The marine seismic industry chalked off 2009 as a year to forget, but Andrew McBarnet suggests that 2010 won't be a whole lot better.
Making predictions is a mug's game. We all know it, but we all do it. And if you're in a business like marine seismic, you have to have a plan even though this is bound to be based on best guesses about future demand for services and technology.
Surprisingly, the mainstream contractors, equipment manufacturers and service suppliers who make up the marine seismic community are in remarkable unison when it comes to predicting what's in store for 2010. In summary, the somewhat disappointing prognostication is for activity levels to be much as 2009 with a possible lift towards the end of the year but nothing to get too excited about. That said, within the general forecast, the micro climate for some areas of the business may be unpleasantly turbulent, with seismic equipment providers possibly in for the worst conditions.
When looking ahead the macro question is always focused on market prospects, ie. the level and nature of demand for marine seismic surveys worldwide. To an extent, the answer is based on feedback from oil company customers on what their E&P;budgets for the coming year look like. That can be impressionistic until clarified by actual numbers announced by the oil companies. Also a large client base for marine seismic resides in national oil companies where budget spending is based on different criteria from traditional oil industry economic thinking. So, in theory, the market isn't that easy to judge.
Yet, the scope for being a wunderkind foreteller of seismic fortunes who can beat the consensus is not as great as you might think. A single graph that Petroleum Geo-Services (PGS) likes to put up at its presentations, most recently at Capital Market Days in Oslo last month, takes all the fun out of the prediction business. However much you slice and dice it, the seemingly irrefutable reality is that demand for 3D marine seismic surveys (as reflected by the amount of tender activity monitored by PGS) goes up and down with the price of oil. Judged in terms of oil company strategic planning, this correlation could be regarded as perverse to say the least. It implies that oil price of the day dictates E&P investment decisions, when on any reasonable assumption (okay fortune telling) the price of oil is likely to be way higher by the time the fruits of those investments are harvested. The upside for seismic company planners is that they only need to focus on the price of oil to have a good idea of what their overall business for the year looks like. Just for the record, the IEA, Opec et al, believe that for the next little while, at least a year, there is going to be little volatility in oil price. So, even if this means flat demand, seismic companies can at least operate on the assumption of some stability, far preferable to uncertainty.
Knowing the E&P spend of the global E&P industry is one thing, where the dollars earmarked for seismic are spent is another matter. And make no mistake, the battle for those dollars will be intense in 2010. One good bit of news is that PGS in its latest market assessment believes that the excess capacity in the global marine seismic vessel fleet as measured by streamer count may be closer to 10% this year and next as opposed to the expected 20%. This should help to forestall further downward pressure on prices quoted for surveys of which there is plenty of evidence.
One effect of a tight market will be to expose some of the smaller players to the chilly wind of competition, which may actually lead to some further consolidation or untimely exits. The trend was clear in 2009. Much of the workforce of Wavefield Inseis was stunned to discover that there was no white knight to rescue them from unwelcome takeover by CGGVeritas at what was a knockdown price compared with what had been offered months earlier by TGS Nopec and Fugro. The lesson was that in recessionary times even the voracious appetite of Norwegian investors for homebred marine geophysical contractors could be soured. Scan Geophysical was unable to retain shareholder support as it struggled with its unsustainable investment in three new vessels ordered from an Indian shipyard. Reservoir Exploration Technology (RXT) has had to make several calls on its backers to stay in the ocean bottom seismic survey business. Right at the end of the year Bergen Oilfield Services was making moves to merge with Global Tender Barges, another indication of challenging market conditions for small operators.
Then there is Polarcus, the Dubai-based company intent on entering a series of six brand new seismic related vessels into the market seemingly without the deep pockets of the Big Four (WesternGeco, CGGVeritas, PGS, and Fugro) to survive many slow days on the survey contract front. For seasoned observers, the company's fortunes are akin to one of those tightrope artists who cross from one city skyscraper to another with no safety net: it is a hugely daring project with two possible outcomes and we wait in awe to see which it is.
Plenty of pizzazz accompanied the launch of the first two Polarcus vessels Nadia and Nailia both of which have immediate work offshore West Africa, and the third vessel Asima has also been put into the water. On the darker side, there appears to be an unfinished effort to finalize the funding of all the vessels' construction, and the company had to put out an assurance last month that its shipbuilder and investor Dubai Drydocks World was not part of a $26 billion restructuring of state-owned parent company Dubai World and continued to have 'sufficient financial capacity to service its debt'. Furthermore, it was 'well-positioned to take advantage of the expected improvements in the ship building and offshore industries in the coming years'.
In the ever changing face of Norway's marine seismic business, no one would be surprised if someone tried to realize the recurring vision of all the minnows being swept into one big company able to contend on a global scale. Wavefield Inseis seems to have been heading in this direction, but the downturn left the company vulnerable.
It is also the case that the demands of many seismic surveys these days are making it difficult for smaller companies to go head to head with the Big Four. One demand from oil companies is for surveys which can provide increasingly high resolution imaging of exploration targets because the presence of hydrocarbons is becoming harder to detect in the remaining prospective areas of the world. That is why PGS has developed its GeoStreamer product, WesternGeco has a whole set of variations on its Q-Marine system, and CGGVeritas has its special high-res offerings including its newly launched integrated steerable streamer Nautilus.
