Analysis:The Maytag repairman isn't the only contractor waiting for the phone to ring.
The seismic industry knows the feeling, particularly for those involved in the North American land sector.
It is not an easy business these days. While the push is on to extend drilling in lands out west, the environmental obstacles to conducting seismic surveys are growing, formidable, and occasionally challenged successfully in court.
Offshore, seismic contractors contend with an array of environmental and regulatory issues surrounding data acquisition. Will it, for example, bother sperm whales or other marine mammals?
Meanwhile operators are pressuring seismic companies to assume greater risks in insurance—in some cases including liability that exceeds the annual revenue of the firm conducting the survey. As seismic acquisition changes from a precursor for exploration into an integral part of the production cycle, it brings seismic boats closer to existing drilling and production platforms, and operators want seismic contractors to indemnify the operator against incidents such as hydrocarbon spills that have little to do with mapping the earth's crust.
These are just a couple of obstacles related to doing seismic business as the 21st century gets underway. No doubt the greatest obstacle is generating a margin from seismic work, even while oil and gas operators complain about the declining inventory of prospects available to them in North America.
Clearly, if prospect availability were a true issue, the telephone would be ringing off the hook for seismic companies.
But it is not that way. In October 2002, WesternGeco, the Schlumberger/Baker Hughes seismic joint venture, threw its hands up and walked away from the North American land market. WesternGeco minced no words about the reason: It was operator pressure to work at rates below costs while assuming greater risk.
Last summer, a proposed merger between VeritasDGC and Petroleum GeoServices ASA foundered because the economics didn't make sense in the current business environment. And just last May, after six straight years of sector financial losses, the International Association of Geophysical Contractors (IAGC) reorganized to grapple head-on with the brutal economics characteristic of today's seismic industry.
The 30-year-old organization has more than 200 members ranging from geophysical contractors to data suppliers, equipment manufacturers, and consultants. The IAGC is scrambling to preserve the commercial health of the industry. It hired Chip Gill, the able membership director of the Independent Petroleum Association of America, as president, revamped the board, and has been working on organizational guidelines to govern how the industry conducts business, fully cognizant that should current trends continue, the seismic acquisition industry will not survive in anything like its present form.
There are today just four major international players left—down from 15 in 1986—while the ranks of smaller contractors continue to thin as the gruesome economics forces companies to downsize, merge, or go out of business. Beyond the survival challenge is the fact that as exploration and production (E&P) firms lean on seismic firms to reduce costs, it means the elimination of research and development, an endeavor that has proven especially effective for the seismic industry's customers.
Seismic contractors can point to direct industry benefits in reducing their customers' finding and development costs. Operators get more for their money now. A Salomon Smith Barney survey of oilfield value found 3D seismic contributed 46 percent of the savings produced through falling E&P costs between 1995 and 2000.
Nor has the seismic industry sat on its laurels. Cumulative cash investment in seismic equipment, data collection, and technology grew from $1.7 billion to $13 billion between 1994 and 2000. The cost per line of data, meanwhile, went down in true efficiency gains for customers. Indeed, it hardly seems as though a decade has passed since 3D revolutionized the search for natural gas, first offshore, and then onshore in the mid-1990s. Seismic companies generated data volume beyond comprehension.
But a funny thing happened in the last drilling cycle. Drilling activity reached levels not seen since the early 1980s while seismic was largely ignored. Most of that drilling was developmental in nature. Indeed, after the initial spurt in 3D seismic, sector cash flow turned negative after 1995, exceeding $2 billion annually in 2000, while 2,500 professional jobs disappeared from the geophysical sector.
Changes in the operator community have also affected the seismic industry. Merger mania means the pool of E&P customers able to underwrite multi-client surveys has diminished. At the same time, more than half of the investment each year by seismic firms has been in multi-client data, a business model that makes sense on paper since it spreads the costs among more customers and theoretically provides the contractor a greater margin.
Unfortunately the theoretical has not worked in real life. Since a lot of that multi-client style data is speculative in nature, the returns are pushed into the future. Those returns are not accruing to seismic contractors for a variety of reasons. There are copyright issues. A seismic company will shoot data for a client who then repackages the data with its own proprietary information and markets the product as a new package. Internationally, host governments have a tendency to release data from multi-client basin surveys to the public domain before contractors have the opportunity to amortize their investment. The host government benefits because the oil and gas cycle is sped up. The E&P firms benefit as barriers to entry fall. But the seismic industry loses money.
Right now the industry carries an estimated $3 billion in book value for multi-client surveys that has yet to be amortized.
There can be little doubt that the seismic industry is the goose that lays the golden egg for E&P firms, particularly in a global environment where the hydrocarbon industry demonstrates all the characteristics of a mature industry.
Meanwhile, the seismic industry is in the midst of structural changes as new computing power, computer modeling, and improvements in drilling and production bring about a convergence of trends that can best be described as the virtual oilfield. On the one hand, seismic data is growing in importance as a means for optimizing reservoir production. It improves industry efficiency by identifying smaller targets in more complex geological configurations. At the same time the business is evolving from a proprietary sampling process for individual prospects into a massive data-generating effort that enables the E&P industry to pursue a basin-wide approach to hydrocarbon exploration and production.
With advances in downhole sensors and communications, it may be possible within a decade to cut in half—to just 18 months—the lag from discovery to production for hydrocarbons. It is not uncommon to hear of a concept in which the drillship literally follows the seismic boat with geological analysis performed as seismic data is generated—a virtual realtime oilfield.
But that's Buck Rogers stuff. The biggest boon initially may lie in the computing power that enables the incredible volumes of seismic data generated over the last half-decade to be reprocessed, or essentially brought into clearer focus. That trend could be a major factor in why E&P firms are slow to call the seismic companies these days. The seismic industry is literally suffering from its own success.
And that is worth noting. After all, there is a virtual unanimity among forecasts that hydrocarbon demand will grow—as will depletion. The trend in oil and gas in recent years has been an ever-spiraling round of larger investments with incremental results. Ultimately the health of the seismic industry will be a critical factor in the technological revolution that enables operators to work within the confines of a maturing resource base.
So give these guys a call. You'll find them downtown, or in the industrial parks, often next to the Maytag repair center. They'll be glad to hear from you.
We Want to Know
The latest buzz in E&P circles is that North American oil and gas prospects are diminishing, or of declining quality. True or false? What is your view of how the prospect issue impacts the oil and gas industry.
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