operational cash flow, further challenging their ability to continue to operate at past levels and reducing the near-term outlook for our products and services. The economic slowdown is also negatively impacting the incremental demand for hydrocarbon products especially in OECD (Organization for Economic Cooperation and Development) countries.
Oil and Natural Gas Prices
Oil (West Texas Intermediate (WTI)/Cushing Crude Oil Spot Price) and natural gas (Henry Hub Natural Gas Spot Price) prices are summarized in the table below as averages of the daily closing prices during each of the periods indicated.

                                                  Three Months Ended
                                                      March 31,
                                                   2009         2008

                Oil prices ($/Bbl)              $  43.18      $ 97.86
                Natural gas prices ($/mmBtu)        4.55         8.64

Oil prices averaged $43.18/Bbl in the first quarter of 2009. Prices ranged from a low of $33.98/Bbl in mid-February to a quarter high of $54.34/Bbl in late March. Low oil prices throughout much of the quarter reflected concerns about weak worldwide demand relative to supply. Oil prices strengthened in late March on reports of lower OPEC production levels. The International Energy Agency ("IEA") estimated in its April 2009 Oil Market Report that worldwide demand would decrease 3% to 83.4 million barrels per day in 2009, down from an estimated 85.8 million barrels per day in 2008.
Natural gas prices averaged $4.55/mmBtu in the first quarter of 2009. Natural gas prices decreased from a high of $6.11/mmBtu in early January to a low of $3.59/mmBtu in late March. The decrease in natural gas prices was the result of a number of factors, including a weak demand forecast, high production levels and high levels of natural gas in storage relative to the five-year average. In addition, gas prices reflect growing concern that imports of liquefied natural gas ("LNG") to the U.S. could rise in 2009 as global supply of LNG increases and demand for LNG weakens in international markets. Rig Counts
Baker Hughes has been providing rig counts to the public since 1944. We gather all relevant data through our field service personnel, who obtain the necessary data from routine visits to the various rigs, customers, contractors and/or other outside sources. This data is then compiled and distributed to various wire services and trade associations and is published on our website. Rig counts are compiled weekly for the U.S. and Canada and monthly for all international and U.S. workover rigs. Published international rig counts do not include rigs drilling in certain locations, such as Russia, the Caspian and onshore China, because this information is not readily available.
Rigs in the U.S. are counted as active if, on the day the count is taken, the well being drilled has been started but drilling has not been completed and the well is anticipated to be of sufficient depth to be a potential consumer of our drill bits. Rigs in Canada are counted as active if data obtained by the Canadian Association of Oilwell Drillers and Contractors indicates that drilling operations have occurred during the week and we are able to verify this information. In most international areas, rigs are counted as active if drilling operations have taken place for at least 15 days during the month. In some active international areas where better data is available, we compute a weekly or daily average of active rigs. In international areas where there is poor availability of data, the rig counts are estimated from third-party data. The rig count does not include rigs that are in transit from one location to another, rigging up, being used in non-drilling activities, including production testing, completion and workover, and is not expected to be significant consumers of drill bits.

Our rig counts are summarized in the table below as averages for each of the periods indicated.

                                             Three Months Ended           %
                                                 March 31,             Increase
                                              2009         2008       (Decrease)

          U.S. - land and inland waters       1,287        1,712           (25 %)
          U.S. - offshore                        57           58            (2 %)
          Canada                                332          516           (36 %)

          North America                       1,676        2,286           (27 %)

          Latin America                         371          373            (1 %)
          North Sea                              50           40            25 %
          Other Europe                           39           51           (24 %)
          Africa                                 59           65            (9 %)
          Middle East                           267          272            (2 %)
          Asia Pacific                          239          245            (2 %)

          Outside North America               1,025        1,046            (2 %)

          Worldwide                           2,701        3,332           (19 %)

