Worldwide socio-political tensions, European community unification in 1992 and a U.S. economy punctured by a burgeoning deficit and excessive debt, will help ensure global economics in the 1990's will be more uncertain and volatile than at anytime in recent history.

The effects of these will most assuredly be felt by the oil exploration and producing industry, which has been operating under an oil pricing scenario that is contrary to fundamental supply and demand tenets. In the U.S., these issues are placing enormous pressure on the long-term global competitiveness of that nation's service and contracting industry. Further hampered by austere environment restrictions, the domestic industry is finding it onerous to economically provide the future needs of the world's largest energy consumer. This restrictive environment is promoting an increase in imported oil and the expatriation of technology into nations providing favorable regulatory climates and the potential for larger reserves.

These complex macro issues create an environment of heightened uncertainty, not only for the U.S., but the worldwide economy's demand for energy products as well. These issues will have a dramatic effect on how the suppliers of energy evaluate the economics of that supply. Those issues not easily solved mask those of a more understandable nature - reserve replacements. The impact of steady reductions in reserve replacements suggest a more alarming trend for the U.S. where imports, as a percentage of production, has increased to more than 50% of demand. Correspondingly, with the U.S. import market viewed as a major opportunity, international governments are promoting regulatory climates that provide opportunities to add reserves, rather than imposing restrictive environments. Cognizant of the international climate, offshore drilling contractors, for instance, are more inclined to cease operations in the U.S. Gulf Coast and forego the expense of shipping a rig overseas. This expatriated technology will have the opportunity to operate at higher utilization and day rates, thus creating a competitive environment that tightens the spiral.

These global economic issues exemplify the need to realign current exploration practices in an environment where cost effectiveness is paramount. Central to this realignment is a contractual relationship emphasizing performance. In this vein, incentives to drilling contractors, in the form of lump sum or turnkey contracts, are becoming more and more popular as a means for operating companies to attempt to lower or at least fix finding costs. Drilling contractors are a key ingredient to this strategy; however, a large fraction of the drilling process - those products and services supplied by service companies - have not yet become a part of the equation. This paper makes a case for the inclusion of the cost savings, and drilling efficiencies that can be realized by including integrated drilling products and services from service companies in the incentive contracts as they are visualized and postulated by operators for drilling contractors.

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