A statement of intent
  from: Asian Oil & Gas
  by: Andrew McBarnet
  Thursday, August 24, 2006

The last month or so has seen Schlumberger make some big decisions in the seismic department, some of them quite expensive. Andrew McBarnet explains their significance.

Schlumberger chairman and CEO Andrew Gould called the purchase of the Baker Hughes stake in WesternGeco a reflection of 'our confidence in the seismic market and our belief that greater reservoir complexity will require more accurate reservoir characterization.' He added that closer integration between surface seismic and other Schlumberger measurement technologies would lead to substantial progress in eliminating reservoir uncertainties.

A decoding of Gould's statement suggests first that Schlumberger clearly believes that the market for seismic services is going to keep booming for a while yet. This in itself is an extraordinary turnaround from the position only six or so years ago when Schlumberger agreed to put its ailing Geco-Prakla seismic services subsidiary into a joint venture with the Baker Hughes subsidiary Western Geophysical, and pay Baker Hughes $500 million as part of the merger arrangement. The combination of the two biggest companies in the seismic sector promised a potentially dominant market share whatever the prevailing conditions. Western Geophysical itself had only been in the Baker Hughes family for two years. It came as part of the Western Atlas package which Baker Hughes acquired in 1998, the other goodie was the wireline logging company we know today as Baker Atlas.

The joint venture in 2000 was a defensive merger, mirroring the large scale consolidation amongst the oil companies which was decimating the potential clientbase for seismic services. At that time both Geco-Prakla and Western Geophysical were suffering, so the parent companies viewed the combination as a way of shoring up the losses and preventing capsize. The immediate aftermath of the combination saw some fairly heavyhanded cost cutting across the board, including the casting off of most of the veteran vessels in the seismic fleet.

Andrew Gould, then executive vice president at Schlumberger Oilfield Services, put a brave face on the prospects. He said: 'This new venture combining Geco-Prakla and Western Geophysical is expected to permit the implementation of substantial cost savings, resulting in better results than would be possible for the companies operating separately. These cost savings would support the development and innovation necessary to help seismic maintain its role as a key contributor to the oil industry's process of lowering the cost of finding and producing oil and gas.'

Three, two, one
Right now it's a toss up between Gould as boss of Schlumberger and Chad Deaton, chairman and CEO of Baker Hughes, as to which man is happiest with the latest outcome. Gould has taken advantage of Schlumberger's current stellar financial performance (big clue is the buying back of shares) to wrest full control of WesternGeco.

Schlumberger was already manager of the joint venture, but being accountable to a partner was always likely to be a frustration, although sources suggest that the two companies worked remarkably harmoniously. Unfettered integration of WesternGeco with Schlumberger's full repertoire of related services, notably the Schlumberger Information Solutions group, makes sense. It should create some marketing opportunities and will presumably result in some improved efficiencies internally.

Meantime Deaton can reflect on what for Baker Hughes has turned out to be an exceptionally profitable if not entirely painless foray into the seismic business, in which the company only had hands-on involvement from 1998-2000. Those with long memories will recall that Western Geophysical came as part of the Western Atlas operation, which had been floated off as a separate company by its owners Litton Industries and Dresser Atlas in 1994. Much further back in time, in 1960, Litton had bought Western Geophysical from its legendary founder, Italian immigrant Henry Salvatori.

Baker Hughes bought Western Geophysical to get into the seismic business, probably persuaded by the same logic which tempted Halliburton: it seemed to provide a more complete package of oilfield services.

In fact only Schlumberger of the 'Big Three' has managed to sustain a seismic business.

Halliburton brought Geophysical Services Inc (GSI) and Geosource together to create what was the largest company in the seismic industry at the end of the 1980s. But by 1994 it was sufficiently disillusioned, particularly by the poor performance of the marine seismic side, that the Halliburton Geophysical Services unit was sold to Western Atlas significantly adding to the fire-power of that company's already substantial Western Geophysical seismic business.

Ironically, a couple of years later, Halliburton was back buying Landmark Graphics, a specialist in processing and interpreting E&P data, which also happened to be the main competitor to Schlumberger's GeoQuest (now Schlumberger Information Solutions) unit. That acquisition has been a success.

Given the history, Baker Hughes is probably relieved to be off the seismic company treadmill, especially given the astonishing financial compensation. The company is letting go of WesternGeco with a pre-tax gain of $1.74 billion, said to be $1.05 billion net of tax. It says it will spend the cash proceeds (net of tax of $1.8 billion) from the transaction as part of a stock repurchase programme. No wonder Deaton described the deal as 'an excellent point to exit our minority ownership position'.

