Subsea Services

photo Words really cannot capture the 180-degree change in psychology impacting construction projects on the Outer Continental Shelf between 1998 and 1999. A year ago, customers were so concerned with equipment availability that the timing of a number of construction projects was accelerated into the first quarter. It would be an understatement to say that equipment availability is no longer a concern in today's markets.

CDI fared well in 1998 even as the market cratered. Demand and rates held fairly firm throughout most of the year, especially in the shallow water regions from the beach to 300 fsw. CDI dominates the next sector, the saturation diving market on the OCS from 300 to 1,000 fsw. Since divers receive premium pay for SAT diving, personnel shortages did not curtail operations. In fact, a record 46 offshore personnel cracked $100,000 in wages and company paid benefits in 1998.

photo We shared the vision of Sonny Freeman, formerly the Chief Operating Officer of American Oilfield Divers, that a void was opening in the shallow water market. The reputation of Sonny and his Aquatica management team attracted experienced divers and customers with whom they had developed relationships over many years. Acceptance of the new company was beyond our most optimistic expectations as Aquatica exceeded its 1998 Business Plan with just two of the four DSVs planned. This investment allows CDI to participate in a market segment experiencing strong demand while keeping our people focused upon the company's Deepwater strategy.

1998 was an outstanding year for CDI vessels that operate on the OCS. Utilization of the two saturation vessels, the Cal Diver I and II, improved to 80% from 73% in the prior year due principally to work in support of alliance partner Horizon Offshore. Shortages of diving personnel were particularly evident in the rates paid for our two utility boats as the Cal Diver III and IV generated revenues of $11,200 per day, an 18% improvement over 1997.

photo The versatility of our fleet was also demonstrated as CDI DP vessels conducted a number of technically challenging construction projects on the OCS. The Witch Queen performed extremely well on a complicated turnkey project which involved setting risers, installing hot taps and tying in six High Island pipelines. At Orsis, Cal Dive subcontracted Horizon to lay 20,000 feet of eight-inch pipe and a control umbilical, while the Balmoral Sea and Merlin handled the tie-in and pipeline crossings. Customers responded enthusiastically to a new product offering: laying coiled line pipe and umbilicals as a very cost effective means of hooking up OCS reservoirs which decline rapidly.

Overshadowed by the Deepwater Gulf excitement is the "Subsalt" play which extends from mid-water OCS to depths that overlap Deepwater discoveries. The large size of the fields, relatively shallow water depth and reservoirs in close proximity to existing infrastructure all make the Subsalt trend attractive. At present only three of 46 announced Subsalt discoveries are on production. During 1998 CDI assisted in construction activities related to three Subsalt discoveries: Gemini, Agate and Penn State. Advances in technology, particularly 3D and 4D seismic that can "see through" the salt layers, are expected to reignite exploration on the OCS at some point in the next few years.

We are building a new 120-foot utility DSV to replace the original Cal Diver IV as part of an ongoing process to upgrade the quality of the CDI fleet. The Cal Diver IV is an excellent case study of the economics of our business. This utility boat, converted to facilitate diving operations, was purchased at a cost of $300,000 in November 1990. Exactly eight years later the vessel was retired after generating a cash return (EBITDA) of $4.4 million. We are happy to report that she remains a part of the Cal Dive family as the Mr. Joe of the Aquatica fleet.

photo 1999 will see CDI launch a new product line, full field development, to assist cash constrained customers on the OCS. CDI originally designed this concept to respond to the impact of Deepwater lease expirations. Stated simply, the goal is to bring new fields online in periods as short as seventeen weeks. Working with industry standard designs, Cal Dive has stocked subsea trees, prefabricated modules, well panels and controls and umbilical tubes ready for immediate assembly. Decks, caissons and platforms are accessible in the "inventory" of ERT-owned facilities. 1999 should also see the impact of cost efficiencies resulting from a supply chain study performed by Arthur Andersen LLP. The recommendations from that study drove a complete reorganization of our newly expanded operations base in Morgan City, LA.

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