Musings: Seismic Replaced By Fracturing, But E&P Cycle Building
We noted in the oil and gas industry capital spending survey conducted late last year by Barclays Capital that seismic was no longer considered the E&P industry's top technology as it had been for many years. That mantle has been shifted to hydraulic fracturing technology, which, when married with improvements in the ability to drill horizontal wells, has contributed to the success in exploiting shale gas resources.
At the turn of the century, 3-D/4-D seismic technology was considered the most important technology by 58% of the respondents
For a number of years the Barclays survey (and its predecessor survey) has asked respondents to rank the most important technologies in the exploration and development business. In the latest survey, Barclays presented a table showing the ranking of the various technologies over the last decade. At the turn of the century, 3-D/4-D seismic technology was considered the most important technology by 58% of the respondents. For the 2011 survey, seismic technology was down to only a 19% ranking, which is the low end of the range of 19%-22% that has existed since 2007.
Readers may wonder why seismic technology has experienced such erosion given its historical importance for E&P success. The decline is probably best explained by the shale gas phenomenon that has come to drive virtually the entire industry’s E&P efforts in the United States, and now even overseas areas. Seismic technology's rise to prominence did not start in 2000 but rather was a function of the increased focus by oil and gas companies on growing their reserves and production organically through the drill bit during the 1990s. That desire became a reality with the introduction of new seismic equipment that helped revolutionized the business. Better data collection at a lower cost coupled with improved software for analyzing the geology sparked a surge in E&P activity. A facilitating factor in this seismic revolution was the dramatic increase in computing power that significantly reduced the cost and the time needed to process seismic data.
Seismic technology's rise to prominence did not start in 2000 but rather was a function of the increased focus by oil and gas companies on growing their reserves and production organically through the drill bit during the 1990s
What caught our eye recently was a press release issued by OYO Geospace (OYOG-Nasdaq) about the sale of a 7,000 single-channel GSR wireless seismic data acquisition system to BGP Inc., a subsidiary of China National Petroleum Corporation, and one of the world's largest seismic data acquisition companies. OYO's new GSR system represents the leading edge of the new technology in the seismic data acquisition industry.
There were two reasons this announcement struck us. First, BGP's role in the global seismic industry and especially within China is significant. Couple the company's market presence with China's growing thirst for oil and gas resources around the globe and one can see the potential for a whole new growth cycle for the seismic equipment business.
Secondly, BGP has formed a joint venture with ION Geophysical Corporation (IO-NYSE) to design, develop, manufacture and sell land-based seismic data acquisition equipment. Included in this joint venture are ION's cabled seismic data acquisition systems and its wireless system, FireFly®. Also included are ION's sensors and its vibrator equipment.
Seismic crews onshore grow and shrink to match the size of the project being performed so there is no standard definition of a "crew"
The size of the global seismic sector of the oilfield service industry is one of the most difficult to measure. Seismic crews onshore grow and shrink to match the size of the project being performed so there is no standard definition of a “crew.” In the offshore segment of the industry, seismic data is collected in all types of water – deepwater with vessels pulling multiple streamers containing seismic sensors and in shallow water where fewer streamers can be pulled due to structural impediments. Seismic data is also collected in the extremely shallow waters off the coast and often involve surveys spanning the coastal land and shallow waters, referred to as the transition zone. The one characteristic of all these markets is the logistical challenge of hauling the equipment around to perform the shoot.
Another complicating factor about estimating the size of the seismic data acquisition market is the large number of local competitors. The chart below shows an estimate of the number of active seismic data acquisition crews both onshore and offshore for the month of June in 2009 and 2010. The global estimate shows essentially a flat crew count year over year. What is not known from the crew count is how much data, reflected in the number of channels recording data in a survey, is being collected. The trend throughout the history of the seismic industry is that as equipment becomes easier to handle and cheaper, the E&P industry desires more data to improve its analytical capabilities. As a result there has been a steadily increasing trend in the number of channels being deployed in surveys.
What do the OYO and ION wireless systems offer the petroleum companies and the seismic contractors? Exhibit 13 contains a listing of the perceived advantages of a wireless seismic data acquisition system compared to the traditional cabled system. Due to the fact that these systems are easier to deploy, more flexible in their layout, easily expandable, easier to maintain and deliver similar or better data translates into wireless systems being cheaper to operate.
On the other side of the ledger, there are certain perceived disadvantages of wireless systems with a major one being the limited battery life. Issues about the system's inability to deliver data in near-real time and having to determine the location of the acquisition point from a satellite are relatively minor points given the huge cost and logistical advantage of wireless systems. However, the critical consideration a wireless system has been for customers to verify through use the performance claims. That appears to be happening.
The decision by BGP to not only become a partner and 16% shareholder in ION with its new wireless system but to also purchase an OYO system suggests that wireless systems may become the new standard for the industry. These developments are also coming at a time when petroleum industry capital spending is rising as operators are growing more confident about the sustainability of high crude oil prices and the likelihood of higher natural gas prices in the future, too. It is possible that the petroleum industry could be on the cusp of another wave of significant seismic technology improvements that help producers improve their investment returns by boosting exploration success rates and reducing finding and development costs.
The emerging success of wireless systems is also being tied to the growth of gas shale development. While at one time it was thought that the blanket nature of gas shale formations in a basin obviated the need for seismic, the industry is now learning that shales also have “sweet spots” that can be identified with seismic. Seismic data is also contributing to improved knowledge of the natural fractures in shale formations that can improve recoverability by better planning of horizontal wells and their hydraulic fracturing applications. This technology can improve producer returns, which gains increased importance in a period of low natural gas prices.
The potential seismic industry environment is similar to one the industry experienced in the early to mid 1990s
The potential seismic industry environment we are describing, marked by a wave of new seismic data acquisition equipment, is similar to one the industry experienced in the early to mid 1990s. At that time the industry was introducing a number of new, larger land data acquisition systems that produced more and better information enabling analysts to do more in-depth geological modeling. That capability spurred both a capital spending surge by seismic contractors along with increased interest in the newly collected data
by producers. At that time, the company with the highest visibility and earnings leverage was Input Output (IO), which has been transformed into ION. The success of IO and seismic data acquirer Dawson Geophysical during the early 1990s can be seen by looking at charts of their stock price performance during that period.
IO showed a dramatic price rise following its spin-off to the public in 1991 as the company's size enabled its earnings to explode as the new series of data acquisition systems hit the market. During this period, IO had little real competition for its new systems. Dawson, on the other hand, is a seismic contractor that uses the hardware to collect data for oil and gas companies. (Exhibit 15 below.) As a result, it does not have as much earnings leverage from new systems, but rather sees its business grow as a result of increased customer demand for seismic data and data acquired by the new seismic hardware sold by companies such as IO.
It may be another year before we know for sure whether or not these new wireless seismic data acquisition systems will spur an industry-wide revolution the new systems did during the 1990s. Our sense is that it will be confirmed as oil and gas companies are slowly getting back to work following the recession and financial turmoil of 2008-2009. The gas shale revolution underway, even with its poor economics, will also provide a strong underpinning to the seismic industry's business. For many in the seismic industry, the next few years may become the fulfillment of that old bumper sticker: "Please Lord just give me one more boom. I promise not to screw it up!"