The rig count in North America decreased 27% primarily due to declines in natural gas drilling activity. Outside North America, the rig count decreased 2%. The rig count in Latin America decreased due to lower activity in Argentina, Venezuela and Colombia. The North Sea rig count increased primarily due to increases in the Norwegian sector. The rig count in Africa decreased primarily due to lower activity in Nigeria and Algeria. The rig count decreased in the Middle East due to lower activity in Saudi Arabia, Oman and Qatar and in the Asia Pacific region due to lower activity in India and Australia.
RESULTS OF OPERATIONS
The discussions below relating to significant line items from our consolidated condensed statements of operations are based on available information and represent our analysis of significant changes or events that impact the comparability of reported amounts. Where appropriate, we have identified specific events and changes that affect comparability or trends, and where possible and practical, we have quantified the impact of such items. In addition, the discussions below for revenues and cost of revenues are on a combined basis as the business drivers for the individual components of product sales and services and rentals are similar.
The table below details certain consolidated condensed statement of operations data and their percentage of revenues for the three months ended March 31, 2009 and 2008, respectively.

                                                     Three Months Ended March 31,
                                                     2009                   2008

      Revenues                                $ 2,668       100 %   $ 2,670       100.0 %
      Cost of revenues                          1,960        73 %     1,769          66 %
      Research and engineering                    109         4 %       103           4 %
      Marketing, general and administrative       281        11 %       250           9 %


Revenues

                                         Three Months Ended
                                             March 31,             Increase
                                          2009         2008       (Decrease)      % Change

    Geographic Revenues:
    North America                      $  1,083      $ 1,177       $     (94 )        (8 )%
    Latin America                           288          235              53          23 %
    Europe, Africa, Russia, Caspian         776          762              14           2 %
    Middle East, Asia Pacific               521          496              25           5 %

    Total revenues                     $  2,668      $ 2,670       $      (2 )         0 %

Revenues for the three months ended March 31, 2009 were flat compared with the three months ended March 31, 2008, primarily due to declines in North America as a result of contractions in customer spending resulting in sharp reductions in activity, lower pricing for our products and services and the weakening global economic environment offset by increases in activity outside of North

America in key geographic areas. The worldwide rig count decreased 19% for the three months ended March 31, 2009 compared with the three months ended March 31, 2008.
North America
Revenues in North America, which accounted for 41% of total revenues, decreased 8% for the three months ended March 31, 2009 compared to the three months ended March 31, 2008, due primarily to the drop in drilling activity in North America. U.S. revenues were down 5% compared to a rig count that was down 24%. The activity declined as customers adapted to a market characterized by lower natural gas and oil prices, scarce commercial credit, ample natural gas supplies, and reduced natural gas demand. Our results highlight the differential performance of our Completion and Production segment, where U.S. revenues were up 13%, compared to our Drilling and Evaluation segment, where U.S. revenues were down 23% in line with the rig count decline. Canada revenues decreased 19% as a result of decreased activity evidenced by a 36% decrease in the rig count. A weaker Canadian dollar was also a contributing factor to the decline in Canadian revenue.
Outside North America
Revenues outside North America, which accounted for 59% of total revenues, increased 6% for the three months ended March 31, 2009 compared with the three months ended March 31, 2008. This increase reflected the relative strength of certain international markets, including Latin America, Norway, and Africa, partially offset by the contraction in the Saudi Arabia, Russia, Caspian, and U.K. markets.
Latin America revenues increased 23% compared to the first quarter of 2008 and compared to a 1% decrease in the rig count. The largest revenue increases occurred in Brazil, Mexico, Colombia and Ecuador. The improved revenue in Latin America was led by directional drilling and drilling fluids product lines in Brazil, completion systems in Mexico and directional drilling and artificial lift product lines in Colombia.
Europe, Africa, Russia, Caspian ("EARC") revenues increased 2% compared to the first quarter of 2008. The increase in revenues was led by the Africa region with an increase in directional drilling, completions and artificial lift activity in Libya and by completions activity in Nigeria. The increase was partially offset by a decrease in Europe as increased sales for directional drilling in Norway was more than offset by weaker sales in the U.K. and a decrease in Russia and the Caspian in our completion product-line sales.
Activity in the Middle East, Asia Pacific ("MEAP") region continued to expand, reflected by a 5% increase in revenues compared to the first quarter of 2008. Middle East revenues increased 2% compared to a 2% decrease in the rig count, and Asia Pacific revenues were up 8% compared to a 2% decrease in the rig count. The improvement in revenues from the region was led by higher activity in the United Arab Emirates, Egypt, Oman, Indonesia, Brunei, and India partially offset by lower revenues from Saudi Arabia and Qatar. Cost of Revenues
Cost of revenues for the three months ended March 31, 2009 increased 11% compared to the three months ended March 31, 2008. Cost of revenues as a percentage of revenues was 73% and 66% for the three months ended March 31, 2009 and 2008, respectively. The increase in cost of revenues as a percentage of revenues is primarily due to lower activity worldwide, price deterioration primarily in North America, costs associated with employee severance of $45 million, costs associated with our provision for doubtful accounts, and a change in the geographic and product mix from the sale of our products and services.
Research and Engineering
Research and engineering expenses increased 6% for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. We continue to be committed to developing and commercializing new technologies as well as investing in our core product offerings. The increase in research and engineering expenses includes $3 million associated with employee severance. Marketing, General and Administrative
Marketing, general and administrative expenses increased 12% for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. The increase resulted primarily from costs associated with finance redesign efforts, software implementation activities and $6 million associated with employee severance.

