TGS picks a partner
  from: Offshore Engineer
  by: Andrew McBarnet
  Wednesday, April 09, 2008

Who would have guessed that the first significant merger of offshore seismic interests in Norway would involve TGS-Nopec. Yet the newly proposed TGS Wavefield makes a lot of sense, according to Andrew McBarnet.

It has often been remarked – even in this column – that at some point Norway’s plethora of marine seismic players would need to consolidate. Commonsense, not to mention the best interests of investors, has suggested for a while now that smaller fleets of opportunity would benefit from combining to extend their reach in what is a global market. Also, should there be signs of softening of demand, then the geographic availability of vessels competing for limited contracts becomes an important consideration. For example, steaming time to a job is a less easy cost to absorb.

Little of that reasoning applies to TGS. A stellar performer for nearly a decade, it remained profitable through the crisis years of 1999-2004 and has since racked up record profits along with everyone else as the market recovered (OE December 2006).

Its success has been based on sticking to its business model focused solely on multi-client seismic surveys. These are inherently more profitable than proprietary contract work because there is repeat business over time from selling the data to many different companies. Customising the data to meet the interests of particular clients with special processing packages provides further ‘added value’ revenue.

But the open secret about TGS’ remarkable track record since the company’s formation (through the combining of two ‘spec’ companies TGS-Calibre and Nopec in 1998) has been to stay out of capital investment in marine seismic vessels. The company is the shining example of ‘rent rather than buy’ being the best policy. Keeping vessels on short term charters has allowed the company to tailor the size of its fleet to the projects in hand, thereby avoiding the significant overheads involved in keeping vessels in the water even when there is no work available. TGS has got its chartering down to such a fine art that it never commits to a vessel for more than two years.

The big question, then, is what persuaded TGS CEO Hank Hamilton and his colleagues to change a winning formula by merging with – more like acquiring – Wavefield Inseis, a newly formed Norwegian marine geophysical services company intent on building up a fleet of its own seismic vessels? The short answer is that the multi-client survey market, as profitable as it may still be, is stifling TGS’ growth aspirations and risking the company’s gold star with investors on the Oslo Børs.

In recent years TGS has done its best to grow its business through acquisition to broaden the scope of its geoscientific data offerings. In 2002 it took over A2D Technologies, a Houston-based well log information company which has expanded its portfolio since acquisition. More recently the UK-based geoscience data provider Aceca was bought. TGS also took steps to bolster its processing services by acquiring NuTec Energy enabling the company to offer a wider range of data packages from its multi-client library.

In the announcement on 30 July introducing the new TGS Wavefield entity (still to be approved by shareholder meetings), Hamilton stated: ‘We see that the multi-client model continues to be highly effective in addressing certain markets, while other markets are better served through contract services. This transaction enables TGS Wavefield to increase our multi-client activity in a more flexible and cost effective manner while participating in the market for proprietary surveys.’

Reading between the lines, this was Hamilton’s elliptical way of saying that too many opportunities were getting away from TGS, and that’s not just about multiclient versus proprietary survey work. In fact TGS may have been beginning to feel a little exposed in terms of the technology it could readily offer. Its bread and butter has been fairly standard 2D and 3D seismic surveys in prospective exploration areas chosen to attract pre-funding from oil companies, typically in anticipation of licensing rounds. As more and more of the world becomes saturated with seismic coverage, the potential for this kind of survey must be a worry for TGS even if Hamilton when asked is unfailingly enthusiastic about multi-client survey prospects. It is also the case that the competition is hotting up again. Major seismic players have been quietly increasing their ratio of multi-client surveys in the last year or two attracted by the lucrative business from successful projects. They fought shy of the business for a while following their bad experience at the end of the 1990s when multi-client surveys were treated as make-work projects for idle vessels and data libraries were recklessly overvalued in the company books.

The other dimension is that the nature of marine seismic is changing to accommodate oil companies’ increasing focus on existing reservoirs to find additional reserves. This more field specific use of seismic for characterisation and monitoring purposes does not lend itself to multi-client application, as there is only one client involved.

From an operational perspective, a whole stack of new technologies are evolving to meet the trend, from which TGS risks being to some degree excluded. Most obvious examples would be multi-component surveys requiring some form of ocean bottom survey and 4D seismic programmes. But the company might also be struggling to offer on a routine basis some of the emerging techniques for targeting complex geological structures, such as wide and multi azimuth surveys, without additional vessels and R&D effort. Which is of course where Wavefield Inseis comes in.

In a sense TGS has recognised that it needs a technology partner and assured access to high-end marine seismic vessels able to offer the latest survey methods (this latter is definitely a problem in a hot market). In Wavefield Inseis, TGS seems to have happened on a solution with minimum risk and a huge potential upside if everything goes to plan (both companies stress that this merger is about aggressive growth).

Of the new (post 2000) crop of marine seismic operations to emerge out of Norway,Wavefield Inseis has undoubtedly made the most headway and indeed was already becoming an attractive takeover target in all respects except one which we will come to. Its origins date back to the late 1990s, when Anders Farestveit, the creator of the first Norwegian geophysical services company Geco in the 1970s and 1980s before its acquisition by Schlumberger, formed the multi-client seismic survey company Inseis along with some old colleagues. In a short space of time Inseis built up a respectable portfolio from surveys commissioned all over the world, including data from the first multi-client controlled source electromagnetic (EM) survey offshore Norway carried out by emgs on its behalf. The EM survey was actually organised by Inseis-Terra during a brief period when Inseis merged with Terra Energy Services, a company in which ex-PGS man Mike Scott was involved.

