Introduction: Andrew McBarnet provides an end of term report for the seismic business in 2000 from November's Petex event in London, and looks forward to the industry's future of which the only certainty is further change if not upheaval.
Treasures from the Depths' turned out to be something of an ambivalent title for Petex 2000, the biennial get together of the European exploration community last month organized by the Petroleum Exploration Society of Great Britain (PESGB).
The promise of wealth from hydrocarbons below the earth's surface was doubtless the intended, upbeat meaning. But, in the current climate, it could easily have been mistaken for a reference to the so far elusive recovery of the seismic and related industries from the depths of a severe downturn in their fortunes.
Nursing the seismic business back to health may require some further radical treatment. That was the clear message from Gary Jones, arguably the person best placed to diagnose the sick patient.
Jones spoke to the Petex conference on the day that he officially took over the reins as first president of WesternGeco, the new combined company which will immediately assume a 50 percent or so share of the geophysical services market worldwide and arguably exercise a dominant influence over its future direction.
Unsurprisingly Jones said that Schlumberger and Baker Hughes expected the merger of Western Geophysical and Geco-Prakla to provide cost reductions, increased efficiency and improved R&D performance.
'It is clear to me that only the companies that most efficiently deploy capital and operate will survive. While this is no revelation to most businesses, it is clearly a lesson that needs relearning in the seismic contracting world.'
Judging from Jones' analysis of where the industry went wrong, it would be hard to make a case for rapid recovery or indeed a stable market in the future.
Like any business anchored by technology, he said the geophysical service industry had to be fast-moving, knowledge-based and open to risk.
Yet, in the commitment to providing customer-value, virtually every major contractor steered their business into some very rough financial waters and were only just beginning the recovery process.
Jones did not acknowledge the irony when he explained that the adoption of 3D technology, one of the most significant advances in the history of exploration, proved to be the contractors' undoing.
In effect they were too anxious to please their oil company customers who were insisting on the benefits of 3D seismic data coverage. The result was that the seismic industry 'overbuilt and overextended, delivering a dramatic increase in capacity, both in total crew capability and multi-client or non-exclusive data'.
The timing could not have been worse. Much of the increased capacity was delivered between 1997 and 1999 just as the bottom dropped out of the market with the abrupt halt in oil company spending.
Even today the picture isn't pretty. Jones pointed to the fall in the seismic crew count from 450 in early 1998 to 250 in May this year, a figure which has not substantially changed.
The collapse was the direct result of reduced spending by oil companies constrained by restricted cash flows from the 1998/99 low oil pricing.
While the drilling rig count and oil prices have recovered, there have been no solid indicators of recovery in the geophysical sector. Jones said that conventional wisdom dictated that higher oil prices would spur drilling which stimulate the seismic market.
'But will it? And when? For how long?' he wondered, concluding that if oil and gas prices fall significantly in the first or second quarter 'we run the risk of missing one whole cycle.'
The economic reality, in Jones' view, was that profitability combined with simultaneous positive cash flow had been non-existent in the industry for some time owing to over-capacity and subsequent survival strategies through the crash.
He showed that Western Geophysical between 1995 and 1999 substantially increased the volume of data processing traces put through its London data processing centre. Yet in 1998/99, there was a 50 percent erosion in prices and slower volume growth which was mainly market related but influenced too by increased efficiency.
Marine acquisition trends told the same story with the cost per acquired trace now as low as 1.5 pennies (US) compared with around 5 pennies five years ago.
In most geographical areas, rates for the classic geophysical contracting business of acquiring and processing land and marine data on a proprietary basis for oil companies were, according to Jones, still below cost and not even the few profitable contracts were providing acceptable rates of return on capital.
His formula for survival in the commodity segments of the geophysical industry was efficient low cost operation, which is where we came in . . .
Jones could not resist comparing the plight of the geophysical services industry as a high tech business with dot com companies.
He said that a 3D marine seismic vessel such as the Western Trident towing 12 streamers would record 600 gigabytes a day, which compared with the 2.5 terabytes/day estimated to be the handling rate of MSN.com and the 10 terabyte daily volume of data handled routinely at Western Geophysical's pre-merger processing centre in London, only one of numerous facilities worldwide.
He noted that the combined worldwide data processing volume handling capability of WesternGeco would be one of the largest capabilities in the world, and that the process involved adding significant value to the input data.
Jones conceded that the valuations of dot com companies were down like geophysical companies, but asked 'if this kind of technological capability and leadership results in unacceptable returns, what can we do to achieve not only acceptable but breakthrough results. How do we get out of the commodity trap?'
He said the answer, based on the classic S-shaped technology adoption curve, was to be the low cost producer in the commodity segment and quickest to market with new technologies on the high value segment.
Investment dollars would flow to where higher returns could be achieved, and markets would eventually punish those who do not consistently produce profits and positive cash flow.
