Seismic Industry in Tough Spot

Some of Damage Self-Inflicted

Did you hear the one about the fella with a cell phone for an office and no seismic equipment, jockeying with the big seismic industry's guys for a job?

Before you laugh, get this: He was low bidder by several million dollars on a sizeable data acquisition project. Rubbing salt into an open wound, he then proceeded to call the contractors, offering to do a deal in exchange for capacity.

This bizarre tale speaks volumes about the current dire straits of the once-robust geophysical industry.

E&P companies seemingly are awash in 3-D seismic data, contractors have enormous surplus capacity eating up the balance sheet, and the rig count is abysmal. Not surprisingly, the contractors have been nailed to the wall by the oil finders who have all the leverage when it comes to cutting deals for data and services.

The challenges the industry must address are varied and daunting:

  • Consolidation of the customer base, i.e., mergers.
  • Tendency on part of clients to view data and services as commodities to be bargained for as cheaply as possible.
  • Clients' use of "brute force" in the form of market power to attempt to shift risk to seismic service provider.
  • Denial and/or ignorance of non-exclusive data ownership rights.
  • Changing standards for safety performance.
  • Quick-changing and evermore onerous environmental rules and regulations.

Despite all the finger pointing, however, the consensus among most members of the geophysical community is the blame for the current situation rests on their collective shoulders. After all, it was they who overextended during the 1990s as the clamor for 3-D reached a frenzied pace.

"I don't blame the oil companies for taking advantage of us if it's thrown their way," said Jim White, vice president North and South America for WesternGeco. "They're now in a position to capture the value of seismic at a fraction of the cost.

"Kudos to them for knowing to take advantage," he said, "and silly on us for not knowing better."

Amazingly, when industry giant WesternGeco recently decided enough was enough and shut down its sizeable land operations in North America, except for Alaska, the action caused nary a ripple among its clients.

"We thought it would send reverberations through the industry," White said. "But our clients weren't concerned, and I don't think it was that big a deal for them.

"It's a short-term mentality, and I think they need to be thinking long term," he said. "When other companies like us start shutting operations, it will leave them in a real lurch, because the dramatic drop in R&D spending will really hurt them."

Image Caption

Laying down seismic cable in the Arctic.
Photo courtesy of WesternGeco.

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Did you hear the one about the fella with a cell phone for an office and no seismic equipment, jockeying with the big seismic industry's guys for a job?

Before you laugh, get this: He was low bidder by several million dollars on a sizeable data acquisition project. Rubbing salt into an open wound, he then proceeded to call the contractors, offering to do a deal in exchange for capacity.

This bizarre tale speaks volumes about the current dire straits of the once-robust geophysical industry.

E&P companies seemingly are awash in 3-D seismic data, contractors have enormous surplus capacity eating up the balance sheet, and the rig count is abysmal. Not surprisingly, the contractors have been nailed to the wall by the oil finders who have all the leverage when it comes to cutting deals for data and services.

The challenges the industry must address are varied and daunting:

  • Consolidation of the customer base, i.e., mergers.
  • Tendency on part of clients to view data and services as commodities to be bargained for as cheaply as possible.
  • Clients' use of "brute force" in the form of market power to attempt to shift risk to seismic service provider.
  • Denial and/or ignorance of non-exclusive data ownership rights.
  • Changing standards for safety performance.
  • Quick-changing and evermore onerous environmental rules and regulations.

Despite all the finger pointing, however, the consensus among most members of the geophysical community is the blame for the current situation rests on their collective shoulders. After all, it was they who overextended during the 1990s as the clamor for 3-D reached a frenzied pace.

"I don't blame the oil companies for taking advantage of us if it's thrown their way," said Jim White, vice president North and South America for WesternGeco. "They're now in a position to capture the value of seismic at a fraction of the cost.

"Kudos to them for knowing to take advantage," he said, "and silly on us for not knowing better."

Amazingly, when industry giant WesternGeco recently decided enough was enough and shut down its sizeable land operations in North America, except for Alaska, the action caused nary a ripple among its clients.

"We thought it would send reverberations through the industry," White said. "But our clients weren't concerned, and I don't think it was that big a deal for them.

"It's a short-term mentality, and I think they need to be thinking long term," he said. "When other companies like us start shutting operations, it will leave them in a real lurch, because the dramatic drop in R&D spending will really hurt them."

Owning the Orchard

It's popular in some corners to tie the decreased demand for seismic data to the continuing decline in drilling activity. Varied reasons for this decline have been proposed, but some industry veterans think the oft-mentioned lack-of-prospects theory should be laid to rest.

"If you truly believe there's a lack of prospects, then you need more seismic data," said Marc Lawrence, senior vice president at Fairfield Industries, "so there's no lack of prospects.

"It's just that the shallow, easy stuff is gone," he said. "So now is the time to apply technology — but they're staying away from it in droves.

"For instance, multi-component seismic technology has a lot to offer, but no one embraced it" he said. "We offered it, but the market didn't respond, so we had to pull away from it because we're not going to give data away this time."

