Turnaround Coming – But When?

Cash Flowing, But Not to Exploration

The recent one-day, 7 percent plunge in WTI oil prices because "the driving season is over" conjured up visions of hordes of Americans abruptly abandoning their beloved personal vehicles in favor of trains and buses or, God forbid, walking.

This is the kind of rationale on the part of the oil traders that tends to trigger a siege of eyeball-rolling among the oil industry folks.

It can be particularly cloying to the geophysical community, which is challenged to have a good day even when commodity prices are soaring through the roof.

Indeed, the long-hoped-for turnaround in the industry remains elusive -- which makes the recent mega-financial commitment to the seismic business by a widely revered investor all the more intriguing.

The famed Oracle of Omaha, aka Warren Buffett, is bailing seismic data owner/provider Seitel Inc. out of bankruptcy. Following its voluntary bankruptcy reorganization, the company will become a wholly-owned subsidiary of Buffet's Berkshire Hathaway Inc.

This is not the legendary investor's only somewhat recent foray into the oil and gas industry.

MidAmerican Energy Holdings, a unit of Berkshire, purchased the Kern River Gas Transmission company from Williams, along with 1.47 million shares of the company's convertible preferred stock early in 2002. Shortly thereafter, it bought Dynegy's Northern Natural gas pipeline.

"We feel pretty good about attracting the attention and interest in investment from an organization like Berkshire," said Larry Lenig, CEO at Seitel. "One can speculate their view was the natural gas business structurally in the United States is a good market to be in, and they view this as an extension of their investment thesis in that arena."

A Complex Business

Meanwhile, angst continues to be the norm in the geophysical industry as the E&P companies remain tight-fisted with the stockpiles of cash acquired via high-volume production in the continuing lofty commodity price environment.

The reluctance on their part to pour big bucks into exploring for new reserves has some of their geophysical brethren scurrying to stay solvent.

Gone are the days when the folks with boats and crews would try to justify acquisition surveys just to keep people and equipment busy. Instead, discipline is the buzzword du jour.

But discipline can accomplish only so much. After all, the geophysical industry is an unusually complex business, noted Chip Gill, president of the Houston-based International Association of Geophysical Contractors (IAGC).

For example:

Image Caption

Round-the-clock seismic operations have resulted in an abundance of valuable data, waiting for geoscientists to study and interpret.

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The recent one-day, 7 percent plunge in WTI oil prices because "the driving season is over" conjured up visions of hordes of Americans abruptly abandoning their beloved personal vehicles in favor of trains and buses or, God forbid, walking.

This is the kind of rationale on the part of the oil traders that tends to trigger a siege of eyeball-rolling among the oil industry folks.

It can be particularly cloying to the geophysical community, which is challenged to have a good day even when commodity prices are soaring through the roof.

Indeed, the long-hoped-for turnaround in the industry remains elusive -- which makes the recent mega-financial commitment to the seismic business by a widely revered investor all the more intriguing.

The famed Oracle of Omaha, aka Warren Buffett, is bailing seismic data owner/provider Seitel Inc. out of bankruptcy. Following its voluntary bankruptcy reorganization, the company will become a wholly-owned subsidiary of Buffet's Berkshire Hathaway Inc.

This is not the legendary investor's only somewhat recent foray into the oil and gas industry.

MidAmerican Energy Holdings, a unit of Berkshire, purchased the Kern River Gas Transmission company from Williams, along with 1.47 million shares of the company's convertible preferred stock early in 2002. Shortly thereafter, it bought Dynegy's Northern Natural gas pipeline.

"We feel pretty good about attracting the attention and interest in investment from an organization like Berkshire," said Larry Lenig, CEO at Seitel. "One can speculate their view was the natural gas business structurally in the United States is a good market to be in, and they view this as an extension of their investment thesis in that arena."

A Complex Business

Meanwhile, angst continues to be the norm in the geophysical industry as the E&P companies remain tight-fisted with the stockpiles of cash acquired via high-volume production in the continuing lofty commodity price environment.

The reluctance on their part to pour big bucks into exploring for new reserves has some of their geophysical brethren scurrying to stay solvent.

Gone are the days when the folks with boats and crews would try to justify acquisition surveys just to keep people and equipment busy. Instead, discipline is the buzzword du jour.

But discipline can accomplish only so much. After all, the geophysical industry is an unusually complex business, noted Chip Gill, president of the Houston-based International Association of Geophysical Contractors (IAGC).

For example:

  • Sometimes competitors are customers, e.g., a data licensing company will bring in a full service company to provide acquisition services.
  • There are different layers, with business models built around different aspects of the data: data acquisition, ownership, processing.
  • Government-owned oil companies are creating and funding seismic companies, e.g., China, which further complicates things. A government-owned seismic company is not on the same financial playing field as one with shareholders.
  • Manufacturers go straight to clients to sell products and then have clients spec-out the next survey with the manufacturer's latest gizmo -- kind of a misalignment.
  • Client (oil company) wants involvement in data quality, so it puts its own Q-C people on the survey.
  • Operational risk, e.g., difficult to put 3,000 people in the rain forest for three months of work.

The once-flourishing multi-client, or non-exclusive, side of the business has been particularly hard-hit over the last couple of years.

