Counting the cost of low prices

November 1, 2010

Reporting from last month’s SEG annual meeting in Denver, Andrew McBarnet finds marine seismic contractors frustrated by contract bidding woes.

There is no question about what was bothering the marine seismic community at last month’s well attended Society of Exploration Geophysicists annual meeting in the mile high city of Denver. Everyone was complaining about the current going rate for seismic surveys. If contractors are to be believed, then prices have plummeted to the point where margins have evaporated so that surveys are doing little more than covering their costs. A familiar refrain is that some companies are said to be buying contracts, ie bidding below cost simply to generate cash and keep boats in the water.

The low bid syndrome is a sensitive topic, especially vexing since all the market evidence suggests that demand from the oil industry for marine seismic surveys is steady to strong with no sign of weakening unless the world economy lurches back into recessionary mode and the price of oil, now a healthy $80+bbl, dips back to the $70s or less.

andrew mcbarnet‘In a low price environment the real lesson is that you can never be sure how or why contractors won a particular contract. It's almost like sporting achievements in these days of sophisticated, hard to detect performance enhancing methods out of the medicine cabinet.'

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Whatever contractors may say, it is far from clear that any one of the major players are more to blame than any other when it comes to rock bottom tendering. You can recognise that the bigger the contract award to one party, the bigger the fuss made by the losers. A case in point would be the five year seismic programme covering 75,000km2 tendered last year by Mexican state oil company Pemex for the Gulf of Mexico. CGGVeritas ran away with the prize making a winning bid of $464 million for the acquisition and processing plus gravity and magnetic coverage, and is now busy on that project with its 12-streamer Alizé vessel. To rub salt into the wounds of the competition, Pemex in August awarded the French company an extension contract involving one of the largest ever wide azimuth projects, estimated to be worth around $200 million. The work will be undertaken by the company’s new X-Bow design company flagship Oceanic Vega and another high-end 3D vessel Vanquish and will last some 300 days.

The CGGVeritas Pemex account is huge by any measure. Predictably perhaps, the company has been accused of leaving money on the table in the original contract, as much as $150 million based on what was offered by the competition, in this instance Petroleum Geo- Services (PGS). The question raised was how such a big bid differential could occur, taking into account the length of the project when unavoidable downtime for maintenance, inflation, and other unknowables are factored into the price.

One answer that doesn’t need to be voiced by CGGVeritas is that in the light of current prices, the Pemex deal looks good if not visionary. The company itself points out that it has a substantial track record of work in Mexico and insists that it can make money using its combination of advanced acquisition and imaging technology. It also alludes to the size of its fleet, the largest in the business, allowing it more global flexibility than some of its rivals, in other words, economy of scale does apply.

CGGVeritas will also tell you that it has lost out on tenders elsewhere in the world which it considered below cost. Perhaps as pertinent as anything, the Pemex tender was only ever going to be a three horse race between CGGVeritas, PGS and WesternGeco because of the project’s scale and the commitment of time and resources required. As it happens WesternGeco somehow managed to get itself disqualified from the tendering process at a preliminary stage, so we shall never know how it would have bid.

In a low price environment the real lesson is that you can never be sure how or why contractors won a particular contract; the contractor cast as villain in one scenario turns up as hero in the next. It’s almost like sporting achievements in these days of sophisticated, hard to detect performance enhancing methods out of the medicine cabinet. Given so many unfortunate precedents, no world-class 100m sprinter, male or female, can ever be entirely free of suspicion about the purity of their triumphs. In the case of Tour de France cycling, the drug culture has been so endemic that the jury has been permanently out for at least a decade over the integrity of its winners with at least two actually coming ‘clean’ about the chemical assistance they received.

So it is with contract pricing in the marine seismic market right now: you never quite know whether a company won a tender with a realistically priced bid or not. Part of the problem is that it is genuinely difficult to compare tenders like for like. What we do know is that the current price per square kilometre for many high resolution 3D seismic surveys is well below the cost plus 10% threshold for profitable operations, and that there is an unspecified amount of backlog chasing, the euphemism for contractors undercutting the opposition to keep vessels in the water.

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The smaller contractors tend to be more vocal about their contract awards. Reading public pronouncements, you could easily have the impression that the likes of Dubai-based Polarcus, the new kid on the block, or the small Norwegian outfit SeaBird Exploration, were the most active in the market and by implication the most successful. In fact it’s probably mainly about vulnerable companies needing to reassure their nervous investors in tricky times.

What, for example, should we make of the full backlog into the New Year proclaimed by Polarcus? There is the explanation which the company would prefer, namely that its shiny new fleet of X-Bow design vessels is a winning formula with a growing record of surveys to prove it, no question of buying contracts. A cold look at the business would suggest that the company is under huge pressure to keep its vessels busy to justify the massive investment involved in its start-up which so far includes the launching of four state-of-the-art seismic vessels and an option on two more. The most cynical interpretation would be that Polarcus is talking up its performance in the hope that it will be bought. This does not make a lot of sense because its fleet value would be deeply discounted in the current market, and as a matter of fact the company denies any such idea. But the precedent is there. Schlumberger/ WesternGeco is the proud owner of a fleet of X-Bow vessels bought in the early stages of planning and construction from Eastern Echo, the very same team now in charge of Polarcus.

All sorts of circumstances can allow a contractor to be legitimately more competitive than another without being unprofitable. Mobilisation and demobilisation costs will vary between contractors depending on the location of their vessels. The major players often have the advantage here because they have their fleet better spread around the survey hotspots of the world. This is also why the smaller players try to focus on particular regions to save on steaming time, which can be a significant cost. More obviously oil company clients have their favourites, maybe based on track record, a longstanding relationship in a particular area, or familiarity with the technology being deployed. This may not be transparent from the tender process, although many is the time that contractors will suspect that their bid is really just a benchmark figure against an already decided winner.

