up: A desert vibroseis crew in action in Abu Dhabi. Geophysical
companies say that, despite the current industry slowdown, a lot
of work remains to be done.
The recent one-day, 7 percent plunge in
WTI oil prices because "the driving season is over" conjured up
visions of hordes of Americans abruptly abandoning their beloved
personal vehicles in favor of trains and buses or, God forbid, walking.
This is the kind of rationale on the part of the
oil traders that tends to trigger a siege of eyeball-rolling among
the oil industry folks.
It can be particularly cloying to the geophysical
community, which is challenged to have a good day even when commodity
prices are soaring through the roof.
Indeed, the long-hoped-for turnaround in the industry
remains elusive -- which makes the recent mega-financial commitment
to the seismic business by a widely revered investor all the more
The famed Oracle of Omaha, aka Warren Buffett, is
bailing seismic data owner/provider Seitel Inc. out of bankruptcy.
Following its voluntary bankruptcy reorganization, the company will
become a wholly-owned subsidiary of Buffet's Berkshire Hathaway
This is not the legendary investor's only somewhat
recent foray into the oil and gas industry.
MidAmerican Energy Holdings, a unit of Berkshire,
purchased the Kern River Gas Transmission company from Williams,
along with 1.47 million shares of the company's convertible preferred
stock early in 2002. Shortly thereafter, it bought Dynegy's Northern
Natural gas pipeline.
"We feel pretty good about attracting the attention
and interest in investment from an organization like Berkshire,"
said Larry Lenig, CEO at Seitel. "One can speculate their view was
the natural gas business structurally in the United States is a
good market to be in, and they view this as an extension of their
investment thesis in that arena."
seismic operations have resulted in an abundance of valuable data,
waiting for geoscientists to study and interpret.
A Complex Business
Meanwhile, angst continues to be the norm in the
geophysical industry as the E&P companies remain tight-fisted
with the stockpiles of cash acquired via high-volume production
in the continuing lofty commodity price environment.
The reluctance on their part to pour big bucks into
exploring for new reserves has some of their geophysical brethren
scurrying to stay solvent.
Gone are the days when the folks with boats and crews
would try to justify acquisition surveys just to keep people and
equipment busy. Instead, discipline is the buzzword du jour.
But discipline can accomplish only so much. After
all, the geophysical industry is an unusually complex business,
noted Chip Gill, president of the Houston-based International Association
of Geophysical Contractors (IAGC).
- Sometimes competitors are customers,
e.g., a data licensing company will bring in a full service company
to provide acquisition services.
- There are different layers, with business
models built around different aspects of the data: data acquisition,
- Government-owned oil companies are creating
and funding seismic companies, e.g., China, which further complicates
things. A government-owned seismic company is not on the same
financial playing field as one with shareholders.
- Manufacturers go straight to clients
to sell products and then have clients spec-out the next survey
with the manufacturer's latest gizmo -- kind of a misalignment.
- Client (oil company) wants involvement
in data quality, so it puts its own Q-C people on the survey.
- Operational risk, e.g., difficult to
put 3,000 people in the rain forest for three months of work.
The once-flourishing multi-client, or non-exclusive,
side of the business has been particularly hard-hit over the last
couple of years.
"Multi-client seismic is an exploration tool mostly,"
said John Adamick, vice president of business development for TGS-NOPEC
in Houston. "And on a worldwide basis, the oil companies are not
spending much on exploration, especially in frontier areas of the
"Even in the Gulf of Mexico, activity is not where
you would expect it to be with $30 oil prices and $5 gas," he added.
The geophysical community is working diligently to
come up with a sustainable model, given the current realities, according
But a shiny new business model won't take you far
if the hand that feeds you, aka the E&P company, is focused
on things other than searching for new reserves.
Opinions abound over what is influencing E&P
company thinking and when there may be a turnaround in exploration
"Everyone in the industry has been waiting for the
second half of the year," Adamick said. "This was the mantra early
in the year.
"But will we see those oil companies with record
breaking cash flow start to spend more on exploration?" Pressure
from investors to provide a better return on investment ranks high
on the list of obstacles to renewed exploration investment.
"It's very much a harvest mentality now," Adamick
said. "If you're in the oil company shoes, one way to make yourself
look better is to not spend money looking for new oil and start
producing what you have like gangbusters.
