Oil market downturn and its effect on the exploration industry

But back orders and momentum are keeping businesses steady. Lessons learned from the last downturn mean that multi-client surveys must be highly funded.   

Jeff Moore, Contributing Editor 

Having seen the price of oil rise to historic highs and then suddenly plummet to uncanny lows, World Oil wanted to know the impact on the seismic market, particularly newbuild vessels. So we looked at numerous press clippings and corporate reports on the subject from March 2009 back through 2008 and interviewed several industry leaders for their take. Here’s what we discovered.

OVERALL BUSINESS

Regarding the oil prices and their effect on the seismic sector, Chris Guldberg of Electromagnetic Geoservices (EMGS) says, “The E&P operators are prioritizing and delaying some projects. The uncertainty of the unprecedented current market conditions have led us to reduce vessel capacity from five to three vessels. However, we have a technology that reduces risk and costs for the operators, and the oil companies’ challenge of improving their respective reserve replacement ratios remains, so the industry needs EM!”

Chris Walker of Reservoir Exploration Technology (RXT) says, “Well, the primary effect has been [that] we’ve had to shut down a crew that’s been working since 2004 in the Gulf of Mexico. We shut that down at the end of last year [2008].” RXT is the only contractor that focuses solely on seafloor acquisitions using Ocean Bottom Cables (OBC) looking at existing reservoirs. It uses no towed streamers. “Outside the GOM,” he continues, “we’ve been less affected because a lot of the work we do is appraisal and development in production-related endeavors. And that, historically, has been less affected by oil price speculation. And many of the projects we’ve been working on are multi-year projects.”

The OBC market overall looks good, says Walker. “The work that’s coming to tender in the next few months amounts to a more than a billion dollars worth of contracts in OBC. And that’s at the current oil price. So we see the OBC market as being differentiated from the streamer market.”

Says Walker, “ExxonMobil and Petrobras are not spending $180 million and $200 million each on multi-year OBC programs because it’s nice to have. They’re doing it because they see specific value in the OBC data compared to the streamer data they’ve collected previously on these producing fields.” Oil companies need high-quality multi-component data to image their reservoirs to maximize recovery, and OBC gets the job done, he says.

Sverre Strandenes of PGS says of the downturn in oil prices, “We came into the year with a pretty strong backlog (Table 1). We have a reasonable workload, so when it comes to the effect of this downturn, it will be most evident at the end of this year. We have seen gradually weakening prices in the market since the end of last year. But our current workload will take us into summer, and we expect that as we reach the end of 2009, we will see more deterioration than we have experienced so far. It’s something that will gradually play out over this year.”

As for the outlook for 2010, PGS is uncertain. “We are preparing for a challenging 2010,” says Strandenes, “although we expect that medium to long term, we will see strengthening in the seismic sector due to the underlying energy fundamentals.” Having said that, Strandens cautions, “We think there will be oversupply [of seismic capacity] in the market ... All the capacity in the market that has been announced to come out will be too much. This will also play a significant role in determining how the market will play out over the next year or two.”

But Strandenes also says PGS is structured to take the hit if it comes. “When it comes to facing a bit more challenging market, a market where we will see the margins erode, the companies that have the most efficient fleets are companies that will be able to sustain their business. PGS has a fleet with the capability to tow more streamers than any other seismic service provider, and combined with our leadership-position in efficiency we are well positioned to meet the current challenges in the marketplace.”

WesternGeco’s Robin Walker describes several market phenomena that are keeping seismic exploration afloat for it. “First,” says Walker, “a sizeable proportion of our activity is related to development or reservoir management, and it’s still critical to maintain production levels in the face of the accelerating decline in reserves. Secondly, as far as mainstream exploration is concerned, slowdowns are happening where discretionary spending is not linked to acreage work commitments or is funded by capital borrowing, mainly by smaller independents.”

WesternGeco has sought to apply technology to increase quality and reduce costs at the same time, especially during the downturn in oil prices. “For example,” says Walker, “a single vessel using the coil shooting technique can gain full-azimuth data more efficiently and without the expense of multiple vessels. On land, an ultra-high channel count and multipass vibrator sweep approach can provide more cost-efficiency, even in complex areas. These two approaches can be demonstrated to offer significant savings over conventional methods, and this offers a better value proposition.”

