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Seismic Lagging Industry Upturn

Mergers, Inventory A Drag

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.

Image Caption

Worldwide Seismic Crews and Rig Count

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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."

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