ION presents a Chinese puzzle

Andrew McBarnet
Tuesday, December 15, 2009

Major players in the marine seismic market are playing it cool, but there must be some apprehension about the impact of recent moves by the Chinese contractor BGP. Andrew McBarnet reviews the plot so far.

The Houdini act performed by ION Geophysical in time for this year’s SEG Annual Meeting held in Houston late October must rate as one of the great escapes by a company facing a dismal financial situation and a persistently poor outlook for improved performance of some of its key offerings. Rescue came in the form of a major joint venture with the Chinese geophysical contractor BGP, announced on the eve of the SEG gathering. The deal, which still has to be okayed by various regulatory authorities, only involves ION’s land seismic acquisition product lines which have struggled for years to make inroads into the increasingly dominant position held by the CGGVeritas company Sercel.

However, the marine seismic community seems unlikely to remain immune from the fall-out. You only have to consider the implication of BGP now having a significant 16% share of ION as part of the land deal. BGP has made no secret of its ambition to become a significant force in the marine seismic world. Furthermore, as a state-owned subsidiary of the Chinese National Petroleum Company (CNPC) it presumably has access to funds to acquire the rest of ION at a stroke if it felt so minded, shareholders were persuaded and the US government allowed such an acquisition. In such a case BGP would have control of the jewels in the ION collection, which are the marine seismicrelated acquisition and processing companies acquired over the last decade or so.

‘In some areas, despite the Chinese reputation for long term planning unthinkable in the Western hemisphere, there may be a temptation to accelerate the company’s build-up. The likely availability of some “seismic vessel for sale” bargains could be a case in point.’
NEW PARTNERS AT SEG (left to right): Guo Yueliang,vice president, BGP International; Wang Tiejun, president, BGP: Jay Lapeyre, chairman, ION: Bob Peebler, CEO, ION

In 1998 Input/Output as ION was known then, acquired New Orleansbased DigiCOURSE, the designer and manufacturer of industry leading marine positioning systems for the seismic industry, including birds, which control streamer cable depth during towing, compasses, and acoustical devices. The DigiFIN streamer steering device, subject of a serious seeming patent dispute with Schlumberger’s WesternGeco Q-Marine system (OE August), is the most recent ‘Digi’ product. In 2004 I/O bought Concept Systems which with the old DigiCOURSE now forms ION’s marine imaging systems business unit.

Concept has been producing the favoured positioning and navigation seismic software systems for most of the marine seismic contractors outside WesternGeco for more than 20 years. It has also branched into multi-vessel operational data management. The same year I/O added GXT, a high-end processing company which has expanded its horizons by commissioning a series of multi-client 2D seismic surveys around the world targeting basin-wide, ultradeep, hydrocarbons prospects.

A long engagement?

The idea that BGP might one day bid for ION is of course complete speculation. In the event of a bid for ownership, BGP’s Chinese credentials might become an issue. In common with its competitors, ION’s streamers contain elements of technology which have potential military application in the submarine warfare field. This could be a stumbling block for US regulators. It is also the case that BGP has no experience of managing a major western technology company, and could be wary about taking on the significant language, cultural and management style barriers likely to arise. The land seismic joint venture may turn out to be just as a ‘getting to know you period’ or dating before any mention of the marriage word.

OHM Leader: To carry out a first marine CSEM project for BGP.

Yet, ION appears to be somewhat vulnerable to predators or a break-up. The joint venture highlights cracks in the company’s façade revealing a number of business units which are not fully integrated. ION management seemed to be developing a smaller version of CGGVeritas or Schlumberger with a finger in seismic data acquisition and processing as well as equipment manufacture and development. But with the land seismic acquisition drafted into a new entity, the company must look very different to the financial markets.

ION CEO Bob Peebler: happy with the prospect of BGP money in the bank.

Although its share price has seen a recovery from rock bottom since the Chinese deal was announced, the company could be considered a bargain from a share value perspective. Thanks to the joint venture agreement, the balance sheet will be cleared of its most worrisome debt. It was observed by many that Bob Peebler, CEO of ION, looked a relieved man at the SEG meeting. The upside for ION was the cash injection of some $175 million in total from BGP plus $40 million in bridge financing arranged by BGP. The price was the 16% stake in ION and the hand-over of more or less its entire land seismic business to a joint venture in which BGP will be the 51% shareholder. This may not be such a bad thing. BGP is by far the dominant contractor on land. It has over 100 seismic crews operating in China and around the world needing equipment. In theory this provides a ready market for the joint venture without looking further afield. An existing ION customer, BGP was the first company to buy the FireFly cableless land seismic acquisition system in which ION had invested great hopes.

Nordic Venturer, formerly BGP Atlas.

As for its marine seismic ambitions BGP announced its intention to get serious in February 2006. That was when BGP bought a factory stern trawler with a view to converting it into a six streamer 3D seismic vessel, the BGP Pioneer. It also revealed that OYO Geospace would be supplying equipment to the company’s first ocean bottom cable vessels. Company chairman Wang Tiejun declared at the time that customers had been asking BGP to enter the market for five years. The request was certainly logical in view of what the company had achieved on land.

BGP Researcher ocean bottom cable vessel.

In the international marine seismic community, it has been the assumption ever since this launch that BGP would gradually, remorselessly build itself into a leading worldwide marine geophysical contractor. This would mirror the company’s land seismic experience which began in the 1960s. BGP only entered the international land seismic market in 1994, but today has 40 crews overseas. Over time it has worked for most of the major oil companies. The company lists a total of 101 land seismic crews, eight shallow water and transition zone crews, seven vertical seismic profile crews and 20 nonseismic crews operating in 29 countries on four continents. This dwarfs any western company with 20 or so crews at maximum.