The technology and services offered by contractors often make the costing comparisons difficult. The major marine seismic players all have different methods to achieve the required client objective, typically high resolution 3D data. Furthermore, data acquisition per se is just the ‘starter for 10’, given that modern 3D seismic data collection and processing have become such an integrated process from the planning stage onwards.

Surveys are essentially a package deal which oil company clients cannot unpick as easily as in the old days when acquisition was one discrete job with the processing offered totally separately. Onboard processing of data as it is acquired has a lot to do with this. At the same time a technology like the WesternGeco Q-Marine single point receiver acquisition system makes the separation of data acquisition and processing impractical if not impossible given the proprietary nature of the methods involved.

Any kind of azimuth (wide-, multi-, rich- etc) survey involves complex planning which links the acquisition and processing of the data so clients have to decide on the total solution from one provider which suits them. In practice the scale and cost of wide-azimuth type surveys involving multi-vessel operations has meant that such surveys tend to be multi-client in order to keep them affordable. As a result contractors may not go head to head leaving the cost and profitability of such operations something of an unknown.

It is fair to conclude that technology differentiation rather than price can determine a client’s choice of contractor for a survey. This is the bright spot for those key players who can promise a well attested superior result. It enables them to charge a premium which is golden when prices are depressed. PGS provides the best contemporary example of a company improving its bottom line thanks to a clear, if inevitably short-lived, technology leadership. There is no doubting the company’s claim that the introduction two years ago of its dual- sensor GeoStreamer provided improved resolution of subsurface targets and proved a winner with clients, so much so that the competition have been working hard to close the technology gap.

For a while WesternGeco had an edge with the steerable streamer dimension of its Q-Marine acquisition system once its benefits were appreciated. That advantage, as invariably happens in such a fast-moving technology-led business, faded with the appearance of the rival DigiStreamer from ION Geophysical. PGS and Fugro adopted the ION offering, albeit in slightly controversial circumstances, since WesternGeco parent Schlumberger and ION have an unresolved patent dispute ongoing. As it happens PGS is moving on. The company is outfitting its first Ramform vessel with a full eBird steering system, which it has helped to develop with manufacturer Kongsberg Seatex. The installation is in line with the company’s strategy to standardize on eBird as the primary system for controlling its 3D and 4D GeoStreamer spreads. The eBird is said to provide a superior solution for lateral, vertical and roll streamer control in marine seismic acquisition enabling the fault tolerant and efficient multi-streamer operations required for complex 3D and 4D surveys.

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The immediate prospects for escaping from the Alcatraz of a low-priced environment do not appear good. Our old friend over-capacity is going to be hard to squeeze out of the system. The major players claim to have rid themselves of untenable older vessels. However, if too many future marine seismic contracts continue to be bid at cost plus zero or worse, then a further review of current capability may be opportune. Even the larger companies are not cushioned forever from the attrition.

In the related universe of marine controlled source electromagnetic (CSEM) surveys, WesternGeco has not hesitated to pull its vessels out of the market. It made the decision on the unchallengeable principle that operations proved unprofitable. Also, in the company’s view, the WesternGeco EM division showed little prospect of being able to come up with a good business case for continuing operations in view of the prevailing economic and technology uncertainties surrounding the application of marine CSEM in the E&P marketplace. It should be added that the company is not abandoning its interest in CSEM technology in which it has invested considerable resources including the purchase of at least two companies. It is taking a watching brief while pursuing further R&D and onshore applications.

Ironically, the pulling of the rug from under the WesternGeco EM division coincides with what appears to be something of a revival in the fortunes of Electromagnetic Geoservices (EMGS). The Norwegian company responsible for the introduction of CSEM has lately snagged some juicy contracts for its vessels while its only other serious challenger (the OHM Group) has recently undergone a life-saving restructure.

WesternGeco’s third quarter results delivered last month provided a somewhat veiled reference to the prevailing frustrating conditions which encourage aggressive pricing. It stated that marine seismic revenue grew as a result of increased activity with no mention of improved margins. Multi-client and data processing sales were described as flat, and the pre-tax operating margin for the whole unit including poor results from EM and land operations was slightly down at 8.3%. Interestingly WesternGeco has been able to keep some seismic survey operations alive in the Gulf of Mexico despite the restrictions imposed in the aftermath of the Deepwater Horizon catastrophe.

In a sense this augurs poorly for early contract pricing improvements: it was assumed that the transfer of vessels out of the Gulf of Mexico would adversely affect competition elsewhere in the world, but WesternGeco continues to keep vessels in the region.

At SEG, expression of relief that no new vessels were being ordered to further inflate the worldwide seismic fleet was not universally shared.

Suppliers of equipment to marine seismic contractors are likely to feel the draught once current order books arising from the spending spree on new vessels, which began in 2007, eventually dry up. A successful supplier of solid streamers in recent years such as Sercel, the CGGVeritas subsidiary, may find the going tougher on the marine side of its business. Admittedly there is a significant service component, but revenue seems bound to be affected. WesternGeco and PGS were always off limits, and now Fugro and Polarcus are reaching the end of their streamer orders from newbuilds. One competitor in streamer manufacture, Teledyne Marine, is still sitting pretty as it fulfills the ambition of PGS to turn all its vessels over to GeoStreamer technology. Each supplier has its own spin on prospects, but at SEG it was hard to find huge enthusiasm about the current market opportunities for equipment sales.

The saving grace for both contractors and suppliers of equipment and services is that there is no immediate hint of a downturn in demand for marine seismic. Which is why most people left Denver in a state of equanimity. OE



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