of water were discovered between 1995 and 1999, and another 158 discoveries could be made between 2000 and 2002 in increasingly deep water, he says. But development did not keep pace, largely because oil prices contracted to $10 per barrel in 1998 and early 1999. "Few deepwater fields have commenced production during the past two years. Instead, upstream operators have focused on merging, rationalizing and recapitalizing." Worldwide subsea construction spending peaked at approximately $3.5 billion in 1998. At that time, three companies- Coflexip Stena Offshore, Stolt Offshore SA and Halliburton Co.'s Rockwater division-accounted for nearly 60% of total revenues. Kieburtz suggests that each of these firms has strengthened its market position in the past two years. "By 2002, we expect subsea spending to surpass 1998's peak level, with an increased concentration among these three companies." Barriers to entering the deepwater construction business will remain extremely high, due to costly research and development, a need for geography-specific knowledge and a limited supply of premium vessels and engineers, he adds. Newbuild world-class vessels cost $150- to $200 million, with construction lead times of up to 30 months. Kieburtz originally expected deepwater construction demand to grow at least 15% annually during the next three to five years. "However, due to the delayed onset of this growth and steady additions to the deepwater-development backlog, we now believe annual growth may average 20% to 25%."

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