And like RXT, WesternGeco is also in the OBC sector. It has one high-capacity 3D/4C crew now in West Africa. “This crew,” says Walker, “is equipped with our proprietary Q-Seabed system, which provides significantly enhanced coupling, improved y-component measurement, and real-time data capture and QC. Most importantly, we have continued to invest in our 4C data analysis capabilities, which is a critical component of the whole technique. We believe that take-up has been constrained principally by fears that the 4C data will not be recoverable, and if recorded, will not be processed properly, or even would not be used by the interpreters. Our intention is to retain sufficient capabilities to process behind our own crew.”

WesternGeco is staying away from nodes at present. “Our first generation 4C system, which was implemented back in the mid-1990s, was a node system, and that taught us quite a lot about the limitations, specifically the issue of not knowing what you have recorded until the process is finished,” says Robin. “We think there may be a potential niche in the market, but in many cases, it is a chink and not a niche, and low utilization as a result of limited market acceptance has sometimes resulted in eventual failure.”

THE MULTI-CLIENT BUSINESS

The oil price downturn has had a mixed result on the multi-client business. Regarding EM multi-client surveys, Chris Guldberg says, “The EM multi-client business model is still in its infancy. Last year, we [EMGS] performed the Barents Sea multi-client project—the largest of its kind in the world. The survey area, at more than 9,000 sq km and covering 30 blocks, included all the Barents Sea acreage in the 20th Exploration Licensing Round in Norway. It represented a breakthrough for the multi-client business model, which will be important for EMGS in the years to come.”

While RXT does not do multi-client surveys, it has been affected by the downturn in the multi-client sector. “All the data we have acquired in the GOM has been in conjunction with seismic contractors’ multi-client programs,” says Chris Walker, “and they have shut down operations due to lack of client demand.”

PGS tells another story and is slipping into 2009 and 2010 cautiously. “When it comes to new multi-client projects,” says Strandenes, “going forward, we require solid pre-funding before moving ahead. Multi-client is a key part of our products and we will continue to invest in new projects as long as they have good backing from the industry. In a downcycle, managing risk is key, and the way to do that with multi-client is through strong pre-funding and sales outlook. At present, our multi-client business is strong but, as with the contract side of the business, it remains to be seen how the market will develop toward the end of the year.”

Robin Walker says, “WesternGeco has seen some changes in clients’ buying patterns, principally deferment of major investments, which is not surprising as multi-client data investment decisions are driven by the availability of cash and the intent to pursue new acreage.” He says that in the past several years, WesternGeco proactively built a leading-edge portfolio of wide-azimuth projects in the deepwater GOM. “We expect that [portfolio] to provide the foundation for future sales, especially as depth imaging technology continues to advance and reprocessing becomes even more attractive.”

He adds, “One thing we see similar to the 1999−2000 period is some industry effort to convert propriety surveys to multi-client. WesternGeco selects multi-client projects based on their merit, and maintains the separation between propriety and multi-client surveys. Given the current credit tightness, we suspect this approach may be widely used this time.”

NEWBUILDS

As far as newbuild vessels are concerned, EMGS still has three vessels being built in 2009. Chris Walker says RXT has one. “We have one newbuild that will come into operation at the end of this year or the beginning of next. That’s been delayed maybe three or four months.” Why the delay? “Our clients have indicated they’d like to start at the end of this year or the beginning of next year.”

PGS will launch a newbuild this summer, and a few legal entanglements are mucking up the launch of several others. Says Strandenes, “We have one big vessel coming out this summer, the Ramform Sterling. It is on track, and it will come out as planned.”

The Sterling is a state-of-the-art Ramform S-Class vessel. Set for delivery in June 2009, the builder is Aker Yards’ shipyard in Tulcea, Romania. At $180 million, the Sterling is based on the same design as the Ramform Sovereign, which was delivered as scheduled March 2008.2

Says Strandenes, “There’s a lot of improvements and upgrades from the previous V-Class that has to do with longer duration, more fuel capacity, higher transit speed and the ability to tow more streamers, to name a few.” The Sterling is packed with modern technology and “represents the ultimate in seismic vessels,” according to PGS. It has a streamer capacity that’s higher than other vessels. “The Ramform Sovereign, our other S-Class vessel, has already towed 17, which is a world record—it towed 17 streamers in the North Sea last year,” says Strandenes. “It’s now towing 14 x 8.1 km, which is also a world record in terms of the number of kilometers of streamers in the water. It’s designed to tow more than 20 streamers, so these are vessels with capacity that is unmatched by any other vessel in the industry.”

