Depending on who you talk to, the industry's latest round of merger mania is either a great deal or a great disaster.
Guess how geophysical contractors vote.
"Obviously this consolidating market is of grave concern to us," said James White, vice president of multi-client data, Western Hemisphere, for Western Geophysical. "With every merger or acquisition we see our client base dwindle, which impacts how many times we can license a non-exclusive data set."
Speculative data, which were spawn and thrives in the Gulf of Mexico, presents a particular challenge.
"When we put our financial model together for a speculative program, we try to determine how many times we think we're going to sell that entire data set," he said, adding that each sale is called a turn. "Basically, we price a program based on how many turns we think we can actually realize. We take the total cost of the survey, divide it by the number of turns we think we can sell and come up with a price.
"Any sales after that obviously starts adding profitability to the overall project."
"So, a program five years ago that we may have estimated getting four or five turns, today would draw only two or three due to industry consolidation," he continued.
"What's invariably going to happen is we are forced to re-evaluate our business model on our existing and newly p;anned projects which will likely result in increases to our license fees."
White and several other industry spokesmen will address the issue of spec data in a consolidating market as part of a panel discussion at an International Association of Geophysical Contractors' conference on "Current Issues in Non-Exclusive Geophysical Data ... The Exploration Tool of Choice."
The conference is set for Nov. 16-17 in Houston.
While the current situation is grim, White said the long term view is a little rosier.
"Typically when one large company gobbles up another, the new company must re-evaluate its assets and determine what is marginal to their business model," White said. "Those marginal assets are sold off to smaller independents that can operate them profitably, and we may eventually see more players involved in areas that weren't available to them in the past."
"So the long-term prognosis," he continued, "is we may see some up-tick in the number of clients due to these giant conglomerates spinning off assets, but the immediate impact is a significantly smaller client base, which is a serious problem."
The financial viability of new surveys is just part of the concern for geophysical contractors when the industry is in the grip of a merger and acquisition frenzy. Data license transfers of speculative data is a serious issue and sometimes a major headache for the seismic industry.
"With spec data the contractor owns the data -- the oil company simply gets a license to use that data and the company must sign a licensing agreement that outlines the restrictions on the data's use, how they can bring partners into a drilling program, and so forth," White said. "These data use licenses, protect our assets, and it's important that oil companies understand that if they sell their assets that our data is not on their balance sheet.
"They do not own that asset -- all they've done is paid for a license to use that data," he continued. "To transfer the data to the merged company they must pay a transfer fee, which typically is a percentage based on the value of the data at the time of the transfer, or turn the data back over to us."
Likewise, when assets are spun off, a transfer fee must be paid before non-exclusive speculative data can be part of that deal.
"Most of the major oil companies understand the data transfer issue," he said, "and we are working hard to educate all companies about the intricacies of non-exclusive data and their responsibilities as a licensee. However, there can be confusion, and in those cases during the due diligence process of the merger the transfer fee tends to get lost in the shuffle.
"It's often not until the deal is consummated that this beast rears its ugly head -- and the next thing you know we are in a sticky situation over the transfer fee."
Geophysical contractors are further constrained by the fact that they cannot negotiate a transfer fee prior to the acquisition or spin off of assets due to disclosure restrictions concerning what data any given company holds.
"So, we have to wait until the deal is done to approach the companies about the transfer fee, unless the two parties jointly agree to sit down with us and discuss the issue -- we try to encourage that approach," he said.
"We put a very high value on our data," he added. "It's important to maintain the integrity of that asset."
Benefits and Guidelines
Non-exclusive data offer numerous benefits to oil companies, White said: They can license spec data for about a smaller fraction of the cost of shooting proprietary surveys, but the trade off is they do not own the data.
"Most companies today recognize the benefits of spec data and are willing to adhere to the restrictions that go along with it," he said.
Infractions typically occur out of ignorance, White added, stressing that the key to avoiding this confusion is education.
Mark Savit, an attorney with Washington-based Patton Boggs LLP, aggrees.
"Transfers of licensed data in connection with mergers and acquisitions as well as joint operations -- and even among affiliates -- have revealed sharply differing perceptions between owners and licensees as to the rights inherent in a non-exclusive license," said Savit, who will address legal precedents involving data transfer at the IAGC conference.
This has spawned not only an increase in litigation but an array of drafting approaches intended to prevent further disputes.
"Non-exclusive licenses have significant advantages for both the data gatherers and users," Savit continued.
On the contractor side, the non-exclusive license allows the contractors to treat what is otherwise exclusively a service business in an entrepreneurial fashion, Savit said.