OHM vessel: ready for first CSEM operation off Equatorial Guinea.

BGP has a relatively modest fleet of seismic vessels today. It consists of the 3D seismic vessel BGP Pioneer, the 2D BGP Surveyor, and the BGP Researcher, whose ocean bottom cable seismic operations to date have been largely confined to Chinese waters ahead of seeking work worldwide. The BGP Challenger entered the fleet very recently. This is a 2D/3D vessel, ironically equipped with two of ION’s newly introduced DigiSTREAMER solid streamers plus a recording system.

Start-up of BGP’s marine operations has not all been plain sailing, and there is an impression that the company has found marine seismic operations much more challenging than land. For example, it took on the Odincova fishing trawler conversion to a 2D seismic vessel called BGP Atlas. It was chartered from Nordic Maritime, a Singapore-based ship management company and did some work for the multi-client specialist survey company TGS-Nopec. For reasons which have never been made public BGP gave up on the running of the vessel in 2008, but renamed as Nordic Venturer it is still working for TGS-Nopec.

In July the keel-laying ceremony was held for the construction at a Chinese shipyard of a 12-streamer 3D seismic vessel due out in 2010, probably the first of a number of similar vessels in the next few years signalling a step up in the pace of BGP’s market penetration. If BGP’s land seismic business model applies, there will be some breathing space before the company makes its presence felt by the current marine seismic leaders such as WesternGeco, CGGVeritas, Petroleum Geo-Services (PGS) and Fugro. BGP will most probably operate its 12-streamer vessel in Chinese waters for a time as a learning process. On land the company’s first international survey contracts tended to be with relatively unsophisticated national oil companies around the world at prices that western contractors could not match. Its service to begin with may not have been to the highest standards but was clearly cost effective for many countries seeking hydrocarbons prospects data. Today there is no question that BGP operations meet the quality expectations of the major oil companies.

Future family

One would expect that BGP will be equally circumspect with the growth of its seismic marine services. There is little doubt that it is preparing for bigger things. Last year the company opened an international marine office and more recently announced initiatives to train foreign nationals in China and in Houston. In order to build the integrated global geophysical services company BGP is explicitly aiming for, land and marine seismic data acquisition capability is not enough. A huge reservoir geophysics research centre opened a few months ago appearing to confirm the company’s realisation that it has to have the all round technology to compete.

Another symptomatic development was last month’s strategic partnership agreed between BGP and UK-based Offshore Hydrocarbons Mapping (OHM) for carrying out marine controlled source electromagnetic (CSEM) survey design, acquisition and processing services. OHM was awarded a $2.5 million CSEM data contract offshore Equatorial Guinea, scheduled to start late November. This first foray into marine CSEM technology follows in the footsteps of the tentative moves made by all the leading contractors. BGP, it seems, wants to have the full panoply of geophysical service offerings and stay abreast of marine CSEM as it evolves. There is no suggestion at this stage that BGP wants to invest in OHM which already has CGGVeritas as a minority shareholder. It is more a case of giving OHM first refusal on jobs it comes across and working together to find the best solution. Fugro and Norwegian company Electromagnetic GeoServices (EMGS) have a somewhat similar cooperative arrangement.

In some areas, despite the Chinese reputation for long term planning unthinkable in the Western hemisphere, there may be a temptation to accelerate the company’s build-up. The likely availability of some ‘seismic vessel for sale’ bargains could be a case in point. The newbuild fiasco in Spain over one or two vessels ordered and then cancelled by PGS’s Arrow subsidiary because of delays, and the three vessels in India unfinished as a result of Scan Geophysical’s insolvency, presumably leave potentially high-end 3D seismic vessels looking for buyers. Also, ships taken off the market by the big players to reduce available capacity have a habit of returning to the market unless, like CGGVeritas did recently, the ships are sent directly for scrap. BGP among others may want to review the opportunities to pick up well priced additional capacity for when the market ticks up, admittedly not a scenario anticipated in 2010.

One potentially weak ingredient in BGP’s make-up may prove to be an internationally recognised full seismic data processing and earth modelling service, which can offer oil company client all the latest techniques to optimise the interpretation of subsurface information and its integration with other data. The company does have its own line of software and makes use of foreign brands, but it would be a stretch to say it could compete with big processing houses such as CGGVeritas and WesternGeco in terms of advanced imaging techniques.

Which kind of brings us back to ION. The company’s GXT division offers advanced seismic imaging solutions which at the right price would be of interest to lots of companies wanting to strengthen their data processing credentials. Working alongside ION on land and as a company shareholder, BGP will get an inside view not just of GXT, but the marine imaging systems operation. Who is to say that the joint venture business model emerging for ION’s land seismic equipment could not be repeated for its marine side?

Here, BGP might find itself in competition with other geophysical contractors. PGS and Fugro come to mind as companies that might see upside in a joint venture. Both would like to bolster their processing capability so that they can do more third party work, which makes GXT an attractive proposition. The addition of GXT’s active Span multi-client library activities would also do no harm. Both companies have been longstanding customers of ION’s marine imaging systems (Concept Systems), so know their potential value in the world market.

ION management and shareholders may not like their assets being ruthlessly weighed up in this way, especially when they are currently undervalued because of the continuing dampener on demand for seismic services. The problem is that the genie cannot be put back in the bottle. Right now the industry has its eye on BGP and where it will go with its ION connection.

But there are other players who may create scenarios beyond even the level of speculation expressed here. OE

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