Many companies, including the big guns, are eyeing the deep gas potential (>15,000 ft.) on the Gulf of Mexico shelf. This activity likely will require additional data because the plethora of earlier shoots in this region were undertaken using acquisition parameters that aren't necessarily ideal for the deep targets being chased today.

Still, random unique areas such as this are not sufficient to keep a whole industry churning along as in the glory days of the recent past.

"I can't find an E&P company who says they don't have enough seismic data," said James Wicklund, managing director, energy research at Bank of America Securities. "Some say they're looking at a brand new area and will have to buy some new data," he said, "but I refute the idea you must have data going forward at an ever-increasing rate.

"And if the top 15 companies in the Gulf have bought every block with 3-D in the Gulf because it's been shot, then how, going forward, will this be a growth business?

"It's like buying an orchard to get apples," Wicklund said. "You go from tree to tree, and your chances of running out of apples anytime soon are greatly reduced," he said. "After all, you own the orchard."

'Serious Dialogue' And Proactive Steps

For 2003, Wicklund predicts the primary activity of the seismic business will be reprocessing of seismic data. Although a good business for the seismic folks, he noted it's not enough on its own to promote higher revenues and earnings.

One of the industry's many problems is over-capacity in the spec business, both land and marine, and the contractors' unwillingness to address this in many instances.

"They say they're retiring two boats, but then announce they're coming out with a new one that's six times more efficient," Wicklund said. "Net-net: they've just increased capacity."

The contractors are grappling with the problem.

"We see capacity being taken out, but it's an individual choice," said Chip Gill, president of the International Association of Geophysical Contractors. "It's both involuntary, like the CGG Mistral that sank in December, and voluntary, like WesternGeco laying off land crews and retiring boats."

He concurred with Wicklund that new capacity seems to pop up as the old goes out.

Desperate times call for desperate measures. The rumor spreading through the contracting community holds that spectators have witnessed grinders going to work on geophones and cables when crews are retired to ensure the equipment doesn't get back in through the back door.

Although the hole the industry sits in is largely self-excavated, Gill asserted a large piece of the current problem stems from the clients. He noted they have not hesitated to take advantage of the contractors, at the same time acknowledging they can't be blamed for doing so.

To salvage what's left of the geophysical industry and regain some semblance of financial strength, he noted the E&P companies and the geophysical folks are going to have to engage in some serious dialogue.

"We're in a weak economic position compared to our clients, and we're limited in what we can do together by anti-trust laws," Gill lamented. "We've got two hands tied behind our backs."

Nevertheless, he pulled out a list of initial proactive steps for the service providers:

  • Shine a spotlight on the circumstances and pose tough questions, e.g., What do E&P companies expect out of the geophysical industry going forward? Do they want back into the geophysical business?
  • Shine a spotlight on the abuse of data ownership rights to help curtail it. A deal's a deal, and leveraging concentrated purchasing power and market clout to negate the terms of the contract are flat out wrong.
  • Shine still another spotlight on the value of the non-exclusive data business model to resource managers and governments so they understand the contribution it brings to the full cycle economic engine that fuels the E&P industry.

The Next Big Thing

There's another school of thought that says it's time for the geophysical community to aggressively reinvent itself.

Since the E&P industry got most all they need of the last big thing, the seismic industry is going to have to come up with something blockbuster as the next new big thing, according to Wicklund.

"The idea of providing data is becoming antiquated in every industry," Wicklund said. "The trend is to provide solutions, which the seismic industry has not yet learned to do, even though they would argue they do this indirectly.

"It's the oil industry geologists and geophysicists who provide the solution, i.e., where to drill and what prospects have value.

"The seismic companies may say it's not their job to pick drilling locations but to provide the tools," Wicklund commented. "But these days you don't provide the tools, you fix it for them.

"The seismic industry has to take all the tools it's got and provide an integrated solution to the industry that will look a lot like doing the oil companies' job for them," he said. "This has been the resistance point in the past."

In other words, the seismic industry must make what will be a very difficult transition from being a data service provider to being a partner and a solution provider.

"The oil and gas companies don't need more data; they need more time in the day," Wicklund said. "If a seismic company comes in and says here's a worked-up qualified drilling prospect with the economics run on it, then instead of giving you a bag of groceries they've given you a meal from Eatzi's," he said. "That's where it's got to go."

Getting Healthy

Thoughts about change are being voiced by others.

"The general gloom today may prompt a reshaping of how the geophysical industry does business," said Chris Usher, president, worldwide data processing, PGS.

"We may be much more clever, such as outsourcing of certain capacity into alliance formats where the lines are maybe blurred a bit," he said. "Why have fixed capacity when someone else could take the risk?"

Regarding the pervasive feeling among the data gatherers that the clients don't feel their pain, Usher had some encouraging words.

"The oil companies are alert to the problems of the industry," Usher said. "The largest companies with the longest term outlook understand that a healthy contractor community is good for their business."

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