Andrew McBarnet forecasts some damaging consequences for marine seismic operations offshore the US as a result of the Deepwater Horizon disaster.
The enormity of the blow-out and sinking of the Deepwater Horizon drilling rig at the BP Macondo field killing 11 crewmen and setting off a still unresolved oil spill disaster in the Gulf of Mexico is such that it is still too early to predict its full impact on the conduct of future offshore US oil and gas operations.
However, it doesn't need a clairvoyant to suggest that the marine seismic business is bound to suffer some collateral damage. The severity will depend mainly on the outcome of government investigations and regulatory reactions, fuelled by a freshly activated suspicion in the Administration and on Capitol Hill of anything to do with the oil industry. The schedule for future exploration, especially if dependent on new leasing sales, seems likely to come under fresh scrutiny with more than an outside chance of delays or restrictions. The uncertainty alone could well discourage oil companies and the financial community from considering investment in Gulf of Mexico seismic, which has been a steady source of revenue for marine geophysical contractors over the past two decades at least.
In addition, the fresh spotlight on the workings of the US Department of Interior's now defunct Minerals Management Service appears to be providing the environmentalist lobby with an opportunity to leverage some longstanding ‘sleeper' issues regarding survey approvals and the perceived danger to marine mammals from seismic acquisition using airguns.
The only seismic company to publicly acknowledge being immediately affected by the disaster has been TGS-Nopec, the multi-client survey specialist. The Mississippi Canyon block 252 location of the Deepwater Horizon is within the boundaries of the company's Justice wide azimuth (WAZ) survey which began in January 2010 and was due to be completed by the middle of the year. On the day of the accident, 20 April, a number of its vessels were called to assist. After they were released, the survey was able to continue until 30 April when the US Coast Guard established a vessel exclusion zone which obliged TGS to move its operation out of the area. The company said it would carry out multi-client operations in a nearby area until it could return to the Justice project. One can only speculate on the financial cost of such an unexpected turn of events.
Fortuitously, perhaps, TGS' recent first quarter interim results recorded consolidated net revenues of $148.2 million, up 109% from $70.8 million in 1Q 2009. Robert Hobbs, CEO of TGS, said: ‘Our strong results in 1Q have further confirmed our view that our customers have returned to investing in high quality data after a very challenging year for our industry in 2009. Strong interest in our modern 3D and WAZ data in established plays such as the Gulf of Mexico has been augmented with increased interest in our new 2D and 3D data off West Africa as E&P companies continue to be drawn to this exciting new play.'
Hobbs has not been alone in hinting that the marine seismic business may be turning the corner on the way to market recovery. Commenting on his company's admittedly less than stellar first quarter performance in 2010, Robert Brunck, chairman of CGGVeritas, referred to a growing confirmation that increasing levels of exploration and production spending would drive a progressive recovery of the seismic market in 2010. His caveat was that prices in the marine seismic market would only strengthen when the growth in demand balanced new capacity entering the market, a scenario expected later in the year.
Clearly talk of recovery for marine seismic must now by tempered by events in the Gulf of Mexico. For a start, contractors such as WesternGeco, CGGVeritas, Petroleum GeoServices (PGS) and TGS have been focusing significant attention and investment on the region with high cost, multi-vessel WAZ operations. With upcoming leasing operations in mind, the companies have been putting together multi-client surveys to revisit key, mainly deepwater, subsalt structures in the Gulf of Mexico which until WAZ could not be effectively imaged using conventional towed seismic acquisition methods.
It seems likely that oil companies will be cautious about pouring further money into these ventures if the acreage involved is not going to be leased as soon as expected because of government intervention, or if the cost of E&P;operations is significantly increased by new regulations. WAZ operations are the most high profile marine and probably most profitable seismic activity in the Gulf of Mexico, but proprietary surveys could be under threat too. In the light of the government's temporary suspension of all drilling permits in the Gulf of Mexico, the International Association of Geophysical Contractors (IAGC) has been expressing concern about G&G permits – both the issuance of new permits and the extension of permits for ongoing seismic surveys. As of the time of writing, seismic survey operations were continuing as planned in the Gulf of Mexico.
Frontier exploration
The big question which IAGC members want answered is whether the Obama administration can stick to its pre-spill announcement at the end of March. Then, the seismic industry applauded the decision by secretary of the interior Ken Salazar to expand oil and gas exploration and development on the US Outer Continental Shelf (OCS) in frontier areas such as the Atlantic and Arctic Oceans, and specifically to call for seismic exploration in the mid-Atlantic and south Atlantic frontier areas.
