Has the recovery tide turned? That's the question Andrew McBarnet asks in this assessment of the marine seismic industry's marketplace and technology as the hoped for pick-up in business in 2000 fails to materialize.
Except for the odd freak event, ocean tides are almost entirely predictable. Sailing folk even have tables to tell them the precise times of low and high tide.
No such calculation seems possible for the beleaguered marine seismic industry, which continues to languish in a depressed looking market. Although you hear from some analysts that 'the tide is turning,' there is little yet to support this observation.
A more general impression is that it will be well into 2001 before oil company spending kicks in and recovery is a reality.
This is of course disappointing and gives rise to some muttering about the massive revenue currently accruing to the oil companies, a proportion of which must surely end up being spent on exploration rather than buying back shares, paying down debt and cosying up to investors with higher dividends.
It's not as though exploration will not be needed in due course, nor is it a lack of areas to explore. Even if the old favourites like the Gulf of Mexico (pretty much shot) and the North Sea (now zoned principally for 4D seismic) have lost their lustre, areas such as offshore Brazil, West Africa, the Nile Delta, Australia, Canada and the Far East are all seen as major seismic plays.
Given the darker prognostications, it is tempting to ask how ready the seismic industry is for better times. One company, Veritas DGC, which currently has a fleet of seven seismic vessels and ranks fourth largest marine seismic contractor in the world, is convinced that the fundamentals are in place for an upturn in the industry's fortunes.
Reporting on the results of its latest improved quarter, which also included the company's land acquisition and seismic data processing operations, 'bullish' was a word arising more than once.
Mention was made of an increase in capital expenditure from $55 million in 1999-2000 to $90 million or more for 2000-2001 with the introduction of more equipment on the agenda.
The company is building up a war chest, possibly with acquisitions in mind, but also quite explicitly to be in a position to increase its capacity as the seismic market improves.
Subsequently, late last month, Veritas announced that it would draw down from its $200 million shelf registration filed in October 1999 and would begin with an underwritten offering of 3,000,000 primary shares of common stock.
No coincidence then, that Veritas is thought to be on the brink of deciding to invest in a third state of the art Viking class 3D seismic vessel. In 1998 when there seemed to be no limit on the demand for marine seismic, Veritas talked confidently of building a new vessel every year.
The company was not alone in its enthusiasm as all its competitors were modernizing and expanding their fleets and newcomers such as Aker Geo and Fugro Geoteam joined the chase for 3D seismic opportunities.
In the event only Viking I and II were launched before oil industry spending came to an abrupt and largely unexpected halt as oil prices plunged.
Newbuilding by Veritas may be a shrewd move because some people believe that the current dynamics of the market worldwide may conceal the stirrings of better times ahead.
The conventional wisdom is that things will only significantly improve once the merger between Schlumberger Geco-Prakla and Western Geophysical, the Baker Hughes company, has been finalized and the new company Western Geco is up and running.
The reasoning is that some uneconomic vessels will be taken off the market which will ease the chronic over-capacity seriously thwarting realistic pricing for 3D seismic work.
As OE went to press, the companies were still at the stage of deciding on top posts for the new entity. All the signs indicate that the marine seismic fleet will be run by a nominee from Geco-Prakla, which would suggest that it will be the dominant influence in the marine seismic sector of the company.
In other words, there is likely to be a Schlumberger imprint on future marine developments, even though Gary Jones, a Western man, has already been named as president of the whole outfit.
This is no more than you would expect given that Schlumberger is to be the senior partner in Western Geco with 70 percent to Baker Hughes' 30 percent, and that Geco-Prakla brings to the table the largest fleet worldwide.
However, the implications are interesting for the marketplace, from the point of view not just of the contracting market but of the direction technology in the marine seismic industry will take in the future.
What Veritas may have worked out is that the market is not in fact suffering that much from over-capacity.
Using the number of streamers available behind vessels worldwide as an index of available supply, the position does not look that promising because there has only been an estimated 20 percent reduction.
This in itself would not be sufficient to correct the market. The key statistic is that the number of seismic vessels has dropped by 30 percent, as a result of contractors retiring older units. What you have as a result is fewer vessels towing a higher proportion of streamers.