So the question is: what next for Schlumberger in the seismic business? To which the answer is that the juggernaut will simply rumble on.

A month after the buying out of Baker Hughes, the Norwegian company Rieber Shipping let slip that WesternGeco, no less, had signed a non-binding letter of intent to order a newbuild multi-streamer 3D seismic vessel for delivery early in 2008 - supplied by Rieber's new subsidiary Arrow Seismic at a cost of between Euro115-125 million, depending on the final contract details. It all sounds rather complicated, but there will be an initial three-year charter period followed by a 'put/call' option to transfer the vessel to WesternGeco. The now wholly-owned Schlumberger company has first refusal on a second newbuild due for delivery later in 2008.

Incidentally, this is quite a coup for Rieber Shipping which has been associated in one way or another with marine seismic for a long time. Only last year the company split off its seismic vessel operations arm into a separate company Exploration Resources (ExRe), based in Bergen. This unit, which included the Multiwave Geophysical services company, was bought for $350 million plus by Compagnie Générale de Géophysique (CGG) as a means of more or less doubling its seismic fleet size and putting it in the big league with WesternGeco and Petroleum Geo- Services (PGS).

With ExRe out of the way, Rieber reverted to its old shipowner credentials and announced the building on spec of two multi-streamer vessels with the possibility of a further two, all through its 54% owned subsidiary Arrow Seismic. It was these vessels that caught WesternGeco's attention and are now subject to negotiation.

Assuming that WesternGeco goes through with the deal with Arrow Seismic, Schlumberger will be able to have a say on some of the design. Arrow Seismic's managing director Sven Rong says that some changes are to be expected, especially with regard to the back deck, the business end of a seismic vessel towing streamers. Most significant, however, is that Schlumberger in common with competitors such as Veritas DGC, PGS and Fugro, have concluded that newbuilding can be justified, despite all the scaremongering about over-capacity. Many vessels in the global fleet are close to their sell-by date as far as technology is concerned, and so contractors with cash in hand can see that a new generation of vessel able to meet the demands of modern 3D and 4D seismic acquisition is needed. Although it's a huge investment and a big future overhead, the thinking is that in the next downturn in the seismic business, these new thoroughbreds will be favourites in the tight race for survey contracts.

Expanding portfolio
At a more prosaic level Schlumberger continues its practice of picking off niche players in the seismic services field which it feels can add to the company's portfolio of offerings.

For example, last month it emerged that E&P specialist software company Ødegaard, based in Copenhagen but with outposts in all the key oil capitals of the world, is joining WesternGeco's reservoir services division. Ødegaard is something of an oddity, not just because it's one of Denmark's few E&P related companies and certainly the only one in seismic; it can also claim to have developed some exceptional seismic data inversion technology for reservoir characterization, and that is something which was missing in the Schlumberger collection.

For reasons best known to the company's founder Jon Ødegaard, the seismic inversion and other software are named after Egyptian mythological figures such as Isis, Osiris and Horus etc. However, the advanced techniques offered by Ødegaard can help to unlock hidden value in seismic data in terms of rock properties predicting subsurface porosity, fluid, and lithology in time and depth. It's an esoteric but critical area in which only a few companies have any pronounced competence. Fugro Jason and dGB in Holland, Rock Solid Images and Hampson Russell in the US, are names which spring to mind.

Predictably perhaps, Schlumberger's other seismic company 'picks' in the last couple of years, the Norwegian companies Petrel and VoxelVision, were also related to reservoir interpretation and visualization. The one recent exception was the acquisition in 2004 of AOA Geomarine Operations (a Veritas company) to give the company access to the emerging market for controlled source electromagnetic surveying as a direct indicator of hydrocarbons. But the pattern is clear. Schlumberger is now in total charge of the largest seismic services company in the world and intends to build its business. No one really doubts that it will grow from strength to strength.

Schlumberger's only vulnerability, according to its major competitors, is the commitment to the Q-technology strategy. Schlumberger believes that Q-Marine and related services provide an important differentiator recognized by oil company clients. The truth is that in the current buoyant market oil companies can't afford to be too fussy if they want to get their seismic survey work done in a realistic time frame.

Availability of vessels is the priority. When that changes, we may get a clearer idea whether Schlumberger's investment in Q-technology is the killer application it hopes. AOG

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