Enjoying the ‘Sweet Spot’
It’s a Good Cycle To be Riding
If you want a quick read of the current state of the geophysical industry, take a look at the goings-on at Houston-headquartered OYO Geospace, which manufactures instruments and equipment for use in the seismic business.
“Our backlog is three weeks,” said board chairman, president and CEO Gary Owens, “and we’re 24/7, working three shifts. I see no signs of a downside now.”
That doesn’t mean he’s become complacent in this cyclical business, where the good times can trigger near-euphoria and the bad times can knock you down flat onto the floor.
“I hear guys say we’ve been through a paradigm change, and we’ll never go through a cycle again,” Owens said, “but this is a cyclical business -- I’ve been doing this for 37 years, and I’ve heard $100 barrels for 20 years or something.”
Still, the current demand for seismic services is so hot that Schlumberger’s WesternGeco seismic division reportedly has a backlog of $1.1 billion.
It’s essential to keep in mind, however, that the geophysical business is, in fact, a subset of the oil and gas industry and therefore vulnerable to most any hiccup -- large or small -- in commodity price, hydrocarbon demand, supply, etc.
Enjoying the ‘Sweet Spot’
So, you ask, just how much longer will the good times last?
“I have no better crystal ball on that one than anyone else,” said Bob Peebler, president and CEO at I/O. “I think what is unique about this time is it’s clearly demand driven.
“If you go back to the last boom we had, it was more or less supply-driven rather than demand,” Peebler noted.
“This quickly brings you to the economic question of Asia and other developing countries,” he continued. “Every time I go to that part of the world, I can imagine them trimming their sails a bit over time -- but I think they’ve gone beyond a tipping point and likely will continue, and their people will want more.”
Richard Degner, president at Global Geophysical Services concurs.
“In the Asia Pacific region, some of the countries with a large population have a low per capita energy consumption yet a tremendous acceleration year after year in recent times of increasing appetite for energy,” Degner said. “So as long as those large populations of underdeveloped countries continue to demand more and more energy, and the overall demand curve in the world continues to increase, and the oil and gas industry from the supply side continues to struggle to keep up, I think the good times will continue to roll.
“I like the place geophysics is in now,” Degner noted. “Its role in helping the E&P companies extract hydrocarbons from the earth is likely to become even more prominent as the supply gets tighter.
“As we shift more toward exploitation of existing reservoirs rather than a lot of large exploration objectives, this is the sweet spot for geophysics,” Degner said. “Going forward, it’s likely to be more important within the E&P technology value chain in a relative sense -- relative to overall expenditure.”
Keeping busy: Marine seismic operations continue to provide plenty of work for geophysical crews -- and plenty of data for geologists.
Stepping Past Challenges
To keep up with demand and to offset production decline -- which Peebler emphasized is substantial -- the oil companies are venturing into increasingly complex areas presenting non-traditional challenges, both in an exploration sense and in how better to develop and produce.
“This brings you into geophysics being used more in the engineering and production side of the business,” Peebler said. “It’s our thinking that demand is creating a whole other generation of geophysical applications.
“It’s not a whole lot different than when we went from 2-D to 3-D,” he noted. “The need and advantage for 3-D drove the formation of new companies and new technologies, and that’s been a very long cycle -- it hit the wall a bit in ‘97, but that was after 10 years of growth.”
When addressing the applications and challenges to come, Peebler separates the marine side of the business from land, noting they have different drivers even though sharing a common theme: the demand for oil and gas.
Regarding marine, the most visible phenomenon today is the dramatic increase in towed streamer.
Indeed, the towed streamer market has morphed from near death only three or so years ago to a near frenzied level of activity today.
“You see a lot of new capacity,” Peebler said, “and I think what’s on everyone’s mind is, are we going to overbuild again. We’re pretty confident that what we see going on -- our guess -- is through ‘08, ‘09 the activity, demand, capacity are out there. Beyond that, we’re not sure how many additional crews will be coming on and what their assumptions are.