Chip Gill, president of IAGC, said at the time that seismic data had not been acquired in areas of the Atlantic seaboard since the 1980s and that advances in seismic imaging technology over the last several decades would facilitate ‘efficient and responsible exploration'.
Secretary Salazar's immediate response to the Deepwater Horizon accident included some broad measures with the potential to upset E&P schedules in the Gulf of Mexico. One is the intention to restructure the MMS to establish a separate and independent safety and environmental enforcement entity, incidentally following the example adopted by the UK and Norway. MMS' inspection, investigation and enforcement operations will be separate and independent from the agency's leasing, revenue collection and permitting functions.
In any circumstance it would be asking a lot to expect the reorganisation of a bureaucracy as important as MMS to go so smoothly that US offshore oil and gas operations could continue to run unaffected. But radical change is being effected under huge political pressure to a very important agency: last year it collected $13 billion in royalties and fees, more than any other federal agency except the Internal Revenue Service. Furthermore MMS has been subject of Congress scrutiny on more than one occasion in the recent past over its allegedly cosy relationship with the oil business and its efficiency. Most notoriously, an inquiry by the US Inspector General into the royalty in kind (RIK) programme, introduced in the late 1990s and run by MMS, found that between 2002 and 2006 ‘nearly one-third of the entire RIK staff socialized with, and received a wide array of gifts and gratuities from oil and gas companies with whom RIK was conducting official business'. References were also made to ‘ethical failure' and ‘substance abuse and promiscuity'.
In the prevailing politically charged atmosphere, MMS looks to be largely defenceless against the accusations now being levelled at its oversight of US offshore and gas operations, and Salazar has implied that more policy changes may follow in due course. According to a Department of Interior statement, reforms involving MMS since 2009 have included ‘the establishment of new ethics standards; termination of the RIK programme; balancing of the agency's mandate to include offshore wind and renewable energy production; implementing recommendations of the Inspector General and independent reviewers; directing an independent Marine Board review of MMS' inspection programme for offshore facilities; cancelling proposed offshore lease sales in Bristol Bay and the Arctic Ocean; and establishing a clear, orderly and science-based process for determining which areas on the Outer Continental Shelf may be appropriate for oil and gas development.'
Another item on the Salazar agenda could turn out to be the most troubling for future marine seismic in US waters. It concerns the additional environmental regulations being proposed by the Obama administration. For example it will be seeking to eliminate a 30-day congressionally-mandated deadline for the Minerals Management Service (MMS) to act on exploration plans that oil and gas companies submit. The government says that changing this 30-day mandatory deadline to a 90-day timeline that can be further extended to complete environmental and safety reviews as needed, would provide MMS more time to conduct additional environmental analysis on an exploration plan. The oil industry, on the other hand, is likely to see this as a brake on its operations particularly as this will be in addition to the full-scale Environmental Impact Statement (EIS) that MMS conducts for its five-year plan. It would also supplement the EIS and other environmental reviews conducted prior to any lease sale. MMS also undertakes additional environmental reviews for smaller grids of lease blocks before they are developed.
The seismic industry would feel uncomfortable about increased emphasis on environmental permitting at any time because concern over its marine acquisition operations inevitably focuses on the use of airguns as a seismic source and the potential harm caused to marine life. Numerous studies have shown that marine mammals and fish can be affected by seismic operations, but the evidence of actual harm is more open to question.
A month or so ago the Norwegian Petroleum Directorate (NPD) added a major scientific study to the body of data available by publishing the results of an investigation carried out by the Institute of Marine Research during the summer of 2009 on the effects of seismic surveys on fishing off Vesterålen. The main finding was that sound waves from seismic data acquisition resulted in increased catches for some species and smaller catches for others. According to the NPD, the survey clearly indicated that fish reacted to the sound from the seismic guns. The most probable explanation for both the increased and reduced catches for the various species and fishing gear was that the sound waves from the seismic guns put the fish under some stress, causing more swimming activity. You could of course argue that the concern here is commercial rather than environmental.
Even so, under highly vocal pressure from environmental organisations, the US and many other countries have over recent years placed increasingly stringent mitigation measures on marine seismic contractors to protect marine life from potential harm from seismic survey operations. As a result the issue is never far from the top of the agenda for industry representative bodies such as the IAGC which has worked hard to ensure government requirements are based upon scientific knowledge, not speculation.
