April 2015 /// Vol 236 No. 4)
Seismic sector is still a reliable E&P market indicator
The recent drop in oil prices should not have surprised those that closely follow seismic activity. Historically, the health of the seismic segment has been a reliable indicator of the future health of the entire upstream oil and gas sector. Seismic is usually first to slow down, and then often leads the subsequent business upswing.
Early indications. The current seismic downturn started in late 2013. As 2014 unfolded, and even with the other oilfield segments booming, the woes of the seismic companies only increased. Their stock prices went into a steady decline, profitability dried up, and staff reductions materialized. By mid-2014, the seismic sector was the worst-performing segment in the upstream complex. Some companies lost 50% or more of their stock value from early 2013 levels.
During this time, I was asked regularly, why the seismic sector results were in such stark contrast to the rest of the upstream segment. Faced with overwhelming evidence that the rest of the industry was doing well, I often hypothesized that the seismic downturn could, potentially, be explained as a conglomeration of micro-market shifts—where multiple regions coincidentally suffered local challenges—all adding up to an overall seismic downturn. Clearly, various geopolitical factors seemed to support this explanation, in the absence of a better theory.
Alternatively, I have a long-held perception that the seismic sector seems to perform at its best when the “rate of change” of oil prices is at its highest. This theory suggests that when commodity prices are consistently high, drilling surges (“drill baby drill”), thus reducing seismic budgets. Furthermore, when commodity prices are consistently low, seismic budgets disappear (along with most other budgets). But when commodity prices oscillate in a “reasonable” range, there is an increased incentive to use more seismic data, primarily to high-grade drilling prospects.
With oil prices around $100 for multiple years, based on this self-generated market indicator, seismic budgets should have been in a slump during 2014—and they were. Now, with the benefit of hindsight, late 2014 ended up being the “bursting of the bubble” for the rest of the upstream industry, bringing it in line very quickly with the seismic sector. So, the seismic sector was not an inexplicable market anomaly in 2014, but actually the reliable forward market indicator that it has consistently been in the past—unfortunately.
The near future. Looking forward, what comes next for the seismic sector? Certainly, there will be further retrenching and consolidation over the next few months, very much in line with the rest of the upstream industry. The extent of this downturn depends on whether seismic firms can either re-invent themselves around lower oil prices, or wait until higher prices return, or a combination of both. So, can the seismic sector reorganize itself to again lead the next market upturn?
In past downturns, like in many other markets, the focus on financial survival spawned some of the most significant technological breakthroughs. Given current market dynamics, another round of innovation will be required in this cycle, probably focused on squeezing yet more costs out of the seismic process, as E&P companies reorganize around lower oil prices. The seismic companies that can scrape together enough R&D budget and bring forward more cost-efficient products and services will lead the next upturn. It is a tall order, but my guess is that enough progress will be made, by enough companies, to create this next “seismic wave.”
Continuing innovation. My current employer is one of several companies working diligently to bring forward new seismic technologies. We are focused on reducing onshore seismic acquisition costs with a new recording system that replaces cables with radios (for transmitting data back to the central recorder in real time), thus reducing crew headcount and improving crew productivity. These types of innovations will need to be implemented broadly across the entire sector.
The offshore seismic segment also has made tremendous strides in the last decade, increasing the number of streamers being towed for surveys, thus improving seismic data resolution. Wide-azimuth towed-streamer surveys also have improved subsurface image quality greatly. More of such innovations, and further cost reductions, will be needed over the next year or two to regain a competitive edge.
On the seismic processing side, the rapid adoption of cluster-based super-computing in the early 2000s unlocked subsurface imaging algorithms that were previously impossible to contemplate. These new algorithms, especially Reverse Time Migration, have (for example) dramatically improved the ability to image below salt, significantly reducing drilling risk. Another round of innovation in processing algorithms will be needed.
The seismic sector is an essential contributor to the entire upstream market. Unfortunately, while seismic firms have long been as technologically innovative as any other upstream segment, they have generally struggled to produce consistently attractive returns on capital invested. This track record, hopefully will be improved during the next business cycle, but it will take some changes in attitudes and approaches to achieve improved results.
My personal view is that seismic data is a tool that is seriously under-utilized by many E&P companies. To lead the next up-cycle, and to produce improved financial results, the seismic sector will need to further reduce the costs of delivering seismic data to its customers, and it will need to do a better job of demonstrating the full value of the seismic product or service being delivered. A stout set of challenges for sure—but we’ve done it before.