By 2005 with the recovery of demand for marine seismic surveys, Inseis was becoming worried that the cost of carrying out multi-client surveys might become prohibitive as vessel chartering rates were expected to go through the roof. The company already had plans to acquire vessels of its own when it became the unexpected beneficiary of CGG’s takeover of the Norwegian company Multiwave Geophysical. A significant clutch of senior Multiwave management chose not to join CGG and in April last year formed Wavefield Geophysical with the backing of Farestveit and others. Months later it merged with Inseis and earlier this year Wavefield Inseis (with Faresveit as chairman) was on the Oslø Bors with serious intentions of becoming a major player in the marine geophysical services market with an emphasis on innovative technology.

During its short life Wavefield Inseis has probably exceeded in its own expectations in terms of the worldwide seismic survey contracts it has carried out with a limited fleet, initially the Bergen Surveyor 2D vessel, and the Geowave Master, Geowave Commander and more recently the Geowave Champion 3D vessels. This fleet is due to be expanded with the addition of three high capacity 3D vessels beginning with the delivery of the Geowave Endeavour next spring. Along with its survey operations, the company has honoured its belief in progress through innovation. For example, it is involved in a project for permanent reservoir seismic monitoring using fibre optic technology and is working with Hydro and NGI in Norway on the development of EM equipment.

It’s no wonder that the boards of the two companies were especially upbeat about TGS Wavefield, already claiming it as one of the world’s largest geophysical companies with a fully integrated product offering including a global multi-client data library composed of 2D and 3D seismic, gravity, magnetic, electromagnetic, well log, and regional integrated interpretation products. The combined entity will also immediately control a fleet of six 3D and seven 2D vessels on a combination of short and long term charters, which apparently satisfies the TGS requirement to have enough flexibility to adapt to market demand. TGS Wavefield inherits a substantial processing capability, which probably puts into question the current processing arrangement Wavefield has with the Houston-based company Geotrace. Most importantly the combined company is better positioned to accelerate its technology developments to meet emerging markets such as 4C/4D and EM.

All in all, the fit between the two companies couldn’t be better. There is very little apparent overlap and some obvious synergies, as well as improved economics. At the official merger presentation it was said that cost savings in carrying out multi-client work could be in the order of 30-40%. In addition the company will have some locked in capacity if the market continues to remain firm. Hamilton said that the demand outlook for seismic surveys was still surprisingly strong given the anticipated increase in the global fleet. Bookings for vessels were already overflowing into 2009, he said, and both TGS and Wavefield had growing backlogs.

About the only fly in the ointment was raised at the launch of the merger. Some bright analyst asked whether TGS, as the senior partner in the merger (around 62% of the combined entity and effectively the purchaser), was worried about retaining key personnel from Wavefield given their entrepreneurial achievements at Multiwave and Wavefield Inseis. What’s to stop them going off again to start another marine seismic company?, he asked. Consensus from the top table was that now was not the time to propose a new seismic venture, as conditions had changed somewhat from two years ago.

This observation would certainly not be welcome at Eastern Echo, the new Norwegian-run marine seismic company which has just ordered three Ulstein design, state-of-the-art vessels from a yard in Spain to kick start its business. More diplomatically Hamilton noted that the enlarged TGS Wavefield would offer a wide range of career opportunities and that TGS had an excellent record of staff retention in its recent acquisitions. OE

Rock solid future for OHM

When the UK company Offshore Hydrocarbon Mapping (OHM) revealed its strategic alliance with CGG a month or so ago, it hinted that further developments were imminent. Now the company, which specialises in controlled source electromagnetic (CSEM) surveys, has announced it is spending some $21 million in cash and shares to acquire Houston-based Rock Solid Images (RSI).

The purchase underlines the importance which OHM places on developing the means to integrate data from seismic and EM along with well-log data into the same model. If successful, OHM would be equipped with an extremely potent technology for improving the chances of oil companies pinpointing untapped reserves in the subsurface. The two companies have been working together for a year or so and the expectation is that the research work can now be accelerated.

Fully integrated data has the potential to provide oil company clients with better insight into likely rock and fluid properties and improve upon the direct detection of hydrocarbons. In the past, Richard Cooper, president of RSI, has expressed the belief that rock-physics relationships hold the key to integrating seismic and well-log data for quantitative interpretation. RSI itself provides solutions for seismic reservoir characterization, and specializes in the integration of surface seismic and borehole data to build seismic-scale models of reservoir properties such as porosity and fluid saturation (OE September 2003).

It also offers turnkey seismic reservoir studies, as well as developing software for rock-physics and seismic modelling and seismic attribute calculation and classification via industry funded consortia.Word is that RSI will continue to operate as a separate entity but with more of its effort focused on EM imaging, something the company began to consider a couple of years ago, prompted by the increasing significance of CSEM in the oil and gas exploration field.

It is a bit of a puzzle as to why OHM elected to buy, given that RSI has a number of other interests. Best guess is that it was for competitive reasons. It didn’t want anyone else using one of the few centres with the expertise to focus on this vital part of the EM puzzle.

Click here to register to receive your own copy of Offshore Engineer each month.