If you could listen to a heartbeat of
the geophysical industry today, you might be tempted to call 911.
While not yet to the life support stage, the health of this sector
might best be described as poor and still declining.
The suffering is especially acute among the seismic
data contractors.
"We as an industry missed the last up-cycle of 18
months or so almost entirely," said Jim White, vice president multi-client
data worldwide at WesternGeco, "and activity has trailed off dramatically
in the last three to four months."
It's a real conundrum.
For the last 10 years there was a close correlation
between drilling activity and seismic data acquisition that was
pretty robust until 1998. When the rig count dwindled basically
to historical lows during the downturn of late 1998 and into 1999,
the contractors continued on for a year or so via deepwater activity
and library data shoots, according to Tim Probert, president and
CEO of Input/Output Inc.
A profound disconnect between drilling and seismic
became apparent once commodity prices did an about-face and headed
into the stratosphere.
Drilling activity revved up like gangbusters, reaching
a high for the cycle last July. The seismic contractors, however,
were left in the lurch during the near-frenzied drilling pace, and
idle crews and vessels were the order-of-the-day.
Today, drill bit action in the United States has
declined about 40 percent from its peak in 2001. Domestic seismic
activity is down another 10 percent from its already depressed level
at the height of the drilling action, and international seismic
has dropped by 26 percent, Probert noted.
The finger pointing is in myriad directions.
When commodity prices skyrocketed, the E&P companies
allocated budgets to drilling rather than seismic to reap the benefit
of the high prices. Another area of blame: There's long been talk
that the E&P companies were caught holding vast quantities of
unworked seismic data when prices tanked in 1998-99, and they needed
to work through their inventory.
"I'm not sure there's a whole lot to that," White
said. "But I know one thing that has hurt in the last three to five
years is the consolidation of the oil companies, causing a shrinking
client base.
"When an Exxon and a Mobil merge, it's like one plus
one equals 0.8," he said. "They jettison smaller properties and
focus on bigger areas where they find huge reserves, and it takes
a year for the deal to go through. So for a year they're sitting
around not doing a lot as separate entities."
On the other hand, certain mergers can be a big positive,
particularly among the seismic contractors themselves.
The relatively new undisputed industry giant, WesternGeco,
came about as a joint venture between Schlumberger and Baker Hughes.
The link-up of PGS and Veritas is under way, and more such activity
undoubtedly will follow.
This industry consolidation is lauded by the contractors
for the most part.
"On the contractor side, consolidation is good because
it brings discipline to the market," said Bert Chenin, vice president
offshore North America at CGG Americas. "There is still over-capacity
today."
White concurs.
"If we could get the capacity to more manageable
numbers, we could make some headway where we'd have more opportunities,"
he said. "That's one of the best things we can do as an industry."
Chicken-and-the-Egg Syndrome
If you're wondering if this ultimately will result
in a handful of super-sized companies running the smaller ones out
of business, the consensus for the moment is that this is an unlikely
scenario.
White emphasized there always will be niche players
in the business to fill certain needs. He noted, however, that companies
without data libraries and a niche area where they perform a service
well and can generate cash flow and make money are in for a tough
ride.
He predicted, too, that some of the marginal companies
will be weeded out over the next year.
These thoughts are shared by Steve Mitchell, vice
president and division manager at Fairfield Industries.
"I think there will be several large companies,"
he said, "and the small companies will become more specialized to
a locale. I will say the healthier seismic companies are and will
be those that have a spec data base to carry them over the hump
in lean times."
To accommodate changes in the marketplace, Fairfield
has adjusted its strategy somewhat: They increased their capability
and are acquiring long offset data on spec surveys to accommodate
the demand for deeper targets on the Gulf of Mexico shelf.
Also, they outfitted all equipment with the capability
to acquire multi-component, or 4-C, data once the anticipated demand
becomes a reality.
But this is a reality that seems to stay just out
of reach.
Acquisition is pricey — Chenin said it costs 10
times more to acquire 4-C as normal streamer data — and there's
the thorny problem of how best to deal with the data.
"We're waiting on the industry to catch up on the
interpretation side," Mitchell said. "We do a little, and the interpretation
side learns more, and then we get a little more efficient at shooting
it.