“It seems like everyday someone else new is coming into the market,” Peebler added “and the existing acquisition companies are increasing capacity. It’s a bit of a gold rush now for people getting into that market.
“We wonder ourselves if there’s a need to be gearing up -- will it be longer than a two- to three-year bubble, or will it fall dramatically?”
Next: 3-D on Steroids?
In addition to new capacity coming on, the challenge of what the oil companies are trying to solve is driving another level of capability in marine towed streamer.
For instance, there’s increasing demand for wide azimuth surveys, particularly for subsalt imaging.
“These are bigger, more complex surveys, which steps it up a notch in the kind of equipment and capabilities you need,” Peebler said. “As people are trying to image deeper and trying to image more complex reservoirs, we’ll see a bit of re-tooling of existing fleets to accommodate those more complicated surveys.”
Should a shakeout be in the cards somewhere down the line, Peebler predicts the commodity-type players would be the ones to fall by the wayside.
“The guys who have captured more of the technical leadership will still be in pretty good shape,” he said. “But who knows how it will all sort out?
“It looks good for the next couple of years,” he added. “Beyond that for towed streamer, we’re not sure.”
Look for a growing, more technically complex ocean bottom market, particularly in complicated areas where it’s more difficult to implement surveys with towed streamers.
“You can probably do these more efficiently and effectively with ocean bottom,” Peebler noted. “We think putting new generation digital sensors on the seabed will get better measurements than streamers, and we think that niche will grow and probably cannibalize some of the towed streamer business.”
It’s generally acknowledged that land has been treated a bit like a commodity by the oil companies for the last few years. Using 3-D has become routine, but there’s been no concerted effort to take the technology to another level like in marine, according to Peebler.
“There’s a lot of opportunities, and a good part of the world’s reserves are on land,” he said. “Yet most 3-D on land has not been designed for deeper reservoirs and more complicated formations like fractures, low porosity sandstones.”
Over the next few years, it’s likely there will be a re-tooling of the whole land technology base that’s driven by the need for higher density shooting, longer offsets, even using multi-component or full wave.
“When you put it all together, it’s really another technology cycle,” Peebler said. “I’m pretty confident we’re looking at least at a five-10-year cycle on land -- and we’re closer to the beginning of it than the end.
“I think we’re going from 3-D to 3-D on steroids -- recording more information, more content at each sensor point and also putting more out onto the ground,” Peebler noted. “More interesting survey designs to solve these very specific problems will take a lot more technical capability -- and that drives in new processing, new interpretation and all those things.”
Getting Off the Cycle
As the challenges increase for the oil companies, particularly on the production side, 4-D seismic activity likely will increase. Even though some fairly large marine 4-D surveys have been implemented, Peebler noted it’s still early in this game, and he emphasized that 4-D has really only just begun on the land side.
When all’s said and done, however, it all comes back to what the perception is regarding demand.
All bets are off if the industry wakes up one day and Asia has imploded economically or a serious worldwide recession looms on the horizon, Peebler said. He emphasized, however, his instinct kicks in to say this isn’t in the cards in the time frame being discussed.
Nevertheless, preparing for the proverbial rainy day is a good thing, according to Owens.
“What we’re trying to do here is build around our core competencies,” he said, “but try to smooth some of our revenue stream out. When it goes bad for the industry, we want to have some way to make some money, and one of those is to try to take the seismic method and go to the production side.
“In exploration, when the cash flow goes away, you go away,” Owens said. “We’re trying to find something more stable, and from an instrument manufacturer’s standpoint, permanent installation of equipment is attractive.
“When you have a boat you do part of a survey, turn around and do another part and so on,” Owens noted. “But when you’re doing it with an entrenched (cable) system, it has to be a large system so you cover the whole field and shoot it once -- this is one of a number of ways we’re trying to soften the cyclic nature of the business.”
In this volatile industry caution has become a part of most everyone’s vocabulary.
“We have to be cautious that all prices associated with exploring, finding and producing hydrocarbons remain in balance relative to commodity price and that supply remains in balance relative to world demand,” Degner said.
“But I don’t see anything being tremendously askew right now.”