Interest Expense
Interest expense increased $20 million for the three months ended March 31, 2009 compared with the three months ended March 31, 2008 due to higher average debt levels as a result of the long-term debt issuances of $1.25 billion in October 2008.
Income Taxes
Our effective tax rate in the first quarter of 2009 is 31.5%, which is lower than the U.S. statutory income tax rate of 35% due to lower rates of tax on certain international operations, offset by state income taxes.
Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. These audits may result in assessment of additional taxes that are resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. We have received tax assessments from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding these matters. We believe we have substantial defenses to the questions being raised and will pursue all legal remedies should an unfavorable outcome result. However, resolution of these matters involves uncertainties and there are no assurances that the outcomes will be favorable. We provide for uncertain tax positions pursuant to FIN 48, Accounting for Uncertainty in Income Taxes: an Interpretation of FASB Statement No. 109.
OUTLOOK
Worldwide Oil and Natural Gas Industry Outlook This section should be read in conjunction with the factors described in "Part II, Item 1A. Risk Factors" and in the "Forward-Looking Statements" section in this Part I, Item 2, both contained herein. These factors could impact, either positively or negatively, our expectation for: oil and natural gas demand; oil and natural gas prices; exploration and development spending and drilling activity; and production spending.
The credit crisis, lower oil and natural gas prices, and a weakening global economic outlook are all impacting our business environment. Our customers typically fund their activity through a combination of borrowed funds and internally-generated cash flow. The continued limited availability of commercial credit is having a negative effect on both the general economy and the ability of our customers to continue to operate at pre-crisis levels. The decline in oil prices and natural gas prices from 2008 mid-summer highs has also reduced our customers' operational cash flow, further challenging their ability to continue to operate at past levels as well as their future spending for our products and services. The economic slowdown is also negatively impacting the incremental demand for hydrocarbon products.
Our outlook for exploration and development spending is based upon our expectations for customer spending in the markets in which we operate, and is driven primarily by our perception of industry expectations for oil and natural gas prices and their likely impact on customer capital and operating budgets as well as other factors that could impact the economic return oil and gas companies expect for developing oil and gas reserves. Our forecasts are based on our analysis of information provided by our customers as well as market research and analyst reports including the Short Term Energy Outlook ("STEO") published by the Energy Information Administration of the U.S. Department of Energy ("DOE"), the Oil Market Report published by the International Energy Agency ("IEA") and the Monthly Oil Market Report published by the Organization for Petroleum Exporting Countries ("OPEC"). Our outlook for economic growth is based on our analysis of information published by a number of sources including the International Monetary Fund ("IMF"), OECD and the World Bank.
As an oil service company, our revenue is dependent on spending by our customers for oil and natural gas exploration, field development and production. This spending is dependent on a number of factors, including their forecasts of future energy demand, their expectations for future energy prices, their access to reserves to develop and produce oil and gas and their ability to fund their capital programs.
Our industry is cyclical, and past cycles have been driven primarily by alternating periods of ample supply or shortage of oil and natural gas relative to demand. The current down cycle is different in that the primary driver is the rapid deterioration of the global economy, which has led to declining demand and forecasts for further reductions in future demand. The drop in commodity prices, in conjunction with reduced access to the debt markets, has forced many oil and gas companies to reduce their spending to levels supportable by their expected free cash flow.