"Another commonly cited concern is the Enron fiasco,"
he continued. "A lot of companies have needed to restore their balance
sheets, and we've seen a lot of them taking the extra cash from
good prices to get out of debt or lower debt.
"We all know this is self-correcting," Adamick noted.
"Some of the money will funnel back into exploration because we
can't keep producing out of the ground and not fund more exploration.
"It's got to come back," he said, "but the problem
Challenges -- and Hopes
Meanwhile, there's likely to be further bloodletting.
"To see the industry still struggling to maintain
reasonable levels of cash flow and profitability with oil and gas
prices so high for so long," Seitel's Lenig said, "clearly indicates,
I believe, more restructuring will occur."
The upside is this has the potential to eliminate
over-capacity in the contracting arm of the business, which continues
to plague the industry.
"Over-capacity in the past was masked by the very
aggressive, though unsustainable, development of multi-client programs,"
said Jonathan Miller, president CGG Americas.
"Now that multi-client has slowed, the mask is removed,"
he said. "True over-capacity is much more evident, both on- and
As the E&P companies continue to exert pressure
on the geophysical industry to provide data/services at the lowest
possible cost, and the financial health of that industry in turn
continues to decline, there is concern over where the next technological
innovations will come.
"The (issue) is, at some level of management there
needs to be a larger view," Miller said. "What a company saves on
specific contracts in the end can force reduction in the overall
technical evolution of our industry.
"It's a shame that right at the time when exploration
is becoming more expensive and difficult, this industry is suffering
so," he said. "It's more difficult for us to deliver new methods
and reductions in cost in this environment."
Despite the cloud over the industry, optimism does
break through occasionally.
"Geophysics is being used more and more for field
development and for production," Miller said. "It's hoped this will
be a major growth area for our industry as companies to learn to
use geophysics to identify sweet spots before drilling, therefore
improving the overall cash flow from their projects.
"This growth is a bright spot even though it hasn't
been enough to offset overall declines in exploration expenditures,"
"We're just at the beginning of that science," he
added," and to slow development of geophysics in that area to save
a bit on exploration contracts in the end will cost the E&P
industry an enormous amount."
Who Wants What?
This touches on a burning question being tossed around
for some time now: What does the E&P industry really want from
the geophysical companies?
Ever-higher-capacity computing power allows more
life to be eked out of existing data. As a result, there's plenty
of talk that the companies no longer want data but solutions.
But they want the risk of developing the solution,
and whether or not it works to be the service company's burden,
according to Adamick.
Different solutions have different degrees of risk.
The data providers already are offering derivative
products from their data such as interpretation, AVO processing
and such that used to be performed in-house at the oil companies.
Some of the data folks go so far as to work up ready-to-drill prospects
to present to their E&P clients.
At TGS, for example, one of the latest solutions
being offered is regional maps for the fledgling shallow-water deep
gas play in the Gulf of Mexico, which has triggered a respectable
amount of long-offset 2-D surveys to try to image the deep structures.
The key distinguishing feature of the maps, according
to Adamick, is they are updated each quarter, with the idea that
most oil companies don't have the personnel in-house to do this.
"The kicker is when people buy into this, they're
getting updates as new wells get released and are added to the interpretation,"
Adamick said. "So the interpretation is not static but evolving
WesternGeco has invested heavily in the solutions
arena with its Q-Technology for seismic imaging for enhanced reservoir
description and management.
"With Q, the focus is the reservoir," said Patrick
Ng, marketing manager for North America. "It's a kind of cradle-to-grave,
for-the-life-of-the-reservoir type of concept, which is designed
to function from the exploration mode all the way to abandonment."
Despite all the head scratching over what the E&P
companies want and the potential blow to future activity as technology
innovations dry up along with seismic company budgets, the onus
to revitalize the geophysical industry rests squarely on the collective
shoulders of the seismic folks.
"I think the E&P industry is starting to ask
questions of themselves and examine their own role," Gill said,
"but I don't think it's pervasive.
"At the end of the day, it's the geophysical companies
that have to provide their own solutions to this problem and not
expect their customers to give them a handout," Gill said.
"They recognize this and are taking on that task,"
he said. "It's just not happening very fast.
"The downturn and the sorting-out seem to be taking
longer than anyone expected."