"Through the use of the non-exclusive license, the seismic data owner has the ability to maximize the revenues that may be gained from a single data set. Of course, the data owner also assumes the risk that there will be a limited or nonexistent market for the data which he has risked his money to acquire."
On the user side, non-exclusive data are by far the least expensive data available -- "but in exchange for that advantage," Savit said, "the producing company recognizes that its competitors may purchase equivalent rights to the same data."
Prior to the late 1980s most of the people who dealt with seismic data were under the mistaken belief that both the seismic and oil industries shared a common understanding as to the meaning of non-exclusive license agreements, Savit said. Many of those early agreements were drafted without the benefit of legal counsel and were relatively vague regarding the exact nature of the rights attendant to the license.
"Inevitably the combination of vague agreements and misplaced reliance on implicit understandings led to increasingly heated disputes about the meaning of the licenses," he continued. "While some of these disputes, in turn, led to litigation, they also had a beneficial effect. They focused the attention of both the seismic and oil companies on the language of the agreements at the root of the disputes and began a reexamination and redrafting process intended to resolve the underlying misunderstandings."
In an effort to eliminate some of the emerging problems regarding spec data licenses, the IAGC drafted guidelines and suggested contractual language addressing several areas of concern. The IAGC guidelines cover transfers to consultants, joint operators, prospective purchasers, as part of a sale of assets and as part of a merger or acquisition.
These guidelines offer two approaches to data transfer.
Under the first approach transfer is allowed by contract with certain conditions set out by the data owner.
Under the second approach no transfer is permitted except as agreed to in writing by the data owner, and any party receiving data with permission of the contractor is bound to a set of conditions requiring that the confidentiality of the data be protected.
Basically the IAGC addressed data transfer in three ways:
- It is not transferable.
- It is transferable with the permission of the licensor on a case-by-case basis.
- It is transferable under a predetermined set of conditions, including but not limited to the payment of a fee.
"While often couched in prohibitory terms, this language is intended to set the baseline for the alienation of data held under a non-exclusive license," Savit continued. "All of the terms are negotiable."
This, he added, should enable both the seismic and oil industries to strike a balance that will preserve the licensor's right to determine how and by whom its data should be transferred -- while at the same time "preserving the flexibility necessary to enable the oil industry to fashion appropriate business arrangements."
While mergers and acquisitions get the headlines, much of the litigation regarding allegedly improper transfer or disclosure of data has been the result of single company reorganizations or transfers to a joint exploration partner or a related company.
For example, Savit said, in the case of Target Seismic vs. Wolverine Exploration Co., the court addressed a situation in which one licensee, and perhaps several others, holding data under a non-exclusive license from Target, shared that data with Wolverine, an exploration program partner that did not have a license to use it.
"It was apparently clear to the court that Wolverine either actually possessed the data or had interpreted or reviewed it to such an extent that it should have had a license," Savit said. "The court ruled that Wolverine was liable to Target in an amount equal to the amount that it would have been charged for a license to the data."
Another case that landed in court was related to the alleged unauthorized transfer of data among related companies. PGI alleged that Hunt Oil shared certain PGI data with its affiliate, Placid, which had not been granted a license.
"Beginning in 1979, allegedly unbeknownst to PGI, Hunt provided duplicate copies of the PGI data to Placid," Savit said. "Placid used the data for its own benefit. In 1983 a geophysicist at Placid wrote to PGI, stating that Placid and Hunt had merged and that further copies of the data should be provided directly to Placid. Believing the letter to be true, PGI continued to provide Hunt's data to Placid. However, the letter was not true and when PGI realized that, it filed its claim against Placid in 1986."
Although the facts "originally promised to provide a watershed test of acceptable practices regarding the sharing of non-exclusive licensed data among affiliates," Savit said, the bankruptcy court granted summary judgment against PGI, holding that PGI's claim was time-barred.
The court ruled that the 1983 merger letter should have put PGI on notice of the alleged unauthorized use of its data.
"The court created an implied duty in seismic contractors to police the use of data held under license by their clients," he added.
These cases and others have lead to unprecedented change in the relationship between the seismic and oil industries, Savit said.
"Until recently, relationships between the two industries were characterized by loosely worded, vague contracts and the mistaken belief that each side understood what the other expected with regard to the protection of data transmitted under a non-exclusive license," he said.
Certainly, some tension between seismic contractors and oil companies will continue. But in the long run?
"Parties appear to be addressing core issues at the negotiation stage, rather than the dispute resolutions stage," Savit said.
"Such a development can't help but presage an improved business atmosphere in the long term."