"It's the chicken and egg syndrome. There's chickens
and there's eggs now," he said, "but we had to start somewhere."
Stop the Hemorrhaging
While it may behoove contractors to regroup strategy-wise,
the overall impact might be likened to using a bandage to stop the
hemorrhaging. So other, more all-encompassing changes to get the
industry back on track to better times are being pondered and discussed.
Who on the contracting side of the business would
argue with Probert's assessment that the current business model
is broken, especially in North America?
Twenty years ago, seismic contractors performed jobs
on a term contract basis, realizing steady margins of 8-10 percent
on their money, according to White. Today, there are turn-key contracts
that may be 60 or so pages long, filled with onerous terms and conditions
placed on the contractors.
One outgrowth of the E&P companies' aggressive
wielding of concentrated purchasing power is the global procurement
contract. The larger companies who represent a significant percentage
of global exploration dollars in a given year will offer contracts
for the next five years, yet with no promise of any projects.
"Even though they don't guarantee any work, they
make it clear that all of their business will be conducted only
with seismic acquisition contractors under the global procurement
contract," said Chip Gill, president of the International Association
of Geophysical Contractors. "They don't promise anything but say
you must sign if you want our business."
Unlike other oilfield services groups, the seismic
contractors typically are burdened with all the risk once they sign
a contract.
This can include such variables as inclement weather
and community-related problems where the work occurs. Ranking high
among the most worrisome risks is the issue of marine exclusion
zones, where an area of one-half kilometer around an offshore production
facility ordinarily is off limits to seismic vessels.
The trend toward collecting multi-component and time
lapse (4-D) seismic data increases the need for proximity to these
facilities so that the seismic grid is closer to the reservoir.
Yet, even if a vessel is invited to work in this zone, it bears
all liability — an untenable situation, Gill said.
Given such scenarios, it's clear the upside for contractors
today is minimal and the downside enormous — a self-inflicted ailment
in the minds of some members of the community.
"We as an industry have accepted that, so we can
blame only ourselves," White said. "We allow ourselves to get caught
up in a bidding process where we assume all the risk.
"We need to better understand what it is we're trying
to accomplish," he continued, "and create a new business model so
the oil companies will know we're not going to go about business
the way we used to."
The irony of the current situation is striking when
one considers what seismic data brings to the table.
"The geophysical industry facilitates the creation
of wealth," Gill said. "In fact, the E&P companies readily cite
3-D seismic as making the significant difference in their increased
success rates. Yet the industry is not compensated in a way commensurate
with the extent of the wealth created.
"The actions of the oil companies, especially the
largest ones, drive the valuing of what the seismic contractors
do as a commodity service rather than a value added service," Gill
noted.
Keep On Keeping On
Despite a weakened pulse, the industry perseveres.
For instance, contractors are buzzing about WesternGeco's
ambitious non-exclusive 24,000-linear-mile 2-D 4-C shoot, which
is well under way in the Gulf of Mexico. The Multi-Vision™ program
is in partnership with AIM Geophysical, and data are being acquired
in water depths as much as 1,000 meters.
The 2-D data with 10,000-foot offsets will tie key
fields throughout the shelf to the deep water.
And the deepwater targets that continue to lure the
big players with deep pockets offer promise for seismic action.
"The deep offshore activity that began two to three
years ago is maturing," said Luc Schlumberger, executive vice-president
processing and reservoir at CGG, "and we see a move to proprietary
high resolution seismic data to really understand the geometry and
physics of the reservoirs.
"There's a strong effort up front with seismic to
develop these deep, expensive fields," he said, "and avoid a costly
mistake."
Given the immense value of such activity and the
potential to experience negative fallout down-the-line from the
increasingly murky state of the contracting business, the E&P
companies at some point may be convinced to reconsider their current
hard-edge tactics.
As profits fall and risk increases, the contractor
numbers likely will continue to diminish along with the invaluable
R&D they provide. It's not inconceivable that capacity could
shrink to a level where the lack of competition, particularly among
the big contracting companies, might prove to be unpalatable to
the oil finders.
"This has the potential to be an unintended consequence
of their drive to wring out cost," Gill said, "regardless of the
price of that drive."