“When it comes to other vessels,” says Strandenes, “we have four that are now under construction in Spain. These came through our acquisition of Arrow Seismic in 2007. Two of these vessels will be under contract to WesternGeco, and one of these has already been cancelled due to delays at the yard. The last two vessels, Apollo and Artemis, will be undertaken by PGS. The exact delivery times will depend on the progress at the yard.”

The cancellation of one of the newbuilds has caused a confusing melee of legal wrangling among four companies: PGS, Arrow Seismic Invest (a PGS subsidiary), Spanish shipbuilder Factorias Vulcano and WesternGeco (a subsidiary of Schlumberger). PGS canceled newbuild 532. Then Arrow asked Factorias Vulcano for a refund of $53 million for the cancellation. Some reports say WesternGeco sanctioned the cancellation, but it’s not entirely clear. As of March 30, 2009, Factorias sent Arrow a notice explaining it intends to challenge the legality of the cancellation. Since the original contract for the vessels was written in Norway, arbitration will occur according to Norwegian law.³

Robin Walker of WesternGeco says his company has been quite public about its fleet. “When we purchased Eastern Echo in 2007,” he says, “our intention was to grow and renew our fleet in a pragmatic way. The six new Eastern Echo vessels, which we call the Explorer Class, are on schedule; in fact, the first one is completing final sea trials prior to commencing work in the Gulf of Mexico.”

Robin says Explorer Class vessels are specifically designed to perform different tasks, making them flexible and cost-effective. “For example, for our source vessels, we have used chartered boats but may convert some of our mid-size (eight-streamer) vessels for source use. This plan gives us the flexibility to right-size our fleet while retaining the ability to revert to full vessel capacity when the market picks up again. We know that the economic situation is resulting in delays and cancellations for some players and, as a result, the level of net additions will be less than originally estimated.”

Regarding other companies’ newbuilds, in May 2009, Singapore Technologies Marine Ltd. will begin building a seismic vessel for Swire Pacific Offshore. The two companies signed the contract on Nov. 25, 2008, for delivery in mid- to late 2010. Built to Ice Class standards and 68 m long, it will be 2D and 3D capable, will have a helicopter landing deck, and will be able to tow multiple streamers. The new vessel is part of Swire’s fleet modernization strategy. Swire’s seismic survey headquarters is Singapore. Its current fleet consists of the Pacific Sword (1980), the Pacific Titan (1982) and the Pacific Ataawhai (2007)—hence, its efforts to upgrade.⁴

As of February 2009, SCAN Geophysical was pressing forward with the construction of three vessels at ABG Shipyards in India. The vessels are the SCAN Finder, Superior and Emperor. SCAN has had some financial trouble with the projects, however. In 2008, says a press report, “a letter of intent with PFS Shipping (Singapore), an associate of ABG Shipyards, for a sale and lease-back agreement for the three newbuilds failed to materialize.”5 Undaunted, SCAN has invested millions of dollars in seismic technology for the three ships and has used short-term debt financing to keep the project going in the immediate term. It plans on securing long-term financing for the future.⁵

It’s not as if SCAN is out of work, however. It has enough business to continue revenue streams for three to eight months. One of those projects includes the company’s 2D vessel Geo Searcher acquiring as much as 8,000 km of long-offset 2D data for GX Technology (GXT) off the coast of Argentina—the “Argentine SPAN program.” Geo Searcher tows a 10,000-m solid streamer and special tuned source.5

SCAN will next survey 10,000 km of Ecuador’s coast, which is a majority of its offshore territory, with its SCAN Stigandi vessel. It is a new multi-purpose seismic vessel towing an 8,000-m streamer with 2D technology for the government’s Empresa Estatal de Exploración y Producción de Petróleos del Ecuador in a new program to harness offshore hydrocarbons.⁵

A new seismic company now building a six-vessel fleet is Polarcus. Founded on Dec. 17, 2007, Polarcus began operations in 2008 and describes itself as a “pure play marine geophysical group with a pioneering environmental agenda, specializing in high-end towed streamer data acquisition from Pole to Pole.”⁶ It is perhaps the world’s first “green” seismic company. Polarcus vessels use the Ulstein X-Bow for increased fuel efficiency, burn marine gasoil with low sulfur content, and sport high-specification exhaust catalysts, just to name three. None of its ships are yet completed, however, and it will not see a revenue stream until they set to sea, which is scheduled for late 2009. All vessels are supposed to be operational by 2010.⁷