Very efficient, you may say, but what happens when a few more oil company clients come looking for 3D surveys in different locations around the globe.
The answer may very well be that there aren't enough vessels to be in all the places required at the same time. In such a scenario, newbuilding makes sense.
Equally, Western Geco may conclude that only a light weeding is required amongst its fleet, assuming most of the 'clunkers' have already been discarded.
The proviso to the bullish interpretation of the market is that the picture has been suffering from some major distortions since the downturn took hold. The biggest black hole has been the impact of multi-client survey work, which in normal times would make up around 50 percent of a contractor's business.
As exclusive work from the oil companies dried up, contractors were faced with two expensive options. Either they tied the vessels up in dock or kept them operating on multi-client surveys, the fancy term for old fashioned 'spec'.
Contractors will tell you that the costs involved in having a leased vessel sitting in dock are not much less that keeping it operating.
Given that a multi-client survey may provide a return in the future, contractors understandably focused on building their data libraries with largely self-funded 'spec' surveys.
Some subsequent company financial results have revealed that, with one startling exception, everyone spent way too much on their multi-client libraries.
Data sales have not matched the investment put into them. Petroleum Geo-Services (PGS), Veritas and CGG have reduced their investment in data library acquisition until sales of their existing data pick up and they can see some return for all the work done.
One good sign is that all these companies report oil companies finally beginning to search out available seismic data in prospective areas, with Gulf of Mexico data leading the way.
The exception to the rule was the US-Norwegian company TGS-Nopec which has just published another set of stellar financial results, highlight of which was a 178 percent increase in operating profit (NKr65.5 million) over its 1999 equivalent quarterly result of NKr23.6 million.
The company deals entirely in non-exclusive surveys. The secret of its success is that it does not own any vessels and is therefore relieved of the huge overhead of maintaining a fleet whether it is operational or not.
The risk in this strategy may be that in a hot market the company will be unable to find vessels available to carry out its surveys, particularly as the vessel operators are competing with it for suitable areas for multi-client surveys.
However, TGS-Nopec, particularly in the Gulf of Mexico and offshore Brazil, has actually been working with companies such as Geco-Prakla and CGG on multi-client surveys.
The company says that these contractors value its expertise in preparing and marketing multi-client survey projects, so are happy to collaborate.
Multi-client surveys are something of a conundrum. Analysts don't trust them because it is difficult to put a value on the data. If the seismic companies have chosen an area which is going to be subject to an early licence round, then there could be a bonanza in sales. But by their nature these surveys are speculative.
As protection, an element of pre-funding from oil companies is normally a pre-requisite for a contractor, although even this tends to be dropped in desperate times such as last year. The pre-funding at least provides the contractor with some confidence that the survey area has merit.
One trouble with the business model is that oil companies can relatively cheaply persuade a contractor into carrying out the survey without concerning themselves about the number of sales the contractor has to make to turn a profit. In effect, it is a buyers' market for oil companies with none of the potential downside of an unsellable survey.
The other major distortion in the marine seismic market has been the pressure on prices. With too many vessels chasing too little work oil companies have been able to play 'how low can you go' on the price of a survey and get away with it.
Stories are legion on how this or that company 'bought' a particular contract. There was certainly some cynicism recently amongst Aker Geo's competitors when it successfully emerged with the award of the largest 3D marine seismic survey ever carried out off West Africa.
The company is committing its two 3D vessels Aker Symphony and Aker Amadeus to shooting some 9000km2 on licences held by Vanco Energy Company in deep water off Morocco, Gabon, Cote d'Ivoire, Senegal, Equatorial Guinea and Namibia.
Vanco, headed by a legendary wheeler-dealer Gene Van Dyke, specializes in beating the big boys to potential acreage and then farming out his interest. Van Dyke admits that he got a 'good deal' for his seismic campaign.
In a fragile market, observers wonder just what that deal amounts to for Aker Geo, a company launched into the seismic market in the most inauspicious circumstances two years ago as the market began to evaporate.
The danger oil companies court by continuing to squeeze contractors is that they will consolidate (Western-Geco) or go out of business (Eagle Geophysical/ Horizon Exploration).
