The seismic question: does it pay to keep a secret?
  from: Offshore Engineer
  by: Andrews McBarnet
  Wednesday, March 19, 2008

Andrew McBarnet believes that marine seismic companies might benefit from being more open about their operations.

Human nature is such that we always want to know what’s going to happen next. This applies both to the lives we lead and to any kind of imaginary existence found in books, films, etc. In the fictional world we are entertained by the unexpected outcome. In real life our natural instinct is to try to control our destiny.We don’t take kindly to unpleasant surprises. This is particularly true when it comes to money.

Foretelling the future in business wins and loses many a fortune. Companies which are successful over the long term seem to manage their future with investment decisions based upon eliminating as much speculation as possible. In simplistic terms this means examining known economic indices, supply and demand, idiosyncracies of the specific market, etc and then betting on the conclusion, hopefully with a Plan B if things don’t work out as expected.

This is not something that the seismic industry is very good at. Looking back, there have been periods of booming business followed by the spectacular market collapses in 1986 and again at the end of the 1990s which seemed to take companies by surprise. In the last crisis, there was certainly no Plan B when the good times stopped rolling. The main contractors were caught over-capitalised and the attempt to keep things afloat with increased resort to over-valued multiclient surveys merely compounded the problem. Consolidations and a period of misery ensued.

What will happen next time is the question, because as surely as night follows day there will be a next time and it may well be sooner than we think. Curiously this is not something you hear mentioned much if at all in public, even though the highly cyclical nature of the seismic industry is well known. Indeed it is arguable that the cloak and dagger approach to marketing which is endemic in the marine seismic business contributes to observable signs of changing market conditions being overlooked until it is too late.

You can certainly argue that in the last few years, the seismic industry has been operating on a fairly simple economic model. Oil companies of all complexions – majors, independents, and national oil companies – have all been in high exploration expenditure gear for all sorts of easily discernible reasons, headlined by the dramatic and sustained increase in the price of crude. So, it’s been a nobrainer to cash in, no questions asked.

That will all change when the first hint of uncertainty creeps into the market. Going after new business will all of a sudden become a whole lot more complicated. Managements will be under pressure to play it safe, but in order to avoid unnecessary risk, they will need as much information as possible about the factors likely to affect market trends. Turns out that such information is hard to come by, especially if competition intensifies and companies are fighting for survival.

Covert operations

One of the least understood aspects of marine seismic acquisition contracting is that it invites covert operation. On the face of it, this is weird, because ownership of most of the activity belongs to very few companies and you would have thought the companies would know each other’s business inside out as a result. Yet this is definitely not the case. The market for marine seismic vessel services is 70-80% dominated by an exclusive club of WesternGeco (Schlumberger), CGGVeritas and Petroleum Geo-Services (PGS). Automatic entry to the club would be granted to TGS-Wavefield should this company merger ever go ahead. Otherwise, TGSNopec and Wavefield-Inseis would join Fugro in the second tier. Beyond that, there are no companies with fleets large enough to impact the market.

There are a host of reasons why seismic companies play their cards close to their chests, possibly against their best interests. Sometimes of course they have no option. Unlike many other businesses, seismic companies are frequently unable to advertise their successes in winning contracts. Oil company clients regard the location of proprietary surveys as highly sensitive commercial information. In a prospective licensing round, for example, oil companies do not want to let the commissioning of a seismic survey give away to potential rivals which blocks they are interested in. The result is that seismic contractors are often bound by a code of silence which can extend not just to the location of the survey, but the vessel and the equipment being deployed.

To some extent contractors are not averse to this conspiratorial ethic because it leaves their competitors in the dark. True, contractors as public companies would like to let shareholders know more about their contract successes, but this has to be weighed against the value to the competition of knowing where and for how long a particular vessel is committed. This also applies to other oil companies: with sufficient knowledge they can work out whether, for instance, the price of a tender includes the cost of a contractor mobilising a vessel from another region because all its local capacity is busy.

As a general rule contractors seem to go public about proprietary jobs once they have been secured and if the oil company is prepared to have the information released. This happens more frequently when the oil company already has the acreage locked up and is in effect reporting to shareholders on progress in the exploration and possible development of a prospect. It is noticeable that recently listed oil companies are much readier to volunteer information about their seismic exploration activity. Case in point would be the UK-listed companies focused on Falkland Island offshore exploration such as Rockhopper Exploraton, Desire Petroleum, and Falklands Oil & Gas. In their time they have all delivered detailed accounts of their survey activity and their latest assessments, invariably positive, of the structures and their hydrocarbon potential. More established players are less forthcoming about seismic information in the exploration phase, because they believe the data has commercial value. When, for example, did ExxonMobil last even mention a seismic survey it had commissioned?

Show and tell

How much to show and tell presents a delicate balancing act for contractors putting together multi-client survey programmes for pre-funding by oil companies. Potential prospects have to be identified with detailed geoscientific reasons for carrying out the survey. The package then has to be pre-sold to oil companies before any other contractor comes up with the same idea. Keeping a lid on the planned survey can be a tall order, especially if a forthcoming licensing round has been signalled by a government and the need for seismic data over certain blocks is clear if oil companies are going to be persuaded to bid. This is why multi-client surveys are often more speculative, based on the hope that the survey area will be covered by a future as yet unannounced licensing round. Ironically, once a multi-client programme has been completed, the contractor is keen to promote the results to as many companies as possible in order to stimulate data library sales.

