Another stellar year?
  from: Offshore Engineer
  by: Andrew McBarnet
  Friday, April 04, 2008

Predictions are a mug’s game. Undeterred, Andrew McBarnet divines what may be in store for the marine geophysical services industry.

Execs in the marine seismic business must wake up and pinch themselves every morning just to make sure they’re not dreaming the seemingly endless backlog of business and all it represents for their companies. And yet, it seems too obvious to suggest another stellar year is on the cards. Stellar for some might be a better forecast, because some of the stars are certainly not properly aligned and we are talking about a seriously cyclical industry.

With regard to bread and butter offshore seismic survey work, it’s hard to argue that global demand is anything but extremely solid. No one believes that there could be a dramatic collapse comparable to 1986. That year started out sunny and then, thanks to an Opec-inspired drop in the price of the barrel, contractors were left out in the cold as oil companies dumped a whole swath of exploration projects, previously deemed as viable but overnight considered too costly.

However, it’s worth asking the question whether the gathering clouds in the global economy developing from the cumulus nimbus hanging over the US might affect oil companies’ notoriously short-term investment planning. Apparently not, according to most observers. Logically it would take a mighty fall in the price of oil to reach the viability threshold of most projects in view, although companies are beginning to whinge more audibly about the rising cost of seismic and drilling operations.

The real driver for continuing exploration and by implication marine seismic is that oil companies have a lot of catching up to do. The lack of investment during the period of industry consolidation, downsizing, etc at the end of the 1990s left many oil companies embarrassed for new reserves. In addition, they are all aware that the available prospective areas up for grabs around the world are diminishing rapidly, and what’s left will need ever more sophisticated technology to exploit. This is all a plus for the immediate future of the marine seismic business. The astute service companies are also cosying up to the nationalised oil companies as a precaution against that end of cycle rainy day when international oil company clients pull in their oars.

In the last cyclical downturn at the end of the 1990s, the marine seismic companies were caught out not just by the sharp drop in orders. Their troubles were compounded by rampant over-capacity which with hindsight might have been avoided. Today, major contractors insist that they have learned their lesson and won’t fall into the same trap again. At first sight this might seem like wishful thinking given the substantial, possibly reckless, number of newbuilds and vessel conversions due on the market from now through 2010 (OE last month).

Schlumberger’s WesternGeco, for example, will be adding some eight vessels to its roster, six from its purchase of the Norwegian start-up company Eastern Echo, and another two already ordered. Petroleum Geo-Services (PGS) has ordered two super-size Ramform design vessels capable of towing up to 20 streamers. It will also add two more 3D modern seismic vessel newbuilds in Q2 and Q3 of 2009, plus three 2D/source ships, all as a result of its acquisition of Arrow Seismic, the company created and floated by Rieber Shipping. And so on . . . the majors are not holding back.

One justification is that many of the vessels serving the global seismic business are old and tired, and need to be replaced if the company fleet is going to remain competitive. Furthermore, should the market go soft, it is always thought that the better equipped vessels will be favoured by clients. The other safety play, adopted by Fugro’s management, is to keep a proportion of the fleet on shorterterm charter so that these vessels can be given back quickly if there is no work. When buying from new, the company has tried to go for a multi-purpose design vessels so that they can be switched to other market segments if necessary. It is an option well suited to Fugro which offers a broad range of marine ‘geo’ services.

Even if market fundamentals, so far as one can tell, look good, there is a section of the marine seismic business community which is becoming increasingly vulnerable, namely those companies financed via the famously volatile Oslo Børs. Any ugliness in 2008 is likely to stem from this quarter and was already manifesting itself at the end of last year. A case in point is the possibly doomed merger between Norwegian listed companies TGS-Nopec and Wavefield InSeis. TGS has justifiably enjoyed the status of darling of the investment community in Norway ever since it was listed in the late 1990s. CEO Hank Hamilton and his management team have been serving up positive results year on year even during difficult times, based on the company’s focus on multi-client seismic surveys using vessels on short-term or project charter. Last August’s bid for the full service geophysical contractor Wavefield implied that the company was feeling the pressure in the competition to charter seismic vessels, particularly on a short term basis. Some of the shine may also have been coming off the multi-client survey business model because cash-rich oil companies are happy to commission their own exclusive surveys and to heck with sharing the data if they can afford not to. In the good times contractors also prefer proprietary work because it’s very profitable and shows up in the quarterly results, whereas multi-client work, valuable as it is, has a much longer payoff in library sales.

