Forging on regardless

The new year of 2012 does not offer great tidings of comfort and joy for the marine seismic business. Andrew McBarnet explains why.

Contemplating prospects for 2012, there is a discernible air of frustration, even resignation, in the marine seismic community, but not for the reason you might think. It's all about lost opportunity.

With so much economic turmoil in the world, it would seem logical to presume that the marine geophysical and related technology businesses face a year of unprecedented uncertainty in 2012. One clue that this might not be the case is the word from Chevron that it intends to spend a record $32.7 billion on exploration and production. With other supermajors showing no signs of holding back, seismic vessel operators with backlog to fill must be able to breathe a little easier about how the upcoming year will turn out. They know that some of that oil company largesse will be channelled in their direction, just as it did in 2011.

Sanco Swift, a newbuild 3D vessel due to join the Dolphin fleet in 2013

The apparent disconnect between international oil company spending behaviour and the sickly condition of the world economy is explicable in at least two ways. One reason is that the long run of high oil prices we have experienced has filled the coffers of the big oil companies. In other words they have money to spend. A second related factor is that cash rich oil companies clearly believe that current oil price prognostications can justify investment in a higher level of asset development from exploration through to production.

It has been shown time and again that the demand for marine seismic services is closely linked to the fluctuations in oil price. The relationship is so uncanny as to suggest that oil companies use the price of oil on the day of the budget meeting to base their future E&P expenditure plans! We don't need to concern ourselves unduly about the real explanation, it is the trend that matters.

Staying Positive: ION Geophysical CEO Bob Peebler sees continued growth in seismic demand.

Most analysts argue that high prices are here to stay for the foreseeable future, an opinion shared by Bob Peebler, CEO of ION Geophysical and a notable seer in the E&P business. In a presentation on the outlook for 2012 he forecasts that oil prices will stay in the $80 to $100 per barrel or even higher over the next five years. This is partly predicated on the currently chaotic world around us, and the razor-thin 2% of spare capacity to tide us over any further unpleasantness. Peebler also states that the aggregate natural decline of the large oil reserves around the world is approximately 10%. This has been slowed to 5-6%, as a result of the new technologies designed to extend the life of the reservoir. He argues that the pace of reinvestment will need to increase just to keep the actual decline in the 5-6% range. With oil production at approximately 85 million b/d, Peebler thinks, and who really disagrees, that we're looking at the need to discover and bring online approximately 5 million b/d a day just to keep even.

Adding to the pressures, non-OPEC companies are struggling just to maintain production and there is the uneasy feeling that they are not achieving this. Out of the top 16 IOCs, 14 experienced declines in production in the second quarter of 2011, representing an aggregate 1.2 million b/d. Some large non-OPEC companies such as Lukoil and Sinopec also experienced declines. For IOCs, lack of access to acreage in many non-OPEC countries is likely to compound the problem. It is also the case that of the remaining oil reserves out there, a sizeable proportion are going to fall into the 'hard to find' category. This may be in terms of the technology required and/or the challenging location (think deepwater, the Arctic etc).

It is easy to conclude that there is every incentive for IOCs and independents to increase their exploration programmes and to intensify their reservoir enhancement operations to maximise output from existing producers. And don't count out all the nationalised oil companies, many of whom have embarked on aggressive programmes of gaining access to international acreage.

Separating out marine seismic Peebler expects spending by oil companies to increase by 8% to 11% in 2012. This is in line with a recent CGGVeritas statement referring to the current market as 'a new cycle supported by technology'. The company estimates that E&P spending rose by 16% worldwide in 2011 and will continue to increase in 2012.

Fundamentals for growth

The fundamentals for continued growth in the marine seismic survey market are clear. Even the seabed oil market is growing, according to Peebler, driven by oil company interest in the results of improved ocean bottom survey technology in providing higher resolution imaging of the reservoir.

Spending on seabed seismic has increased 150% from $420 million in 2006 to $1.4 million in 2011.

