A capacity to surprise

Andrew McBarnet
Thursday, March 1, 2012

A rising tide of seismic demand has quite suddenly changed the conversation in the marine seismic community. Andrew McBarnet explains why.

It’s amazing sometimes how quickly the clouds can clear. Just a month or two ago marine seismic companies were forecasting another flat year. 2012 was expected to be characterised by a good level of survey demand marred by the inability of the industry to squeeze out over-capacity leaving contractors struggling to operate profitably.

All of a sudden the gloom seems to be lifting. Jon Erik Reinhardsen, CEO of Petroleum Geo-Services (PGS) was the first to let the cat out of the bag. Speaking last month at the company’s presentation of its 2011 fourth quarter and preliminary full year results, he predicted that survey rates will rise by 10% in the coming year and that this summer may actually witness a shortage of vessels to meet demand in the North Sea. The very next day after Reinhardsen’s statement, Atle Jacobsen of Dolphin Geophysical publicly acknowledged the favourable change in market conditions for 2012 anticipating rate increases up 10-15%.

Whether we should be surprised at this turn of events is another matter. The extent of over-capacity in the market in the last year or so has been more of a frustration than the potentially fatal condition experienced a decade ago. In effect this means that it does not take much of a shift in survey demand for the supply of vessels to turn from abundance to scarcity. There is little flexibility on the supply side to meet unanticipated additional seasonal demand: the marine seismic industry has of late been working with a fairly stable number of vessels.

The new building spree initiated four or five years ago has finally worked itself out, so there is minimal scope for the rapid introduction of more vessels even if the money and appetite existed for such a move which is doubtful. Right now Polarcus is scheduled to introduce the last two of its planned eight vessel fleet. PGS has two of its new Ramform W supersize boats on order for delivery in 2013 with an option for two more, and Dolphin looks likely to add two new vessels to its growing fleet in the next year or so. Further seismic vessels will be built by the Chinese, but in the past these have not ventured much outside home waters. Also the Russians – with President Putin’s approval – are discussing seismic fleet expansion targeted principally to reap the potential rewards of Arctic hydrocarbons exploration.

Sifting through what has changed in the marine seismic business climate, it’s clear that an accumulation of factors is responsible. As noted often in this column a favourable oil price scenario is the pre-requisite for any E&P spending increases by oil companies. Prices continue to hold steady – currently at an eight month high of over $100/bbl for both WTI and Brent indexes – which immediately augurs well for 2012. Last December Barclays Capital forecast that the 2012 world upstream spend would reach a record $598 billion, a 10% increase over 2011, a year that itself witnessed significant renewed enthusiasm for the E&P sector. Barclays actually cautioned that the increase might be greater given that oil companies had conservatively based their expenditure plans on an oil price of only $87/bbl for WTI and $98/bbl for Brent. The prediction has certainly been borne out by the supermajors like Chevron, ExxonMobil, BP and Shell (this latter upping its E&P budget worldwide by 35%).

International companies not only have the investment dollars ready but have been encouraged by some big offshore discoveries in parts of the world where resource nationalism does not exclude their participation. Pre-salt finds in the Gulf of Mexico, offshore Brazil and Angola are gaining momentum, while the emergence of areas such as Ghana, Mozambique, French Guyana and the eastern Mediterranean was not on the cards until very recently.

Indeed this rather unexpected turn of events must give pause to even the most fervent believer in the imminent arrival of Peak Oil, especially when added to the shale oil and gas revolution that has completely changed the energy outlook of the US in less than five years and is destined to spread elsewhere. In this context the recent BP Energy Outlook 2030 also paints a somewhat optimistic future for the world’s energy supply and demand.

Activity surge

In the immediate future the stars appear to be aligned for the marine seismic business. PGS, Dolphin and doubtless the rest of the comparatively small community of contractors can see that the straining point for current capacity will be this summer’s North Sea activity; this is in fact shorthand for all northern activity – including northern Norway, Greenland and the Barents Sea. 2011 saw some serious multi-client activity in this huge prospective region, which is expected to increase this year.