"Multi-client seismic is an exploration tool mostly," said John Adamick, vice president of business development for TGS-NOPEC in Houston. "And on a worldwide basis, the oil companies are not spending much on exploration, especially in frontier areas of the world.

"Even in the Gulf of Mexico, activity is not where you would expect it to be with $30 oil prices and $5 gas," he added.

The 'Harvest' Mentality

The geophysical community is working diligently to come up with a sustainable model, given the current realities, according to Gill.

But a shiny new business model won't take you far if the hand that feeds you, aka the E&P company, is focused on things other than searching for new reserves.

Opinions abound over what is influencing E&P company thinking and when there may be a turnaround in exploration activity.

"Everyone in the industry has been waiting for the second half of the year," Adamick said. "This was the mantra early in the year.

"But will we see those oil companies with record breaking cash flow start to spend more on exploration?" Pressure from investors to provide a better return on investment ranks high on the list of obstacles to renewed exploration investment.

"It's very much a harvest mentality now," Adamick said. "If you're in the oil company shoes, one way to make yourself look better is to not spend money looking for new oil and start producing what you have like gangbusters.

"Another commonly cited concern is the Enron fiasco," he continued. "A lot of companies have needed to restore their balance sheets, and we've seen a lot of them taking the extra cash from good prices to get out of debt or lower debt.

"We all know this is self-correcting," Adamick noted. "Some of the money will funnel back into exploration because we can't keep producing out of the ground and not fund more exploration.

"It's got to come back," he said, "but the problem is when."

Challenges -- and Hopes

Meanwhile, there's likely to be further bloodletting.

"To see the industry still struggling to maintain reasonable levels of cash flow and profitability with oil and gas prices so high for so long," Seitel's Lenig said, "clearly indicates, I believe, more restructuring will occur."

The upside is this has the potential to eliminate over-capacity in the contracting arm of the business, which continues to plague the industry.

"Over-capacity in the past was masked by the very aggressive, though unsustainable, development of multi-client programs," said Jonathan Miller, president CGG Americas.

"Now that multi-client has slowed, the mask is removed," he said. "True over-capacity is much more evident, both on- and offshore."

As the E&P companies continue to exert pressure on the geophysical industry to provide data/services at the lowest possible cost, and the financial health of that industry in turn continues to decline, there is concern over where the next technological innovations will come.

"The (issue) is, at some level of management there needs to be a larger view," Miller said. "What a company saves on specific contracts in the end can force reduction in the overall technical evolution of our industry.

"It's a shame that right at the time when exploration is becoming more expensive and difficult, this industry is suffering so," he said. "It's more difficult for us to deliver new methods and reductions in cost in this environment."

Despite the cloud over the industry, optimism does break through occasionally.

"Geophysics is being used more and more for field development and for production," Miller said. "It's hoped this will be a major growth area for our industry as companies to learn to use geophysics to identify sweet spots before drilling, therefore improving the overall cash flow from their projects.

"This growth is a bright spot even though it hasn't been enough to offset overall declines in exploration expenditures," he said.

"We're just at the beginning of that science," he added," and to slow development of geophysics in that area to save a bit on exploration contracts in the end will cost the E&P industry an enormous amount."

Who Wants What?

This touches on a burning question being tossed around for some time now: What does the E&P industry really want from the geophysical companies?

Ever-higher-capacity computing power allows more life to be eked out of existing data. As a result, there's plenty of talk that the companies no longer want data but solutions.

But they want the risk of developing the solution, and whether or not it works to be the service company's burden, according to Adamick.

Different solutions have different degrees of risk.

The data providers already are offering derivative products from their data such as interpretation, AVO processing and such that used to be performed in-house at the oil companies. Some of the data folks go so far as to work up ready-to-drill prospects to present to their E&P clients.

At TGS, for example, one of the latest solutions being offered is regional maps for the fledgling shallow-water deep gas play in the Gulf of Mexico, which has triggered a respectable amount of long-offset 2-D surveys to try to image the deep structures.

The key distinguishing feature of the maps, according to Adamick, is they are updated each quarter, with the idea that most oil companies don't have the personnel in-house to do this.

"The kicker is when people buy into this, they're getting updates as new wells get released and are added to the interpretation," Adamick said. "So the interpretation is not static but evolving over time."

WesternGeco has invested heavily in the solutions arena with its Q-Technology for seismic imaging for enhanced reservoir description and management.

"With Q, the focus is the reservoir," said Patrick Ng, marketing manager for North America. "It's a kind of cradle-to-grave, for-the-life-of-the-reservoir type of concept, which is designed to function from the exploration mode all the way to abandonment."

Despite all the head scratching over what the E&P companies want and the potential blow to future activity as technology innovations dry up along with seismic company budgets, the onus to revitalize the geophysical industry rests squarely on the collective shoulders of the seismic folks.

"I think the E&P industry is starting to ask questions of themselves and examine their own role," Gill said, "but I don't think it's pervasive.

"At the end of the day, it's the geophysical companies that have to provide their own solutions to this problem and not expect their customers to give them a handout," Gill said.

"They recognize this and are taking on that task," he said. "It's just not happening very fast.

"The downturn and the sorting-out seem to be taking longer than anyone expected."

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