Drydocks World Dubai LLC is building Polarcus’ ships. Ulstein Design AS designed them. The six vessels are: the Polarcus Nadia, the Naila, the Samur, the Selma, the Asima and the Alima. The cost of the vessels is $876 million, and G&A costs make Polarcus’ bill a hefty $926 million.8 The first four are 12-streamer 3D vessels, and the last two are “ultra-modern source” 2D vessels. They will be capable of 2D, WAZ 3D, classic 3D and 4D, high-density 3D and 4D, and MAZ 3D surveys.⁹

As of this writing, the Nadia and the Naila are approaching completion. Polarcus’ schedule has slated the first for deployment in the third quarter of 2009 and the second for the fourth quarter. The company expects a delay of two months for the Samur and the Selma “due to delays in production of drawings,” according to the company. In contrast, Polarcus says the Asima and the Alima are ahead of schedule, and they will easily make their deadlines.¹⁰

Why would Polarcus build these vessels in a market downtrodden by low oil prices and slowing demand? It believes oil and gas have a bright future and that seismic acquisition will continue to play a major role. Polarcus figures demand for oil will be up 30% by 2030, mainly driven by the “BRIC” countries: Brazil, Russia, India and China. It also sees energy companies continuing to maximize production of producing reservoirs, which requires seismic surveying. Polarcus also believes energy company demand is outpacing seismic capacity, a trend since 2006. Whether this trend will ride out the downturn in oil prices remains to be seen. The company moreover cites 60,000 sq km of WAZ underway in the GOM, seismic acquisition expanding off West Africa, the Barents Sea and the Mediterranean Sea. It sees growth potential for sub-salt basins off northern Norway, Brazil, West Africa, Northwest Australia and possible exploration in the Arctic that might have 29% of the world’s reserves.¹¹

In July 2008, Cochin Shipyard Ltd., a company owned by the Indian government, announced it was building India’s first ever domestically produced seismic vessel. Cochin won a 150-day contract from an unnamed Norwegian firm to convert the fishing vessel Pavlovsk into an oil and gas explorer. Indian officials call it a “sophisticated diesel-propelled vessel” they intend to use for exploration beyond its shallows. Company representatives said it was aiming at converting another vessel into a seismic explorer but kept the details secret.12

NEW TECHNOLOGY INVESTMENT

Despite the relative slowdown in the E&P business, many seismic companies are defying the expected trend by increasing technology investments. “We have taken a major step into the 3D world,” says Guldberg, “and more and more of our customers are now turning to 3D EM surveys.” He explains that EMGS’s 3D acquisition and processing services, which are all dedicated to offshore, now account for almost 70% of its revenues. The company believes 3D EM provides superior data quality that can be more easily integrated into the exploration and production workflow and also interpreted alongside other subsurface information.

In addition, “The shift toward larger grid-based 3D surveys requires the deployment of more active receivers,” says Guldberg. “We have increased the number of receivers on each vessel. The new, purpose-built vessel Boa Thalassa, which we launched in mid-December, will lead the way in efficient 3D EM surveying, with its threefold increase in receiver capacity.”

Scores of exploration contractors are expanding their technological developments. For example, EMGS is plying its technology in shallow water. “We used our [EM] technology in water depths of about 60 m in Malaysia last year,” says Guldberg. “Our record is approximately 50 m in the North Sea, Mediterranean and South China Sea.” Guldberg says the recent development of EMGS’s shallow water capabilities has significantly broadened its operating window. “We believe that there is potential to even further enhance penetration depth and resolution in shallow water environments compared to deep water,” he says. “In other words, we can perform surveys at virtually any water depth now. This is vital, as many important hydrocarbon exploration opportunities remain in many shallow-water basins across the world.”

Chris Walker says RXT is actively developing a transient cable-based EM system. “The majority of EM work that’s been done offshore in the last five years has been frequency-delayed EM using stand-alone nodes,” he says. “And that application has primarily been in deeper water for exploration purposes.” RXT is taking another track, however.

“We are developing a time-delay EM solution (as opposed to frequency delay),” says Walker, “which is going to be cable-based so we will use cables similar in overall concept [to those] we use in our ocean bottom seismic operations. And that design—the transient—allows us to work in shallow water directly. It’s specifically designed to operate in shallow water.” Walker also says RXT is going to record all three components of both the electric and the magnetic fields. “So what we are doing is actually making the vector measurements of the electromagnetic response without using vertical array or sources,” he says.