A couple of weeks ago the Norwegian Petroleum Directorate (NPD) put out a marker for more seismic than originally expected in this hot area. NPD is to start mapping the geology of the northeastern part of Norway’s Barents Sea which is no longer off limits following an inter-governmental agreement in September 2010 with Russia. A tender is being issued for the surveys which will start this summer and continue into 2013. NPD has already commissioned PGS and Dolphin vessels to acquire seismic data this summer in the undisputed southeastern sector of the Barents Sea, around the Jan Mayen Ridge and in the Nordland IV and V vicinity. NPD may not find the process of finding available vessels as easy as in previous years, or the price tag will have gone up.

The fact is that flexibility to move vessels around has diminished. Looking at the higher end of the 3D seismic market there are, give or take, around 60 vessels available worldwide. In the post-Macondo fall-out there was a freeze on marine seismic in the Gulf of Mexico. The resulting exodus of boats from the Gulf allowed a rising tide of demand elsewhere in the world to be met. Brazil and Angola have been soaking up the capacity and as mentioned earlier, new plays notably off the east and west coasts of Africa, in the eastern Mediterranean, and in the Caribbean (where the conjugate margin – analogue of West Africa – is exciting interest following a find off French Guyana by Tullow Oil) are adding demand to the regular seismic exploration areas like southeast Asia, offshore India, eastern Canada, and those mature parts of the North Sea which keep on giving and giving.

This year the Gulf of Mexico is pretty much back to normal. Not only has a backlog of work been building because this continues to be a key hunting ground with, among other things, more deepwater pre-salt prizes to be won; but June will also see the last remaining sale scheduled in the 2007-12 Outer Continental Shelf Oil & Natural Gas Leasing Program and that is bound to stimulate seismic exploration.

The net result is that some 10 vessels of the world 3D seismic fleet will be tied up in the Gulf of Mexico leaving fewer to go round elsewhere just when there is something of a frenzy of exploration interest among oil companies. Initially contractors are bound to view this as a welcome development driving rates up for the first time in a few years, but as yet no one is getting carried away by what may be a false spring for seismic hopes.

For example, Reinhardsen noted that the first quarter activity would still be soft and emphasised that this summer’s uptick in northern activity would not necessarily translate into a sustained cycle. He did note, however, that at least one PGS customer had already deferred a survey into a later quarter of the year having assessed the likely summer vessel utilisation picture.

It is arguable that the apparent surge in seismic activity owes something to the increasing emphasis on multi-client surveys. WesternGeco, CGGVeritas and PGS have all accredited the sale of data library as an important contributor to the bottom line and will be putting more investment into this sector in the coming year. PGS expects 40% of its 2012 surveys to be multi-client compared with 35% last year, with prefunding somewhere between 80% and 120%. On the face of it this new found fondness for a multi-client strategy is surprising. A decade ago the major contractors nearly went out of business by embarking on unsupported multi-client surveys to keep their vessels in the water during the downturn of the time, booking the resultant data as assets which in the end had to be heavily downgraded or written off.

Multi-client perspective The change of perspective on multi-client stems as much as anything from the oil companies themselves. Conventional wisdom was that companies were paranoid about sharing geological secrets acquired from seismic surveys. But in well mapped areas such as the North Sea and the Gulf of Mexico where promising structures may well straddle block borders, oil companies seem increasingly willing to suspend their competitive suspicions in order to defray the cost of data acquisition. There is a technology element involved as well. When it comes to the search for deepwater pre-salt hydrocarbon reserves, multi-vessel 3D wide-azimuth seismic offers the most effective option, but it is expensive. This is why all the wide-azimuth in the Gulf of Mexico is being shot on a multi-client basis. Block sizes are so small that a contract multi-azimuth does not make sense.

In areas such as offshore Brazil and Angola, the acreage to be covered is often huge and the regulatory hurdles to organise any survey are onerous to say the least. In order to expedite their exploration plans oil companies are willing to settle for multi-client data.

