Engineered back to fortune
  from: Offshore Engineer
  by: Andrew McBarnet
  Friday, April 18, 2008

It’s typical of the way Schlumberger operates that Dalton Boutte started his career as a wireline engineer, worked his way through the management ranks in various places around the world and today is president of WesternGeco, the leading brand in the geophysical services business where he’s been in charge for just over five years. Andrew McBarnet talks to him about the company and his experience.

With hindsight Dalton Boutte’s arrival at WesternGeco in February 2003 couldn’t have been better timed in the sense that, in those days, there was only one way for the company to go, and that was up. Basically he took over leadership when the seismic business in general was struggling to survive a deeply depressed market. The question was how low it would go.

Adding to those cyclical woes, WesternGeco itself was still trying to find its feet as the world’s largest geophysical services contractor, created by a joint venture agreement in 2000 between Schlumberger’s Geco-Prakla and Baker Hughes’s Western Geophysical. Boutte inherited a company in which Schlumberger owned 70% and managed the operation while Baker Hughes retained a 30% interest. It could not have been an ideal arrangement but it reflected the need for the seismic business to follow the same consolidation path being taken in the late 1990s by all the leading oil company clients.

Fast forward to the present and we find Boutte presiding over a remarkable renaissance in the fortunes of WesternGeco operations, which are dominated by marine acquisition and processing services with onshore seismic accounting for no more than 25%. Full year 2007 company revenue of $2.96 billion was a 20% increase over the 2006 figure which itself was stellar, and the pretax operating income at $1.06 billion was 31% higher than the previous year. For the second year in a row the story for WesternGeco has no longer been one of steady recovery, but instead was an adrenalin-pumping chapter of high vessel utilization, strong prices in marine seismic and accelerating demand for exploration-driven seismic services. And the immediate future is bright too; for example, current backlog for all WesternGeco’s operations is running at a record $1.2 billion.

Financial results these days relate to WesternGeco as a wholly owned Schlumberger business unit. The Baker Hughes interest was bought out for $2.4 billion in April 2006, itself an indicator of the rising tide of confidence in the prospects for the seismic industry, which have subsequently been fully justified. Boutte doesn’t elaborate on the relationship with Baker Hughes, but admits that there is freedom now to explore more fully the opportunities for integration of services within the Schlumberger family. ‘It made sense for us to buy them out. Baker Hughes did not consider WesternGeco as core to its business, while Schlumberger sees itself as a reservoir company offering value to clients through an integrated offering of all the technology they need.We wanted to develop that side.’

Accounting for the turnaround in WesternGeco’s performance, Boutte implicitly recognises the working of the business cycle when he self-deprecatingly says ‘better to be lucky than good’. But the company has had to make some difficult and bold choices during his watch for which he ultimately is accountable. Early on, when the business was looking extremely fragile, he risked being dubbed the hatchet man. Headcount in the company was cut by 33%, and a large chunk of the 27-vessel marine seismic fleet was sold outside the industry, so that in 2004 only 11 3D seismic vessels remained, along with three ocean bottom cable crews.

Probably the most significant decision taken during the bad times was to stick with the development of Q-Technology, which was introduced commercially in 2001. ‘Regardless of market conditions, Schlumberger continues investment in R&D,’ Boutte said. ‘We never stopped our R&D investment because Q was not only an exceptional service – it was going to be the technology that would differentiate us in the market.’ The company could have been forgiven for feeling discouraged by the slow take-up by oil companies over the next few years. In retrospect, oil companies were not focused on E&P at the time, the Q-Technology was innovative but had few case studies to support its claims and, finally, it was regarded as expensive compared with conventional seismic acquisition.

The idea behind Q-Technology was to offer an entirely new suite of acquisition and processing technologies that could be applied to marine, land and seabed seismic surveys with the promise of more accurate, higher resolution data than was available from any other system. One of the key innovations was the introduction of single-sensor recording as opposed to recording groups of sensors during seismic acquisition. The basic Q-Marine technology platform, for example, consists of single-sensor acquisition, steerable streamers (already being imitated by competitors), a dense acoustic positioning network and calibrated marine sources. Last year, the system was enhanced with the addition of Dynamic Spread Control, an automated vessel, source and streamer steering technology.

Early adoption

Boutte says that the development of Q has shown how Schlumberger companies bring differentiating technology to market better than anyone else even when the circumstances are difficult. ‘I am particularly pleased with the way early technology adopters quickly saw the value of Q, but the achievement is meaningless unless it is reflected in the financial results of the company.’ Those results show that in 2007, Q-Technology revenue (marine, land and seabed) reached $1.14 billion, 38% of the full year revenue, and are convincing enough for Boutte to confirm that, on the marine side at least, ‘everything going forward will be Q or next-generation Q technologies.’

At present the 14-vessel WesternGeco seismic fleet is split evenly between Q and conventional ships. The company is expecting delivery of two new Q-Marine equipped vessels from Arrow Seismic, ordered before that company was taken over by Petroleum Geo-Services. All six additional vessels coming from Eastern Echo, the company purchased by WesternGeco last year, will also be equipped with Q-Marine technology. Boutte says that the company has agreed to honour the pre-purchase commitment by Eastern Echo to two solid-streamer acquisition systems being supplied by Sercel, the manufacturing division of rival geophysical services contractor CGG Veritas. The systems will be available to the non-Q vessels in the WesternGeco fleet.