Unauthorised operations
So we come to the fact that the Deepwater Horizon oil spill and its exposure of MMS vulnerability has presented unexpected leverage to the environmentalist lobby. The US-based Center for Biological Diversity has filed a formal notice of intent to sue interior secretary Ken Salazar and the MMS for ignoring marine mammal and endangered species protection laws when approving lease sales, exploration and development plans, and seismic permits in the Gulf of Mexico.
Since Salazar took office, the Center for Biological Diversity says that the Department of the Interior approved three lease sales, more than 100 seismic surveys, and almost 400 exploration and development plans (including drilling) without permits required by the Marine Mammal Protection Act and the Endangered Species Act that are designed to protect endangered whales and other marine mammals from harmful offshore oil activities. Miyoko Sakashita, oceans director for the Center for Biological Diversity, says: ‘Under Salazar's watch, the Department of the Interior has treated the Gulf of Mexico as a sacrifice area where laws are ignored and wildlife protection takes a backseat to oil company profits.'
Sakashita's over the top quote can be discounted, but technically the basic claim is correct. Apparently MMS has indeed been permitting seismic and drilling operations without full compliance under the Marine Mammal Protection Act or the Endangered Species Act. There is no public suggestion as yet that seismic or drilling companies have not followed the requirements laid down in environmental legislation, more that the MMS waived some of the paperwork. In its defence it is understood that MMS was aware of the issue and had been trying to get into compliance for some time, not that anyone will be in the mood to listen.
Claims by the environmentalist lobby will have to be addressed at some point, possibly at some expense to the extent and timing of future seismic and E&P operations. But the Obama administration has first to requite public anger at the perceived mess that Big Oil has created in the Gulf of Mexico. This will require some tough-looking measures on offshore safety and the environment. In addition, from a political standpoint if nothing else, a cautious approach to future leasing and permitting seems unavoidable. That is clearly bad news for marine seismic contractors going forward. Data library sales and reprocessing will be hit along with survey opportunities related to upcoming leases.
Big Wave letdown
Such a prospect must be particularly frustrating for a small multi-client data specialist like Spectrum. While the moratorium on leasing in the eastern Gulf of Mexico has been in place, the company over the last three or four years has been building a substantial seismic data library in anticipation of the day that the ban on exploration was lifted. In March it seemed to have hit the jackpot when the Obama administration outlined the possibility of a future eastern Gulf of Mexico lease proposal. At the time, the company was gearing up for the start of phase four of its ‘Big Wave' multiclient seismic programme in the eastern Gulf of Mexico. The new acquisition by the GGS Atlantic 2D seismic vessel is destined to increase Spectrum's eastern Gulf of Mexico coverage to 65,000km of long offset high quality seismic data. Now the crucial question for the company is whether the eastern Gulf of Mexico will be opened in the 2012-17 time frame originally envisaged by the administration. The potential value of its data is at stake.
Having everything up in the air has to make marine seismic business in the US OCS a worrying proposition. Oil companies need some certainty before making investment decisions which include new marine seismic. It would seem that seismic revenues for a quarter or two will be impacted. If fewer surveys are mobilised in the Gulf of Mexico, that is going to make additional vessels available for work elsewhere. The timing could scarcely be worse because the industry had been hoping to bring the world seismic fleet into some kind of balance which could presage an increase in currently depressed pricing.
Possibly reassuring is that the Obama administration knows that it has to pit public outrage at the spill and its consequences against the need to keep the oil taps flowing to meet that same public's expectation of plentiful (cheap) gas to fill their motor cars.
A new Datamonitor survey warns that banning offshore drilling in the Gulf of Mexico would cost the offshore services industry almost $11bn a year. It also points out that current production of oil in deepwater areas of the Gulf of Mexico corresponds to nearly 1.8 million b/d. Fields expected to come onstream by 2014 are estimated to add a further 250,000b/d, the equivalent of around 14% of the current Gulf of Mexico output. No sane government would want to put that kind of production in jeopardy.
Gregory Lemaire-Smith, associate energy analyst at Datamonitor, says: ‘If the accident in the Gulf of Mexico triggers a spiral effect, the impact on the global oil and gas offshore industry could be alarming. Our research clearly demonstrates that the state of the oil market doesn't allow the US the luxury of closing offshore regions to activity – a fact that both political parties are all too aware of. The Deepwater Horizon explosion may have caused one of the worst spills in living memory and shaken the very foundations of the world's most significant piece of environmental legislation, the US climate bill, but eventually oil will emerge as the winner.'
If this observation is correct, the seismic industry will want to know what constitutes a win and how long it will take. OE
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