Jones made clear that WesternGeco intended to dedicate itself to innovation and technological leadership enabling the company to provide greater value to its customers.
This assertion underlined the general assumption in the industry that WesternGeco would follow the Schlumberger business model of using its worldwide research and development facilities and programmes to develop its own technology solutions.
Schlumberger has always argued that offering in-house technology gives it the edge over its competitors, although there was little evidence that Geco-Prakla as a company was winning market share from its competitors with its technology for marine seismic.
That was before the much heralded Q-Marine system from Schlumberger arrived on the scene last summer (OE August). As yet it is virtually untried in commercial operations, so its impact is hard to assess.
However, most observers feel that Q will eventually rule in the operation of WesternGeco vessels at the expense of suppliers of competing data acquisition systems currently used in the former Western Geophysical vessels.
At Petex there was some palpable apprehension about the more general effect of having one company in such a dominant position.
In the case of suppliers of seismic acquisition equipment and services to the marine and, for that matter, OBC, transition zone and land markets, there is a feeling that the available market opportunities may have diminished significantly given that Western Geophysical with Geco-Prakla were easily the two biggest companies in the business.
It is clearly too early to guess how the geophysical services market will adapt to the new combination.
Jones indicated that WesternGeco intended to be the world leader in seismic exploration but would be shifting the business focus by moving seismic into the reservoir, a trend already observable in the industry and much in evidence at Petex.
He predicted that some large areas would be overshot with higher fidelity seismic to enable better depth images.
Some areas would be reprocessed with modern depth imaging, other prospects and fields would be imaged frequently for 4D time-lapse reservoir monitoring with integration of seismic, petrophysical and production datasets.
Some fields would be equipped with permanent seabed sensors while he also foresaw seismic streamer techniques being used for continuous survey monitoring and optimization of reservoir performance. All this in the expectation of a 27 percent growth in demand for oil by 2010, which in his view suggested steady growth rather than boom times ahead.
One possible spanner in the works may be the lack of sufficient skilled people to deliver the necessary technology. Jones warned that 'retention of the best will be a challenge for some time to come'.
Not all at sea in the marine market
One immediate issue that WesternGeco management can be expected to address as it looks for increased efficiencies is the size and nature of its fleet in a marine seismic vessel market perceived to be suffering from over capacity.
In fact the attrition may not be as drastic as some have predicted. Some analysts argue that most of the Western vessels if not as many of the Geco-Prakla units are modern, high capacity, multi-streamer 3D vessels able to punch their weight in the marketplace.
Also there may be a minimum number that the company wishes to maintain in order to offer a global service.
The other intriguing factor is that at least two other contractors remain positive about the role of state of the art 3D seismic vessels.
Veritas DGC recently confirmed that it would go ahead with the building in Norway of a third Viking class seismic vessel for delivery in April 2002.
A month or so ago French contractor CGG announced a significant change in its marine seismic acquisition strategy.
The company said it was buying for $118 million the Aker Amadeus (left) and Aker Symphony (right) from Aker Geo, the wholly owned subsidiary of Aker Maritime.
The purchase was described by CGG president Robert Brunck as a 'quantum leap' in the company's offshore capability taken in conjunction with its decision to upgrade its Mistral seismic vessel to 10 streamers in the second half of next year.
Brunck made it clear he intends CGG, with six vessels, to compete as a 'first tier contender' in the marine seismic market.
For CGG, its participation in the 3D marine seismic market, albeit at the high technology end, was in the past regarded almost as an inconvenient necessity.
During the boom period of 1997/98, it followed the fashion and built a modern 3D vessel, the CGG Alize, making its fleet up to four vessels, all with six or more streamer capacity.
The thinking was that the company could not maintain its position in the data processing market, where it has renowned strength, without day-to-day operational knowledge of marine data acquisition and onboard processing issues.
In order to reduce its financial exposure to the fluctuations of the marine seismic contracting business, CGG sold 40 percent of its fleet operation to Louis Dreyfus Armateurs (LDA) and formed a CGG Marine joint venture. CGG has now reversed that strategy by buying back the 40 percent retained by LDA in CGG Marine.
For Aker Geo, the sale of the vessels is the end of rocky road. The company was launched at a time of high demand for 3D survey work, although there was considerable skepticism in the industry about the need for more capacity and the wisdom of starting a new company.
By the time Aker Geo's first vessel the Aker Amadeus was launched, the outlook had turned bleak as the impact of low oil prices took their toll on oil company exploration budgets.
To the company's credit, the vessel was able to find work in the marketplace and the Aker Symphony was added to the fleet in the wake of the collapse of Horizon Exploration, the operating company of Eagle Geophysical which declared Chapter XI in the US.
One casualty of the vessel sale to CGG appears to be an agreement announced by Vanco Energy with Aker Geo to carry out the largest ever deepwater 3D survey off a number of different countries in West Africa.
by Andrew McBarnet
© 2001 Mena Report (www.menareport.com)