Another scenario is in the oil companies' interest if they are looking for healthy competition, with regard to price not to mention technology and productivity.
Emerging technologies may well be at a watershed that determines the future development of the marine seismic market, and the Western-Geco alliance could be a major influencing factor.
If, for the sake of argument, the Schlumberger marine seismic approach is adopted by Western-Geco, oil companies will over time find that 50 percent of the market is limited to a particular technological strategy.
In the short term, it would be too expensive to re-equip Western Geophysical vessels in the new combined fleet with Schlumberger equipment.
But Schlumberger has recently invested major dollars in its newly launched Q-Marine seismic recording system (OE August) and in steerable streamers, and has a well regarded towed streamer system in general which competes successfully in the market (although it is an open secret that Geco-Prakla, unlike Western, has been leaking serious losses for a number of years).
Western-Geco's management will have some interesting choices to make. One leading question mark may be raised over the future of the Sentry solid streamers developed by Thompson Marconi Sonar Seismic (TMS) and adopted by Western Geophysical.
TMS, based in Sydney, Australia has delivered some 400km of solid streamer to Western vessels and also found a new, small-scale customer in Fugro Geoteam. On the other hand, Geco-Prakla has to date shown no interest in the solid streamer approach.
Nor has PGS, the company which will present the main competition to Western-Geco. PGS has consistently said that the solid streamer does not offer sufficient advantage to justify the investment and has been focusing on other improvements in streamer design and performance.
Just to add to what may become a worrisome dilemma for Western-Geco, the hot news is that Veritas DGC has agreed to equip its vessels with Solid Cable developed by CGG company Sercel.
This is something of a coup for Sercel and an undeniable blow to TMS and by implication Western which recently let go of its exclusive licence to the Sentry solid streamer.
Poignantly, Veritas DGC opted for the Sercel equipment while Richard White was serving what turned out to be a very short stint as chief executive (he resigned over policy differences after six months).
White was previously president of Western Geophysical and instrumental in investing in the innovative TMS product.
Word from Veritas is that both streamer designs do eliminate the noise excitation known as bulge waves associated with conventional liquid-filled streamers, but Sercel's design unlike the TMS streamer has no liquid at all in the cable offering an operationally more satisfactory solution.
TMS has been developing a second generation cable with improved performance characteristics, but elimination of all liquid is not one of the expected features.
Conventional seismic streamer operations are clearly marked for continued development with contractors trying to win oil company attention with the best technology. Once again, it is a scenario where oil companies can only win as long as sufficient competition exists.
The same applies in the field of multi-component and 4D reservoir seismic technology. Oil companies have been stalling over investment in these advance techniques for accurate imaging of reservoirs, potential and producing, principally on the grounds of expense but also on the understandable thinking that the longer they delay the better the technology will become as contractors introduce refinements.
During the downturn the industry witnessed a significant oil company disenchantment with ocean bottom cable surveys, the operational technique for multi-component recording of pressure and shear waves using a combination of hydrophone and geophone on the seabed. The objection was primarily cost, and justifying the use of a largely untried technique. Neither of these objections has been entirely overcome.
On a more positive note, one industry estimate suggests that at least 16 4D seismic surveys are already in the offing for the coming year, indicating a growing acceptance of the technique and appreciation of the better understanding of reservoirs such surveys provide.
No one, however, is expecting to get rich from 4D surveys, but all work in this field will be a bonus. One practical trend is that towed streamers, rather than more costly and complex ocean bottom techniques, look increasingly likely to be the survey method of choice for many 4D or 3D time-lapse seismic surveys, where reservoir imaging over time can be compared.
Among other things, this opens the market given that only the Western-Geco unit, PGS and to a degree CGG have any significant capability in ocean bottom surveys.
Most encouraging of all, two companies - BP and Shell - in announcing major new investments for the North Sea both explicitly mentioned increases in 4D seismic surveys in light of the successes in adding value to reservoirs which both companies have experienced.
Contractors have been waiting for this kind of endorsement, but whether the tide has turned or not for a more general acceptance of the technology must still be a matter of conjecture.
By Andrew McBarnet
© 2000 Mena Report (www.menareport.com)