Competition to ramp up
Busy Cycle Entering New Phase
Don’t look for seismic crew members to be scrambling to find work anytime soon.
Indeed, the future for the entire oil field services sector is looking mighty bright.
“I believe the oil field services cycle we’re in – which includes everything – is a long cycle,” said Bob Peebler, president and CEO at ION (nee I/0). “We’re well into the cycle, but I won’t be surprised to see it last well into the next decade, if not further.”
Supporting this line of thought is the premise that the demand for oil and gas will continue to increase during that period, driven mainly by developing countries.
“The only offset I can see is a clear move over time with higher prices due to conservation,” Peebler said. “The ‘green’ movement reinforces that, but we need that.
“We need all we can muster to deal with the combination of the decline curve of reserves and the increase in demand from developing countries,” he noted. “It looks like we’ll likely be struggling for some time to try to keep up with demand.”
The Impact of NOCs
The national oil companies (NOCs) play a key role in expected continuing demand in many countries.
China, for instance, has appeared to be sensitive not so much to prices as to its own energy needs. The country is a net importer of energy and also has its own domestic issues of pollution. This means it’s keen on having more cleaner-burning natural gas, in addition to securing energy supplies for its economy.
“Countries like China are not so much worried about quarter-by-quarter stock prices,” Peebler said, “they’re worried about country energy supply – and since their oil companies are NOCs and even their contractors, they’re pretty much driven by this agenda versus short-term price swings.
“That’s the case for many of the NOCs, and I think we’ll see the NOCs driving the universe a lot more than the IOCs (independent oil companies).”
Peebler views the current lengthy oilfield services cycle as being a two-phase scenario.
He noted we’re close to the end of the first phase, which is characterized by a kick-up in activity, which drives demand and ultimately leads to shortages and huge price appreciation.
As a result, the folks in the supply boat business, cementing, drilling and even the seismic vessel business have seen considerable revenue and earnings increases.
“We’re sort of coming to the end of this part of the cycle,” Peebler said, “because now it’s been long enough, you have capacity coming into the market.”
In the geophysics arena, this likely will show up in selective markets:
- Land – There’s been a problem getting enough capacity in the land seismic business, but activity has been slowing, and that likely will put a bit of pressure on margins.
- Marine – Higher-end seismic vessels are still in great demand, with a backlog likely lasting to perhaps 2011. Then a lot of capacity will come in, putting pressure on that segment of the market.
Cycle Two: Technology’s Value
As the first phase of the cycle winds down, there’s a tendency to begin looking more to technology. This, in fact, becomes the second phase of the cycle, enabling the companies to make money and continue to grow.
“You can compete on the basis of technology differences and continue to hold your market position,” Peebler said. “You can use the technology to improve productivity by better imaging, fewer dry holes, faster drilling.
“Whichever sector of the oilfield services it is, the guys who bring significant improvements in productivity can continue to grow and expand even if part of the market is starting to soften up.”
A good example is the birth and ensuing growth of 3-D seismic, beginning in the 1980s when oil prices had tanked. New companies came into the market, and the role of geophysics expanded as it became increasingly valuable to the oil companies because it made them so much more productive.
“At the end of the first phase of the cycle, it’s sort of ‘game over’ for the easy business, and everyone has to work harder,” Peebler said. “But you can still make money and grow your business.
“Right now, the sector goes up or down as a whole, but I think we’ll see breakouts of companies,” he noted. “It will become obvious who has the advantage, so we’re getting out of the ‘all boats rise’ phase.
“The oil companies will start putting more demands on quality, reliability (and) performance, because they will be more in the driver’s seat again.
“If you look at the marine business, there are the very high-end things like wide azimuth surveys that take special boats and complicated operations and are very expensive,” Peebler said. “But that end of the market appears strong.
“As long as it works and creates value for the oil companies – even if they choke a little on the price – they’ll continue to pay it. That kind of market will continue to grow and expand.”
Reasons for Optimism
The towed streamer market has its own story.
“I think everybody gets a little fuzzy out there around 2010 to 2012,” Peebler said, “mainly because there’s enough capacity coming into the streamer business that people aren’t certain what demand will be versus capacity.
“There are still a lot of older vessels out there, and if times turn tough I’m guessing they’ll start to retire the older fleet,” he noted. “You could see a different kind of consolidation if people basically lay off the older fleet and continue to move up the value chain.”
On the land side of the business, the picture looks downright rosy.
Many regions are opening up, and people need technology, Peebler noted, citing three specific examples:
- Libya, which is almost new because it’s been off limits for a decade or so.
- China, which has some very complicated reservoirs and is under pressure to increase domestic production.
- Russia, which has so much virgin frontier and such a large area that was shot in the past with fairly old technology.
“I think the land business in the international arena will continue to grow nicely and really have a demand for improvement in technology,” Peebler said, “because a lot of places people are trying to shoot are very complicated. We think it will be a healthy business, and we’ll see a lot of technology continue to flow into it.”
The industry appears to be at the beginning of a third cycle of technology on land – a bit like the former movement from 2-D to 3-D – and the companies are starting to re-tool for that.
“This brings in the need for new processing technology, training people, new technology infrastructure,” Peebler noted. “I think we’ll see several years – maybe a decade or two – of very strong growth in land geophysics.”
Geophysics, however, is not just about seismic.
Indeed, there are new measurements coming into play under the whole big umbrella of geophysics.
These include electro-magnetic technology, or EM, which has rapidly become a buzzword among many data gatherers. Despite the buzz, those who play the EM game are realizing it’s a mighty complex technology that may take longer to create real value than originally thought.
“There’s been a lot of hype around EM at the start,” Peebler said, “and I think reality is setting in and people realize it has great applications, but there’s a lot of work to do to really get the value out of it.
“I think it will be a fairly long slog for that business to grow, but it’s another important technology that’s got a lot of life in it.
“It’s just going to take longer than people thought for it to become a major piece of the action.”