So why, you ask, are there so many forlorn faces in the marine seismic related business? To which the answer is that practically no one is making decent money, even though demand prospects for marine seismic data acquisition have hardly ever been better. It must be an uncomfortable if not downright irritating feeling to know that more 3D seismic was shot around the world last year than ever before, and yet the main contractors are struggling to maintain margins.

The problem lies with our old friend over-capacity which shows absolutely no sign of going away. In his review Peebler states that marine supply in 2011 was estimated to be within 5-10% in balance with demand, and that operators are expecting a 10-15% price uplift in 2012. That is certainly not the perspective shared by the operators who are all looking at a flat 2012 because there are too many vessels in the market place. A constant complaint throughout 2011 was that this or that contractor was buying a contract and couldn't possibly be making money on the survey.

Peebler himself projects that the seismic fleet will grow from 125 vessels in 2011 to 150 vessels in 2016 with 23 out of the 25 vessel additions likely to be 3D. Both streamer count and length are expected to continue to increase over the next five years, in other words individual vessels are being equipped to harvest more data. These are all reasons why capacity available is likely to remain out of sync with demand for the foreseeable future.

It is actually possible to be quite gloomy about how marine seismic continues to play out. The usual exception applies in the form of the multi-client specialist TGS, which has once again been turning in enviable financial results from its marine seismic business: as ever the key to the company's success is to operate with vessels on short term charter relieving itself of the overheads and headaches of seismic fleet ownership. Not only that, the inability to squeeze excess capacity out of the system means that TGS always has vessels to choose from for its multi-client projects. By all accounts the company takes every opportunity to make offers that in other circumstances vessel contractors would prefer to have refused.

One company that is cottoning on to the TGS formula is Spectrum. Originally a UK-based minor player in the multi-client survey and data processing market, the company went through an unfortunate merger with Norwegian investors during the boom period a few years ago. Now it is resurfacing in a new Norway-UK format, divested of its previous partners in the ill-fated Spectrum-GGS venture. It has won market support for rapid expansion of its multi-client marine survey business worldwide. Last September it spent $40 million on the entire CGGVeritas 2D multi-client library. Spectrum's library now exceeds 1.1 million km of 2D multiclient seismic which the company boasts is the second largest of its kind in the seismic marketplace. As part of the deal, CGGVeritas is now a major shareholder in Spectrum, holding a 25% stake and with a member on the board.

CGGVeritas says it will now focus its marine 2D multi-client activity through Spectrum. This is logical given that 2D is a niche market and not much of a money-spinner compared with 3D. Spectrum under its new ex-PGS CEO Rune Eng undoubtedly intends to develop its more profitable 3D library as well as 2D, but is following TGS in the fundamental principle of not owning and operating vessels. Last year it managed to rid itself of responsibility for its only vessel GGS Atlantic in a deal with SeaBird Exploration which commits Spectrum to an agreed programme of 2D seismic using SeaBird vessels. Even after the latest rescue package agreed with lenders (including a somewhat embarrassed PGS) at the end of last year it is a moot point as to whether the SeaBird seismic fleet, now without its node operation, will survive.

The major contractors are tolerant, if envious, of the TGS operation. It is on a smaller scale than theirs, and from time to time they benefit from being able to provide vessels and participate in joint ventures. For example, TGS last month began acquisition of a 3D multi-client wide azimuth (WAZ) survey covering 11,655km2 in the Gulf of Mexico in partnership with WesternGeco, which is providing the vessels. The company has also recently been working with PGS on a 2D survey in the Labrador Sea and with Fugro doing 2D in northeast Greenland.

The real beef of the established players is the seemingly insatiable urge of shipowners and investors, mainly based in Norway, to continually play the market even when it is counterproductive. There is no need to recount the history of companies such as Scan Geophysical, Multiwave Geophysical, Wavefield-Inseis, Eastern Echo, Bergen Oilfield Services and Arrow Seismic. They were all launched during a boom period in the last decade and are all now just a memory. For a variety of reasons, none of them ever operated as a profitable seismic company, yet their presence in the market obviously affected capacity and pricing and the strategy of the larger contractors.