The TGS choice of Wavefield as an acquisition target seemed inspired. The company looked easily the best of the bunch of recent Norwegian seismic units floated on the Børs. Its rapid growth was engineered by some of the most experienced Norwegian oil execs including the legendary septuagenarian Anders Farestveit. The fit with TGS as a partner seemed perfect – vessel capacity and an increased portfolio of services for TGS, global reach and substantial additional business for Wavefield. However, consummation of the marriage needed the blessing of the Norwegian investment community, and that’s where things became unstuck, whether permanently remains to be seen.

After the boards of the respective companies had agreed the merger in August subject to shareholder ratification etc, TGS surprised Wavefield investors by revealing a previously unanticipated profit shortfall in its Q3 results announced in October.Wavefield claimed that TGS must have known about this likelihood at the time of the merger deal negotiations, and nothing so far has been able to persuade its shareholders otherwise. While the stalled merger is headed for an arbitration process, investors have deserted both companies in droves, making a nonsense of the valuations agreed last August.

TGS and Wavefield are not the only companies to have experienced the vicissitudes of the Oslo Børs. None other than the new technology sensation Electromagnetic Geoservices (EMGS) has suffered a drubbing at the hands of its shareholders since it listed around one-third of its shares last May. The initial valuation of the company based on its IPO at well over $1 billion raised some eyebrows, but investors were clearly excited by the initial success and operation of seabed logging, the company’s trade name for marine controlled source electromagnetic (CSEM) surveys. On the wave of investment money EMGS expanded its CSEM capacity way further than any of its main competitors, UK-based Offshore Hydrocarbons Mapping (OHM) and the WesternGeco EM business unit, both of which have taken a more circumspect approach to the market. EMGS will soon have seven CSEM-survey vessels at its command. None of this activity seems to have impressed investors who most recently saw EMGS downgrade its revenue forecast for 2007 from $160-170 million to $135 million due to contract delays.

Business theory enthusiasts can probably have fun pondering whether EMGS conforms to such pet notions as Gartner’s ‘hype cycle’ or Geoffrey Moore’s ‘crossing the chasm’ model. Both concepts deal with identifiable stages in the introduction of new technology. Gartner’s categories are fairly self-explanatory. Interest is generated by the launch of a breakthrough application, called the ‘technology trigger’. This is followed by the ‘peak of inflated expectations’, the ‘trough of disillusionment’, ‘slope of enlightenment’, and finally the ‘plateau of productivity’. On this analysis EMGS may just be entering the trough. Geoffrey Moore divides client companies between visionaries and pragmatists, and views the innovation challenge in terms of an adoption lifecycle beginning with innovators, followed by early adopters, early majority, late majority, and the laggards.

In a presentation to analysts last month, Terje Eidesmo, CEO of EMGS, sounded as if the company had not crossed the chasm beyond the early adopters despite a 30% increase in business in one year. He acknowledged that ‘awareness’ and ‘acceptance’ of the technology was still an issue even though those who commissioned seabed logging surveys became repeat customers and the seabed logging technique had a claimed 90% success rate in identifying hydrocarbon-bearing drilling targets. This year EMGS will be trying to expand its business with emphasis on the potential of the ‘scanning’ application of seabed logging as a first look prospecting tool in its own right (as opposed to use in conjunction with seismic). It will also be developing 3D solutions and shallow water applications following the joint acquisition with Reservoir Exploration Technology (RXT) of Houston-based KMS Technologies.