In North America, the outlook for spending in 2009 is also dependent on the outlook for the natural gas industry. Increased drilling activity through September 2008 and the application of horizontal drilling and advanced fracturing and completion technologies in the unconventional gas fields has resulted in gas production exceeding demand. Natural gas prices have fallen from mid-2008 highs and are not expected to increase until drilling is reduced to a level below the rate necessary to offset depletion, and supply and demand come back into balance. The commodity cycle in North American natural gas is being aggravated by the recession, storage levels that are approximately 35% greater than last year, low natural gas prices and reduced access to credit for many of our customers.
The outlook for the global economy and the depth and duration of the recession remain uncertain. We use third-party forecasts, including forecasts by the IMF, World Bank and OECD, to set our expectations for global economic growth. Through April 2009, each month has brought incremental negative revisions to the forecasted economic level for 2009. The IEA, OPEC and the Energy Information Administration ("EIA") have also made significant negative revisions to their forecasts of 2009 oil demand over the past ten months.
Expectations for Oil Prices - As a result of the global economic recession, demand for oil is expected to decrease in a range from 1.4 million to 2.4 million barrels per day in 2009 relative to 2008. Non-OPEC supply growth is expected to moderate in response to decreased spending and is now expected to be unchanged (+/- 0.3 million barrels per day). Decreased demand and flat non-OPEC production are expected to pressure OPEC to make significant cuts in its production levels in an attempt to support oil prices. Inventories and spare productive capacity, which buffer oil markets from supply disruptions, are expected to increase as the gap between increasing supply and decreasing demand grows. In its April 2009 STEO report, the DOE forecasted oil prices to average $53/Bbl in 2009. The DOE expects the balance of supply in 2010 to tighten, allowing prices to increase to an average of $63/Bbl for 2010. Variables that could significantly affect this forecast include changes in the assumption for global economic growth and energy demand, changes or delays in non-OPEC supply additions and OPEC production quota discipline.
Expectations for North American Natural Gas Prices - The combination of rising natural gas production and recession-driven decreases in natural gas demand are expected to drive gas prices lower in 2009 relative to 2008. In its April 2009 STEO report, the DOE forecasted that U.S. natural gas demand would decrease 2% in 2009 compared to 2008, assuming continued economic weakness and that natural gas prices would average about $4.24/mmBtu in 2009, down from $8.89/mmBtu in 2008. North American gas-directed drilling activity is expected to decrease in the U.S., resulting in fewer supply additions from new wells to offset production declines from existing wells. Gas prices are expected to remain soft until the gap between supply and demand tightens as gas demand growth exceeds gas supply growth for some period of time. The DOE forecasts gas prices to increase modestly to $5.80/mmBtu in 2010. Prices remain volatile with the economy, weather-driven demand, imports of Canadian gas, LNG imports, gas storage levels, and production from the lower 48 states' gas fields playing significant roles in determining both prices and price volatility. Variations in the supply demand balance will be reflected in gas storage levels.
Industry Activity and Customer Spending - Our forecasts of activity and customer spending are based upon our discussions with major customers, reviews of published industry reports, our outlook for oil and natural gas prices described above, and our outlook for drilling activity, as measured by the Baker Hughes rig count. We believe that our customers' 2009 spending plans are based on forecasts of oil and gas prices and energy demand similar to those stated above. In addition, each company's 2009 spending plans also reflect company-specific drivers such as their ability to finance their 2009 spending plans as well as their assessments of the uncertainty associated with their forecasts. At current and expected oil and natural gas prices, some projects that were planned in 2008 to begin in 2009 or 2010 may no longer be economically attractive. In light of current economic conditions and current oil and gas prices, we believe that our customers, as a group, will decrease spending in 2009 relative to 2008.
• North America - Both customer spending and drilling activity in North America, primarily directed at developing natural gas supplies, are expected . . .