Dramatic changes for both oil companies and service contractors over the past 20 years have led to creative approaches to business -- and not all of these changes have been accepted wholeheartedly.
In the last six years or so, for example, seismic and service contractors taking an equity interest in exploration projects has been one avenue companies have taken to more equitably spread the risk and reward -- but this scenario has met with some consternation, particularly where seismic contractors are concerned.
"In the early 1990s, when this trend was just beginning, some oil companies were concerned there would be a conflict of interest for seismic contractors," said Horace Calvert, president of DDD Energy Inc., a wholly owned subsidiary of Seitel Inc. "But over the last several years, as more contractors have started taking working interests in projects, that concern has died down.
"We are very careful to separate our multi-client or spec data business from our exploration and production business," Calvert continued. "At DDD we only participate in projects that oil companies bring to us, just like any other partner taking a working interest. We pay our way as a partner that can play a significant role in making a project successful."
Gerry Gilbert, president of Baker Hughes Solutions, a division of Baker Hughes, agreed.
"In all cases where we have taken a working interest in a project, the oil company operating the project negotiates their own deals with Western Geophysical (Baker Hughes' geophysical division). We pay our part of that deal just like every other partner," he said. "From the beginning we did not want to get into a situation where we were compromising from a commercial point of view either the oil company or Western.
"And we certainly did not want to create any suspicion that we had any special deal with Western," he said, "which, I can assure you, we don't."
Gilbert said his company decided "from the outset" there were two things they would avoid any concerns of conflict of interest.
- Take working interest only in acreage already held by an operator.
- Only work on subsurface data acquired by the operator or publicly available.
"Every company handles these issues differently," he said, "but we didn't want to compromise the integrity of Western's spec database or compete in anyway with our oil company clients."
Alliances and Risk
Several factors in the oil business led to seismic contractors taking a piece of the action in exploration and production ventures.
For Western Atlas, Gilbert said, it was an outgrowth of the move toward industry alliances.
"We recognized in the search for a formula for effective alliances that it was necessary to have the results of the alliance be the same for all parties, which meant there had to be some kind of participation in the outcome of the project," Gilbert said. "We negotiated a variety of different types of contracts, and one of those was equity.
"Becoming an equity interest partner has one major difference from other contract formulas," he said. "When you hold equity you become a voting partner.
"That issue initially made some oil companies uneasy," Gilbert said, "but the arrangement actually has given us more insight into the decision-making processes that oil companies go through. As a result, I think we come away with a greater understanding of their position regarding decisions on various expenditures and the economics of a project in general.
"To have a truly workable alliance all parties have to have the same goals," he continued, "and sharing the risk and rewards does align all members of an alliance."
Cycles and Trends
Industry alliances were born from two significant trends in the oil industry in the 1980s -- outsourcing of geophysical work and other operations to contractors, and the shift of research and development from oil companies to contractors.
Both of those issues have played a major role in geophysical contractors' move into the E&P business.
"It's a different world today than it was 20 years ago -- contractors are now almost partners with oil companies," said Mike Forest, a consultant in Dallas that has worked for several oil companies. "They sit with oil companies everyday, but that was traditionally on proven, development projects. This move for contractors to take a stake in exploration opportunities is new, although not really surprising.
"Geophysical contractors have taken on more of the research and development duties for the industry," he added, "and it is reasonable that they want a piece of the action to turn some of those research dollars into profitability."
Another factor that spurred geophysical companies into looking at equity interest deals is the cyclical nature of the business.
"Seismic data is a very cyclical business, as is all the industry, but contractors in particular only have cash flow when they are working or selling seismic data," said Mike Fontenot, vice president of Fairfield Resources, a wholly owned subsidiary of Fairfield Industries.
Oil companies, he observed, at least have cash flow through selling product.
"They may be working at some type of loss from time to time, but they do have cash flow and you can do things to manage that cash flow and your business to survive even when times are bad," he said. "We generally don't have those options.
"The cycles in the oil industry are getting shorter and more severe," he continued, "and our survival is being threatened by this change. This move by geophysical contractors to become equity partners is an effort to get long term cash flow that can help get us through the downturns."
All of these factors played a role in Seitel's decision to establish its exploration and production subsidiary, DDD Energy. But the real motivation for Seitel was the growing need for 3-D seismic technology onshore, particularly in harsh terrains like the marshes and swamps of onshore Gulf of Mexico.
"With the advent of new recording technologies in the early 1990s we realized we could acquire 3-D seismic data in a cost effective manner in these areas," Calvert said.
"When we took delivery on our first 3-D shoot along the coast, we saw a dramatic improvement in resolution of structure and stratigraphy compared to 2-D data," he continued, "and we felt if there was an opportunity for us to leverage our expertise in creating 3-D data into participation in exploration and production it would be beneficial to us and our clients who would become partners. We felt we could provide a piece of the exploration puzzle that none of our clients, who were all potential partners, would have.
"We weren't going to generate prospects -- we just wanted to take the piece of the business we understood the best and apply our knowledge while partnering with companies that could handle the rest of the business."
To him, both parties benefit from this arrangement.
"If we can get involved in exploration projects where 3-D could have a significant impact on the success of those projects, then we might have some upside that you would not necessarily have from just licensing the data," he said. "That's the benefit to seismic contractors.
"From the clients' perspective, they are always looking for partners. Why not bring in a partner who has a particular expertise and ability to make things happen?"