GGS-Atlantic has been transferred from Spectrum to the SeaBird fleet.

Business competition

You could say that is what business competition is all about, and it is okay to launch companies into the market place on a speculative basis. For shipowners in particular, such ventures are almost entirely beneficial because their vessels get chartered so there is little downside. If a company goes under, what we see is the emergence of another marine seismic enterprise which takes on the newly available vessels, and so the cycle continues. It was no surprise, for example, that the latest Norwegian investor supported marine seismic company Dolphin Geophysical, launched last year, took over some of the Bergen Oilfield Services vessels as part of its fleet build up. After all, Dolphin began life by mopping up the last two of the Arrow Seismic newbuild orders which got stranded in a Spanish shipyard. As a result there is no particular logic to the varied vessels now in the Dolphin fleet, but at least the company has only been absorbing already existing or under construction capacity. However, its last commitment was to the Sanco Swift, a new 3D vessel which was ostensibly being built on spec. Sanco Shipping has met its commercial objective by finding a home for the vessel due for delivery in 2013, presumably unconcerned about the capacity it adds to an already overcrowded market.

Meantime, given the past record of the main players in Dolphin, who knows where the company will be in a couple of years time.

This brings us to Polarcus which in the last three years has built a brand new fleet of eight vessels and now ranks as a serious operator in the marine seismic market place. The company was founded by the same group which launched Eastern Echo with a plan to build six vessels using the Ulstein X-Bow design. As we know, the plans were never realised because the company was bought by WesternGeco which took over construction of the vessels.

Be patient about the return on your investment: that may be the advice from Polarcus CEO Rolf Ronningen.

Now that we can see the Polarcus operation in action, the whole irony of the marine seismic market dynamics is on display. In building a fleet to meet perceived global demand for seismic surveys, the company has racked up a substantial debt to service which in the best of circumstances will take years to pay down. But the presence of its vessels in the marketplace actually intensifies the competition for contracts, and so contributes to the pricing war which continues to plague the economics of the business. The advice that CEO Rolf Ronningen may have to offer investors is that they may have to be patient about a return on their money.

Another issue for Polarcus is that its boats may be shiny new, but the company does not have the resources to develop a differentiating technology which would allow it to charge a premium for its service in the way WesternGeco, PGS and CGGVeritas can. Fugro is in the same boat, so to speak, in that it does not offer any special technique to achieve the higher resolution seismic data which some oil companies will pay more for. The company has in fact recently let two of its older vessels go, in a sense underlining the competitive nature of the current market.

In essence, the fundamentals of the marine seismic market are such that 2012 will carry on in much the same fashion as 2011 – boats will be busy-ish but not very profitable unless excess capacity can be absorbed. There will be some compensation for those companies with substantial data processing capacity because there is already a lot of data to be processed from the large number of surveys being acquired.

Of the bigger players CGGVeritas is the most challenged on the marine seismic front, a fact acknowledged by the company's management which has been instituting a number of measures to improve the efficiency and cost of its vessel operations. But CGGVeritas is enjoying some success with its new BroadSeis technology which competes with the high end offerings from PGS and WesternGeco for oil companies looking for the best quality imaging available. All three companies will be in the vanguard of multi-azimuth projects for areas of complex geology, especially in the Gulf of Mexico if the authorities as expected continue to ease up on the current exploration regulatory restrictions.

That towed streamer operations will continue to dominate marine seismic operations in 2012 is a sure thing: however, one of the trends to watch for will be the take up by oil companies of seabed node and cable seismic technology. The purchase of SeaBird's node operations by Fugro may be significant in this respect.

Finally, with regard to any statements above that purport to be predictions, it goes without saying that all bets are off if the world economy tanks as the result of Europe's Euro woes or some other catastrophe. In such a case, even marine seismic would not be impervious to the fall-out. OE