In common with all the major contractors, Boutte is confident about the future market for marine seismic. ‘This year the demand is definitely going to be higher than supply, and we are starting to see companies opting for long-term tenders in order to secure windows for shooting seismic. In South America, contracts of at least two years with extensions are being tendered. If you couple this with the growing need for complex geology surveys which we can undertake and the interest in wide-azimuth surveys, then there has to be a degree of confidence about 2009 as well. There could of course be a bottleneck caused by the amount of data being shot and a shortage of skilled interpreters. But as long as reserves replacement remains a priority for oil companies, then the demand for marine seismic services is going to forge ahead.’

When it comes to meeting demand, Boutte acknowledges a problem ahead. ‘Let’s be honest – as an industry we are going to overbuild the number of vessels needed and it’s just a question of when over-capacity will impact the business. As far as WesternGeco is concerned, our focus has been on 3D seismic and high-end vessels. Should there be a softening in the market, we believe that our type of vessels and the technology we can offer will have an advantage, but no company is immune from over-supply.’

WesternGeco’s current strategy is to capitalise on the growing demand for its premium Q-Marine technology, which is partly fuelled by oil company investment in 4D seismic projects, particularly in mature provinces such as the North Sea. The accuracy in survey positioning and the high-resolution data offered by Q-Marine are major prerequisites for survey ‘repeatability’. The company is also at the forefront of the trend towards using wideazimuth and other proprietary techniques to image complex geological settings such as beneath the subsalt in the Gulf of Mexico.

Surprises on the horizon

Boutte hints that more technology surprises can be expected from WesternGeco in the not too distant future. He is clear that involvement in oceanbottom cable (OBC) seismic is unlikely to be one of them. In his view, the economics don’t add up. ‘Depending on the configuration, the rate of coverage of OBC is around 3-5km2 per day. Towed streamers can do more than ten times that amount in the same time, and of course the cost per km2 of OBC is a lot higher. Also noise levels using towed streamers are much lower than even five years ago, which negates one of the benefits of OBC. So, in our view, OBC opportunities may grow, but these will be a niche market for very specific survey targets.’

He is much more interested in the possibilities of marine Controlled Source Electromagnetic (CSEM) surveys, which can provide direct indication of hydrocarbons in a way that seismic data cannot. Yet WesternGeco has to date been stealthy if not secretive about its strategy for developing a CSEM survey service. In 2004 through Schlumberger it acquired a US-based company AOA Geomarine Operations (AGO) which was one of the pioneer companies in CSEM and marine magnetotelluric (MMT) services for use in offshore exploration activities. Last year the company added an Italian EM specialist Geosystem of Milan and took a minority interest in a Norwegian-based EM specialist PetroMarker.

Boutte says that WesternGeco’s EM business has nothing to hide and currently has one vessel on CSEM projects off Oman and another carrying out MMT services in the Gulf of Mexico. ‘We put a lot of money into research and engineering and I am bullish about the technology. But the challenge is to more accurately predict the presence of hydrocarbons by integrating CSEM with many other technologies. Ultimately this integration would allow us to distinguish between a high probability and a low probability of finding more oil and gas, but it needs more investment in data processing and interpretation as well as acquisition techniques. Only when we have a reliable product that offers consistent interpretations will CSEM really take off.’

Boutte notes that he told analysts some time ago that the market for CSEM would be in the region of $600 million by 2010-12. He says WesternGeco estimates the current figure to be in the $200-250 million range reflecting the fact that the technology has still to become a tool used by the major oil companies, independents and national oil companies on a routine basis.

The company is also circumspect about investment in multi-client surveys outside the Gulf of Mexico where it has an ongoing programme. There is some history here. Along with many of its competitors, WesternGeco paid heavily in the early years of the decade for over-investing in insufficiently funded multi-client surveys, partly to keep vessels working when demand for proprietary projects was low. The data libraries built in this era proved to be overvalued and eventually involved some painful write-offs.

In Boutte’s view, the multi-client model only works well in certain regions outside the Gulf of Mexico, such as offshore UK and Norway. ‘The business is very dependent on the size of the blocks and the number of potential participants.We have a current commitment of about 2.2 vessel years in multi-client surveys mainly in the US, which involves spending $430 million on projects that have significant prefunding.’

The financials of any project are never far from Boutte’s mind. He believes that his ‘passion for profitability’ rather than any residual engineering skills have probably surprised the geoscience community, which he appears to have embraced. He started his career as a wireline engineer in Houma, Louisiana after obtaining a BSc in engineering from the University of New Orleans and then held management positions in North America, Trinidad, Caracas, Buenos Aires and Paris. ‘I don’t look back on my days as a Schlumberger engineer with nostalgia, but I believe that WesternGeco now approaches its business more like Schlumberger Oilfield Services. We understand that differentiation through technology is the core of our success and this results in consistency across the whole company.’

WesternGeco in fact doesn’t fit neatly into Schlumberger’s main focus of providing services around the wellhead. Seismic and other geophysical applications involve completely different logistics, which is why the parent company remains organised into two distinct business segments, Oilfield Services and WesternGeco (around 15% of the company). Boutte likes the dichotomy and, one suspects, the degree of autonomy it affords. ‘It has been a fascinating journey. Watching new technology succeed as a result of people’s belief in the project has been very rewarding.

‘And the fact that we are now making a serious financial contribution to Schlumberger is especially appealing.’ OE

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