PGS is in the EM business, too, but it’s still developing the technology. “EM is still a fairly new and immature technology,” says Strandenes. “We have capabilities to conduct EM both in the marine and onshore environments. We are currently developing our offshore capabilities towards a towed EM system. This is similar to a seismic streamer that we can tow behind a boat. We do this for efficiency reasons.” PGS believes acquisition efficiency will be one of the fundamental requirements to succeed in making EM a fully commercial.

Says Strandenes, “The PGS EM technology Multi-Transient EM (MTEM) can be deployed both in shallow and deepwater environments, so we already have the unique capability of being able to acquire EM data also in very shallow waters. As it is still early days for EM, we believe it is important to have the ability to tie EM data into wells in order to properly calibrate the data. Typically this would be shallower water environments. As the industry develops more experience and EM technology matures, we will be able to deploy EM in deeper waters and immature basins with higher confidence.”

Though PGS believes in developing and using EM, it also recognizes that the market downturn has negatively impacted EM. “We see that the uptake of EM technology has significantly slowed down as a result of the current weaker market,” says Strandenes. “And for that reason, we have adjusted our investment and ambitions, and time horizon for commercial deployment. So we basically are developing this over a longer time horizon than we had planned a year ago.”

PGS is pushing its recent banner technology forward. “In 2007,” says Strandenes, “PGS launched the GeoStreamer, a new and unique dual-sensor streamer, as an industry first. The GeoStreamer represents a revolution in seismic technology. By combining two sensors—hydrophones and velocity sensors—we are able to remove the sea-surface reflection, which gives us broad bandwidth data independent of towing depth.”

This gives PGS the ability to tow streamers in an extended weather envelope without compromising frequency bandwidth. It results in higher resolution and deeper penetration data acquired with high efficiency. Says Strandenes, “The results obtained so far demonstrate that the GeoStreamer fully lives up to our expectations, and this will be the future technology platform for PGS going forward. There is strong industry interest for our GeoStreamer technology, and we expect to gradually equip all or seismic vessels with GeoStreamers over the coming years.”

WesternGeco is in the EM sector as well. “In the last few years,” says Robin Walker, “Schlumberger purchased two companies outright, AGO and Geosystem, and [it] has a sizeable stake in PetroMarker.” WesternGeco is a minority shareholder in the latter, but a significant one. WesternGeco believes both of the principal products of EM—Controlled Source EM (CSEM) and Marine MagnetoTellurics (MMT)—have a significant role to play in risk reduction for its customers. “We have used MMT in the Gulf of Mexico to delineate stubborn salt bodies when seismic alone would be ambiguous. This basin-level tool is ideal for reducing the number of possible interpretations.” He explains, “CSEM is showing significant promise in prospect ranking; we had a case last year where regional 2D seismic was integrated with CSEM to highlight the potential of various prospects, resulting in a significant change of ranking of the various alternative exploration wells.”

Walker continues, “These are the ways that EM can help reduce E&P spend per boe—by significantly mitigating risk through methods that are complementary to seismic.” To achieve this, he insists that 3D modeling, survey design, data processing, inversion and interpretation of the measurements are key. “In this area, WesternGeco’s combination of acquisitions and continued engineering and development provides a significant advantage.”

WesternGeco is taking EM to both land and sea. “The Geosystem group has a fairly small but high-end land EM business,” explains Walker, “and we also are looking to expand the use of onshore EM for near-surface characterization in combination with single-sensor land seismic.” He says the value proposition offshore is extremely clear, although any new technology that requires a change of process by the customer takes some time to be widely adopted. “Despite this, WesternGeco is maintaining an offshore crew,” says Walker.

As for WesternGeco taking EM into shallow water, it depends on several technical issues as well as the business case. Says Walker, “This is driven by the physics of the measurement, the achievable signal-to-noise ratio and fidelity of the resulting measurement. If all this can be achieved, then the market potential is there—although the shallower the water (and target), the lower the cost per well, which defines the value of the measurement.”    

LITERATURE CITED

THE AUTHOR
	Jeff Moore is a strategic consultant in Arlington, Virginia. He is author of the book Spies for Nimitz, which depicts America’s first modern intelligence agency. He has also written numerous articles on energy, mining and security in Asia for such publications as World Refining, Asia Times, Asia-Inc and Jane’s.