Ironically the return to favour of multi-client surveys at a time of possible constraint on vessel supply may challenge TGS, the company that has been so successful over a decade or more in offering multi-client survey data to the industry without getting involved in operating vessels. In 2012 and presumably longer, the race to find and market multi-client opportunities is going to hot up. The head-to-head competition will extend further than the Big Three marine contractors: newer companies like Polarcus and Dolphin are focusing quite a lot of their effort on 3D multi-client opportunities to employ their fleets. In a tightening market the potential issue for TGS may be access to the short-term charter vessels which it typically employs for its multi-client surveys. Even if the company can secure vessels the cost may well be more than it is used to paying when there is surplus.

Last time this potential scenario arose – in 2007 – TGS chose to get around the issue of scarce supply by acquiring Wavefield-Inseis which had a ready-made fleet. This would overnight have depth-charged the company’s business model of staying away from all the pitfalls of vessel ownership and management. It was not obvious that the conversion to being a fully-fledged marine geophysical company, of which it had no real experience, was worth the sacrifice of its longstanding success formula. In the end the deal went sour on a technicality, for which the subtext seemed to be that Wavefield-Inseis investors thought they were selling themselves too cheaply. A year later CGGVeritas bought them for nearly half what they had been offered by TGS, and have found that integrating the medley of Wavefield vessels into their fleet to be a costly business.

In other words, TGS dodged a bullet. It’s hard to believe that TGS would this time go out and make an acquisition play for, say, Polarcus or Dolphin, the most obvious takeover targets, but in the world of public companies anything can happen. It is certainly possible to imagine that, if the rising expectations in the marine seismic convert into a boom, then Norwegian ship owners and investors will once again band together to launch a new marine seismic company. In this regard the creation of Dolphin last year just in time to catch the rising tide for marine seismic surveys has proved extraordinarily prescient. No surprise that the puppeteer has once again been GC Rieber Shipping. In a nutshell the company spawned a short-lived outfit called Arrow Seismic which was committed to orders for a number of new seismic vessels to meet the last upcycle five or so years ago. Arrow was gobbled up by PGS on excellent terms for Rieber. Recession hit, the Spanish yard responsible for the construction programme screwed up, and two unfinished newbuilds were left unloved and buyer-less on the shelf. No guesses who the white knight was who would swoop to buy (at a knock down price) and complete the vessels, and then make them available, plus laid-up vessel already on its books, to the new enterprise which is Dolphin Geophysical. Answer: GC Rieber Shipping.

If the seismic upturn is real, then it might just be the lifeboat necessary to save SeaBird Exploration, the company which has been struggling to keep its fleet of mainly 2D seismic/source vessels afloat.

Last year it was forced to sell off its pioneering node-based ocean bottom seismic business to Fugro, but early last month it still had to issue a profit warning. It proved the moment to replace its embattled CEO Tim Isden. Since then, some significant 2D contracts, including a whole season’s work for Osprey Explorerworth $11-13 million, have been announced, and one can speculate that things can only get better even though the fleet is made up of some pretty old units. It will not necessarily be an increase in demand for 2D surveys which will help, but rather the growing requirement for source vessels for use in multi-azimuth seismic operations.

Improving market conditions will not of course resolve some impending issues in marine seismic. The most outstanding is probably the development of broadband solutions to provide much clearer information in complex geological environments such as pre-salt. This is a real technology differentiator, first introduced to the marine seismic market by PGS with its ‘ghost-free’ dual sensor GeoStreamer since when CGGVeritas and WesternGeco have come up with alternative solutions to achieve broadband results. WesternGeco is expected to launch an innovative multicomponent towed streamer at this year’s European Association of Geoscientists & Engineers (EAGE) meeting in Copenhagen in June which should make it fully competitive in this area.

The unanswerable question at this point is how the rest of the pack is going to catch up and whether lack of a genuine broadband solution will hinder companies’ chances in the market. OE

Categories: Geoscience Activity Europe North America Geology

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