EMGS’ experience at the hands of investors must give pause to newish Norwegian companies such as Scan Geophysical, SeaBird Exploration and GGS-Spectrum, all of which will have to come up with solid performances to maintain investor confidence and keep the predators at bay. If the share price drops sufficiently you can be sure that larger seismic service companies currently flush with money will be on the prowl looking for ‘tax efficient’ additions to their portfolios. Schlumberger recently paid a premium price for Eastern Echo basically to jump the queue for new vessels. For far less than premium, just about all the companies mentioned, including TGS-Nopec, could be in play. EMGS is a little more complicated in that Warburg Pincus still has over 60% of the equity, and may be loth to cut its losses since the IPO.

2008 could therefore see some significant acquisition activity. Just how much more of the market the bigger guys such as Schlumberger, PGS and CGGVeritas would be prepared to swallow is a moot point. But if the price is right, who knows? The dark horse in this race may well be Fugro, which has concentrated on rebuilding its fleet under its own steam after being outbid for Multiwave Geophysical two years ago. It has traditionally grown by acquisition and its only notable purchase of late was 4th Wave Imaging, a small but very smart organisation based in California mainly focused on 4D seismic acquisition and processing issues. That said, Fugro usually prefers to dominate a niche sector, which it does in some geotechnical and airborne geophysical sectors, so a substantial purchase may go against the grain.

Towed streamer rules

The technology script for this year looks pretty much pre-written. Oil companies and their contractors are still just feeling out the possibilities of wide-azimuth surveys as the way to image complex geologies such as subsalt in the Gulf of Mexico. All the major contractors are taking the multi-client survey route so that no oil company feels too exposed, and encouraging results to date suggest much more is on the way. Early adoption has been easy because wide-azimuth is based on known towed streamer-based techniques. Indeed we can go further and say that any improved imaging or cost saving method that involves towed streamer is going to be a winner with oil companies.

It is becoming increasingly apparent that the incontrovertible benefits of multi-component data attributable to ocean bottom seismic surveys using cables or nodes have failed to win a substantial following among the mainstream on grounds of cost and unfamiliarity with the technology involved. For the foreseeable future ocean bottom surveys look destined to remain a niche market, focused primarily on complex geology locations, often reservoir specific, which not even wideazimuth can resolve. As for life of field reservoir monitoring based on permanent seabed seismic recording equipment, progress is likely to be even slower although the potential of fibre optic solutions has received some attention. Only innovator companies such as BP, Shell, and StatoilHydro are prepared to take on the risk.

The fact is that streamer-based techniques continue to offer best bang for the buck, and this includes 4D seismic applications where, in theory, ocean bottom surveys offer better repeatability for reservoir monitoring purposes – and multi-component data as a bonus. As a result, seismic service companies, the resource for most R&D these days, have elected to focus on improving streamer technology. For example, streamer steering systems will soon be available from WesternGeco, PGS via the new ION Geophysical DigiFIN, and the CGGVeritas Sercel business unit which is due to introduce its version this year. PGS will be pushing its new generation dualsensor streamer measuring pressure and velocity in the seismic reflection acquisition process for better data quality. The purchase of the Scottish company MTEM also implies that the company seems serious about eventually being able to offer oil companies a combined survey package of seismic and CSEM, both based on towed streamer technology although not carried out simultaneously.

It is safe to expect other as yet unidentified advances during the coming year, but anything as revolutionary as CSEM seems unlikely. The impression you get from service companies is that the operational requirements for meeting full order books are draining scarce personnel resources and leaving less energy and maybe even incentive for coming up with tomorrow’s breakthroughs.

This is why the big seismic players are always on the lookout for specialist technology outfits that can at best shortcircuit development of new products and more prosaically add more hands to the pump.

But there is really no urgency when most oil company clients at the moment are just happy to have a seismic vessel show up when promised. Indeed the challenge for marine seismic contractors in 2008 will be trying to keep up with their full order book commitments. It’s a nice problem to have. OE

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