It is arguable that these companies helped to generate industry taste for ever higher resolution. Along with TGS-Nopec they have definitely been responsible for the growing popularity of methods such as wide-azimuth towed streamer acquisition as an economic solution to imaging of complex geology, eg. Gulf of Mexico subsalt. A further focus is the growing emphasis on seismic surveys to provide data for reservoir management, notably 4D seismic carried out by towed streamer and not by ocean bottom survey techniques which suffer from being branded as an expensive niche market.
It is hard not to conclude that these sophisticated survey techniques, enabled by the R&D departments of the main contractors, are not something the smaller operators can match, which could mean a shrinking share of what work is available for them. It may also be the case that we are seeing a more integrated approach to the whole acquisition, processing and imaging process, particularly where existing reservoirs are concerned but also because acquisition for high resolution data surveys requires a greater degree of pre-planning taking into account the processing needs of what are typically large and complex data volumes. Again, this is not the type of contract that a marine seismic contractor can take on without backup.
As a newcomer to the business Polarcus has anticipated the potential requirement to deliver more than just the data off the vessel by tying itself in with ION Geophysical's subsidiary GX Technology, which delivers advanced processing solutions for customers as well as its own SPAN series of multi-client surveys around the world. The arrangement is a good deal for both parties because the move to more integrated survey contract work could put the squeeze on independent processing/ imaging companies which are out of the Big Four loop.
The expected flat demand for marine seismic surveys this year should reassure the main contractors that the worst of the downturn is over - there will be jobs to do and there will be no plunge into the abyss. But that same demand picture does not tell the same story for suppliers of marine seismic equipment. Their business depends upon the provision of equipment to new vessel buildings of which there are few in the offing and supply of spare or replacement parts to existing vessels, currently a shrinking fleet.
Financial hurt
You only have to look at recent financial reporting by key suppliers of marine acquisition equipment to know they are hurting. ION's recent land seismic joint venture with the Chinese company BGP does nothing to improve the market for its marine seismic offerings, some of which are industry leading. During 3Q 2009, ION's Marine Imaging Systems reported decreased revenues of $29.4 million compared to $49.0 million a year ago, mainly due to the decrease in VectorSeis Ocean system sales compared to last year. Bolt Technology is dependent upon Schlumberger, PGS and CGGVeritas for over 40% of its sales meaning its business in seismic energy sources, controllers and synchronizers as well as underwater connectors is closely linked to only three companies, albeit the biggest in the sector. Gary Owens, boss of OYO Geospace, told shareholders last month that the company had done well to survive the global meltdown and return a modest profit for 2009 on significantly reduced revenues for its seismic instrumentation and reservoir monitoring equipment. Even CGGVeritas subsidiary Sercel has been losing revenue from its marine equipment sales as a result of the adjustments in the global seismic fleet.
Short term beneficiaries of the current slack in marine seismic activity could be the data processing houses. Processing contributes at least 15% of the total revenues of a major contractor, so it is always business worth pursuing with CGGVeritas and WesternGeco leading the chase with the biggest facilities and global network. At the moment there are said to be numerous oil companies unwilling to commit to the expense of a new survey who are prepared to have another look at existing data to see whether continuing improvements in processing techniques, some quite dramatic, can reveal previously unseen prospects. Companies are talking about a lot of data that could be reprocessed on this basis.
Nothing suggests big changes this year in the seismic business, but a couple of trends may emerge more clearly. One is the suspicion that oil companies are tilting in favour of a nodal approach to seabed seismic data acquisition as opposed to cable-based systems. If confirmed, this may have implications for ocean bottom cable surveys and permanent seismic reservoir monitoring. Although SeaBird Exploration's initial node survey operations for Total off Angola with the Hugin Explorer got off to a shaky start, the company seems to have done the industry a favour by proving in subsequent projects that the concept works and potentially has some significant advantages over cable.
Fairfield Industries recently sold a node-based system for use in up to 700m water depths to the Russian company Sevmorgeo and is optimistic about further deployment of its deepwater system which has already been used by BP and Shell. Fairfield is also tapping into the seriously underexploited transition zone survey market which is expected to gain more traction in the near future.
Most intriguingly OYO Geospace has developed a node design ocean bottom recorder which was launched at the Society of Exploration Geophysicists annual meeting in Houston last October. This is the company which has supplied all the ocean bottom cable to date for BP's life of field seismic (LoFS) projects around the world. The attraction of node recorders is that they can be placed more accurately on the seabed than cable using a remotely operated vehicle and can achieve more reliable contact with the seabed for recording data. If nodes can be cost effectively repositioned for monitoring surveys over a reservoir, then this could be a serious alternative to current LoFS thinking. At the moment companies are reluctant to meet what is perceived to be a major upfront cost for a system which cannot be guaranteed to last the lifetime of a reservoir, at least 25 years, not least because no system has been down more than seven years. It could be that retrievable nodes emerge as a viable compromise, with the added benefit of being able to enhance the nodes' performance as technology develops over the years as it surely will.
The other noticeable trend in 2010 may be the increasing interest in seismic surveys in the Arctic region. There are Greenland licensing rounds underway, which may stimulate some interest although the record of past rounds is not good; and Russia is making noises about opening up some Arctic regions to the international oil industry. The US government also seems to be considering offshore Alaska for more licensing. On the technology front CGGVeritas just reported completion of the first Arctic Beaufort Sea project and OCTIO Exploration working on behalf of GX Technology claims its recent 2D survey off northeast Greenland with most lines sailed in ice was an industry first of sorts. Last but not least it should be noted that the newly floated Asima is anticipating the market as the first Polarcus vessel fully equipped for Arctic conditions. OE