Given the reticence which shrouds the workings of the marine seismic business, independent public analysis of where the industry is heading is unusually difficult to locate. Right now, contractors are still saying that there is nothing on the horizon to alter the industry’s extraordinary run of good financial quarters with vessel utilisation rates up and revenues reaching new highs. Their statements are based on internal assessments which cannot easily be challenged given the confidentiality of marine seismic operations. The information is also said to be hard earned and not for sharing. Contractors will tell you that their marketing departments have to assemble data way beyond what is publicly available in order to obtain the full picture of global marine seismic operations, even down to sightings of competitor vessels in ports or at sea.

A year or two ago all the major contractors and a number of others still managed to come to the same conclusion that the demand for marine seismic surveys was strong enough to justify substantial spending on new additions to the world’s seismic fleet. At least 10 new or converted vessels will be introduced this year and more than 23 in total by 2010.

In a presentation last November PGS offered a Power Point rationale for increasing its capacity with two supersize Ramform vessels and the purchase of Arrow Seismic and the vessels it brought. The company said that ‘lack of investment through the cycles had left the industry with an ageing fleet in need of renewal.’ It stated that by 2010 the world’s streamer fleet consisting of competitive vessels aged 15 years or younger would total around 380 streamers, approximately equivalent to the total seismic fleet in 2007. It suggested that technologically advanced vessels would win market share to meet demand for high resolution and wide-azimuth surveys. Yet the exact make up of the demand in terms of survey dollars to be spent by oil companies over the next few years or two was less clear, hopefully a deliberate omission rather than mission impossible.

No contingency plans

Significantly, no contractor including PGS has publicly addressed the possibility of over-capacity which based on past experience would seem to be a possible outcome from the current spending on new units. If companies do have a Plan B contingency, it is not evident. Yet Hamish Stewart, an analyst at ODS-Petrodata, based in Aberdeen and Houston, is prepared to forecast that the market will at least see some ‘flattening out’ as early as the second quarter of 2009 before the full complement of new vessel additions is in operation. His conclusion is based on the findings of the company’s subscription-based SeismicBase database which tracks the operations of marine seismic vessels around the world and is attracting increasing interest from oil companies wanting a detailed independent summary of vessel contracts and availability.

There have been a number of attempts over the years to provide this sort of service but none up to now have got as close as ODS-Petrodata to cracking the code regarding the workings of the marine seismic marketplace. In addition to availability information, currently the most requested by oil companies scrambling for seismic survey capacity, the company is gradually nailing down the pricing trends in the industry. Needless to say the SeismicBase project was met with suspicion by many of the leading contractors (naming no names) mainly because of the perceived threat to commercial confidentiality. As a result it has taken ODS-Petrodata months of painstaking research, often mirroring the methods used by contractors, in order to come up with a credible overview of the industry and to be in a position to make informed forecasts.

Stewart believes that market volatility will surface as extra capacity kicks in, but it could be exasperated by a slowdown in future survey demand from oil companies due to the familiar problem of data overload. Since the cutbacks of the late 1990s, oil companies just don’t have the qualified staff resources to interpret and make decisions on all the seismic data that is being collected. This could lead to a much more selective approach to commissioning further surveys, which may also be more targeted and therefore smaller in scale. Exploration departments may also have to focus on drilling commitments, created by recent seismic acquisition but likely to divert resources from planning further surveys.

Without giving away too many trade secrets, ODS-Petrodata suggests that more attention may be paid to the 2D seismic market in the next few years. The company says that virtually all the recent emphasis has been on meeting the demand for 3D seismic surveys, which are of course more profitable than 2D projects. Yet an obvious and growing market for 2D seismic exists, mainly as a result of the licensing intentions of numerous governments around the world. Every such round is normally prefaced by 2D seismic programmes to include in the bidding packages and licence conditions for successful applicants invariably require a commitment to some 2D seismic data acquisition.

The argument to be made for services like SeismicBase is that oil company customers can make better informed decisions and the seismic industry has an independent barometer of market forces. There is a natural resistance within the marketing departments of contractors to interlopers like ODS-Petrodata which to an extent duplicate their efforts. Yet the possibility of a comprehensive, continually updated, database compiled with the cooperation of all contractors seems to be a goal worth pursuing.

Analysis based on such information might even help to remove the element of surprise in the forward planning of the industry, and in theory companies with high quality services should have nothing to fear from more open market intelligence. It wasn’t so long ago that a number of the major contractors through the International Association of Geophysical Contractors (IAGC) drew up some guidelines to counter the price war caused by over-capacity which was threatening the very existence of the marine seismic industry. The subsequent voluntary retirement of a number of older vessels, notably by Schlumberger, was a rare moment of collaboration.

There seems to be little or no sign of concern from contractors currently raking in the money from their marine seismic activities. Maybe they should have another look at the forward data, because ODS-Petrodata cannot be alone in scenting change in the air. OE

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