Fontenot agreed that contractors and oil companies alike benefit from partnerships.
"Today this industry is all about exchanging information between contractors and their clients and establishing a true partnership is just another outgrowth of that trend," he said. "We can now share the rewards as well as the risks of a project, and oil companies can eliminate the sometimes prohibitive up-front costs of 3-D seismic -- particularly onshore."
Seeking the Best Fit
The very nature of the geophysical business helped push contractors to find new approaches to business, according to Gilbert.
"Ours was an entirely subsurface company -- we didn't bring engineering services or drilling operations to bear on a project," he said. "And, of course, the subsurface is the element of risk, so I think the use of equity, production sharing and royalty type formulas was an outgrowth of taking that risk.
"Oil companies often do want to see us shoulder some of the risk, and if we are going to be at risk then we want the same rewards."
DDD Energy has seen its partnership role evolve over the last several years.
"Initially we thought we would take a backseat, review type role after the 3-D seismic data was acquired and delivered," Calvert said. "However, we spend a great deal of money up front on the 3-D and have a strong interest in monetizing that investment as quickly possible by drilling wells and getting those wells on line.
"We have taken a more active role in the interpretation process than we thought we would in an effort to speed up the process."
Most geophysical contractors are not interested in operating a drilling program -- they are content to stick with what they know best, Fontenot said.
"We have no plans to operate," he continued. "Our expertise is acquiring, processing, and interpreting seismic.We also utilize high-tech tools for subsurface evaluation to a partnership.
"We want to find partners that have the engineering expertise to operate the projects. That's the best fit for everybody."
Oil Company Concerns
While the whole idea of geophysical contractors as working interest partners in exploration and production program is becoming more accepted, there are still areas of concern for oil companies.
Gilbert said one fear of large multi-national companies is that geophysical contractors will provide services directly to national oil companies and, in effect, cut down on those countries' need for international oil companies.
"But we've been doing business directly with national companies for years and that has never diminished the need for the expertise international companies bring to emerging exploration regions," he said.
But perhaps the biggest worry for oil companies has been geophysical contractors compromising their own spec data libraries in the push to get partnership deals.
"It's because of this concern we have made Western's spec data library off limits," Gilbert said. "If somebody had access to a spec data library the size of Western's without having to pay for it -- what a huge advantage that would be.
"But first and foremost we are in the business of servicing our oil company clients and we are not going to jeopardize that in any way."
Fontenot said that his company's business plan is to not even be susceptible to that perceived conflict of interest.
"Everything we have done is with data that was acquired for a specific project. We either acquired the data with our own crews and equipment or specifically for the project.
"We have participated as a partner in spec shoots. We put up our own money, went out and acquired the land and bought the data, generated the prospects and went out and sought drilling partners -- just like any other independent would do," said Fontenot. "We have never compromised Fairfield's spec database."
Forest said the whole concept of spec data dilutes the argument against contractors using their spec data to generate prospects.
"Many companies have access to the same spec data -- that's the nature of the beast," he said. "The value of the data is not in the raw data itself but in the processing and interpretation -- what you do with the data."
To help alleviate the concerns of oil companies, many geophysical contractors have separated their business so that the E&P division is almost a stand-alone business.
"We have certainly created invisible walls that everyone understands are very important," Gilbert explained. "Baker Hughes E&P Solutions approaches other divisions of the company like Western Geophysical, just as an outside company would. We get no special favors."
Fairfield and Seitel likewise have structured the business very carefully. Fairfield Resources is owned by Fairfield Industries, but does not operate as a separate entity. Seitel has created DDD Energy as a subsidiary to the firm.
'Brave New World'
Opinions vary on the importance and longevity of geophysical contractors as working partners in exploration ventures.
"I think this is just a phase we are going through in an effort to try and align the businesses of service companies and oil companies and to enhance the economics of the industry," Gilbert said. "We've experimented with a lot of various formulas, including equity, and that process continues today.
"I don't think this will grow into a huge part of the business because it's not in the best interest of the service companies to invest their money in the subsurface," he continued. "If oil companies want true value from service contractors the best way to get it is not to ask them to invest in their projects. Their job is managing risk and managing the subsurface evaluation -- that's what they bring to the party. We bring the tools that allow them to perform that function in the most economic way.
"We can't all do the same thing," he added. "We've got to get to the point where we're working in a more complimentary style if we are going to reduce costs."
However, DDD Energy has been a growth arena for Seitel.
"We've been involved with well over 100 companies on 50 to 60 projects and we've looked at many more deals," Calvert said. "This accounts for 15 to 20 percent of Seitel's overall business in terms of revenues -- and it has the potential to grow."
Fairfield is just getting its E&P business up and running, but Fontenot sees a great deal of future potential.
"We just started our first drilling program," he said. "We've been working on this for some time. The first year we put our business plan together and the second year we were busy acquiring funding. It's just been in the last 12 months that we've started drilling.
"Today this is an infancy business for Fairfield, but it's a very big growth area where we see a great deal of potential down the road. In fact, we see this as Fairfield's biggest growth arena."
While every contractor has a different opinion on the future importance of exploration operations, there is one issue they all agree on -- change is here to stay.
"It's a brave new world," Fontenot said. "The oil and gas industry will never be the same as it was even five years ago, and we all have to look forward to new ways of doing business.