Until marine seismic capacity is reduced, contractors will continue to struggle.

The ongoing overcapacity problem in the marine seismic industry is causing a continued recession in the business, leaving many to question the business practice of marine seismic.
Technological advancements have dramatically increased not only the data quality but also the volume of data that can be acquired. In an effort to stay at the forefront of this technical revolution, the largest seismic companies and many of the smaller ones have committed significant amounts of capital to compete in this new arena.
But in a cyclical industry like oil and gas, this rush to increase capacity acts like a cresting wave as the cycle turns and demand eases. This most recent industry cycle has left many companies with stranded assets. Companies have resorted to using business practices and management directions that attempt to rationalize these assets and the business as a whole.
A gradual shift has continued. First, oil companies moved from contracting a seismic vessel on a proprietary basis to owning the license for the data acquired. Finally, groups of oil companies started to share the cost of acquiring data. The contractor owned the license, but the contractor took additional risk. If the oil companies fully underwrote the cost of the survey, it was called multiclient or a group shoot, and the contractor's risk was minimal. If the contractor picked up part of the tab for the shoot, it was called spec data collection.
Sharing the cost of acquiring data has dramatically lowered the cost of seismic for oil companies, resulting in:
l equal quality data for 25% of the cost;
l quicker timeline from interest to drilling; and
l lower risk on licensing.
Oil companies can be more flexible in their areas of interest, budgeting and asset allocation. Capital commitments were reduced. But this created a problem in itself. E&P operators realized they could get more data and better quality data at reduced costs, with less commitment than before. This in turn created a mindset fostered by the contractors that has proven difficult, if not impossible, to change. Erroneously, contractors rationalized that these "improvements" were fostered solely by technology. Instead, they evolved into business practice and continue to haunt the industry.
With the high cost of owning a state-of-the-art seismic vessel, in terms primarily of depreciation, contractors could not afford downtime. On a relative basis, operating costs were lower, so during periods between contracts, either proprietary or multiclient, contractors kept them operating. They selected areas where they believed oil companies would have significant interest, even if interest was not sufficient at the time to justify a multiclient shoot. This became more speculative in nature because the contractor took on more of the financial risk, in some cases all of it.
But the returns were good. In many cases, very good. The contractors were shooting in areas that were of great (or potentially great) interest to the oil and gas industry. Because the contractor owned the license, sales of the license could easily exceed the original estimates and generate attractive returns to the contractor. Clients demanded ever-increasing state-of-the-art technology, which came at an ever-increasing cost. But the returns were high enough, or contractors rationalized that returns were high enough. Demand was unlimited, or so it appeared. Consequently, the large contractors added aggressively to their fleets, and smaller contractors risked their balance sheets by jumping into the fray.
Realities set in
Oil prices then collapsed in the wake of the OPEC agreement in 1998 to reduce production. Oil companies' budgets were dramatically reduced as a result. And a 4.3 million b/d glut of production overhanging the market reduced interest in finding new oil reserves. The realization of a finite areal volume of sedimentary basins in the world to shoot further compounded these difficulties. And with an increased capacity per vessel, the dramatically larger fleet has been shooting the estimated 3.7 million miles (6 million sq km) of sedimentary basins at an amazingly rapid rate. Additionally, mergers within the industry greatly reduced the number of potential customers for license sales. The industry hit the wall.
Most of the areas of high interest to the oil and gas industry have been shot. Contractors tried to shoot additional spec surveys from different directions using different bin spacings and offsets, but they have gotten little interest. Longer streamer cables give better resolution of the subsalt, but that was known some time ago, and while some reshoots are possible, the value of data is considered somewhat marginal. Processing can do with a computer most of the tasks that once were done in the field. Clearly, the marginal cost of a few more minutes on a supercomputer is much less than the recommissioning of an offshore seismic survey involving one of the fleet's supercapacity vessels.
Case study: Brazil
The hottest area of interest today is Brazil. After its deepwater areas were opened to international licensing, the first round was completed last summer.
Eleven deepwater blocks were awarded. These blocks carry an initial term of 3 years with minimum work agreements that consist primarily of seismic. The blocks require 26,703 miles (43,000 line km) of seismic data. After 3 years, half of the acreage is returned to the government. Texaco, Amerada Hess, Agip, Exxon, Unocal, BP Amoco and Petrobras all won acreage after 14 companies bid. Round 2 is expected this year.
Brazil has opened offshore acreage to outside participation - one of the most anticipated industry events in the past few years. It is expected to be one of the strongest markets worldwide. While all of that sounds grand, a look into the details is warranted.
In January 1999, only a few vessels were operating in Brazil. By the end of January 2000, there were 19. Eight companies have gotten permits to shoot multiclient surveys in Brazil. Major seismic companies have sent their largest, most capable boats to collect spec data and, to a limited degree, shoot proprietary.
Agencio Nacional do Petroleos estimates 621,000 miles (1 million km) of data will need to be shot during the next 5 years. Under the new rules, confidentiality exists on proprietary data for 5 years and multiclient data for 10 years. Some 745,200 miles (1.2 million km) of 2D data and 558,900 miles (900,000km) of 3D seismic already have been shot in Brazil. About 931,500 miles (1.5 million km) of data shot through 1993 will be available at no cost by the end of this year. At the current data collection rate with the capacity of the seismic vessels today, the 621,000 miles (1 million km) of data estimated to be shot in the first 5 years will be completed in less than 2.
Answer to overcapacity
Companies have been forced to drop pricing significantly to keep assets working to cover at least part of the cash operating costs. As a result, several vessels have been operating below their operating cost break-even points. More than US $1.5 billion of seismic data is on the consolidated contractors' balance sheets with little or no demand by the oil industry. Contractors, with higher capacity and more efficient vessels, allowed the industry to acquire data ever faster, compounding the problem. Cash requirements by the contractors to fund spec shoots began to put a serious strain on already weakening balance sheets. More bankruptcies have occurred in the seismic segment than any other segment of the oilfield service industry.
While it has been a difficult decision, the industry has recognized the liability of the spec data business practice and capacity issues.
Seventy-nine seismic vessels are working today, down from 115 this time last year. In the past year more than 30 vessels have been taken out of service, and with more than 40 idle marine vessels further retirements are expected this year. Twenty-two vessels are operating in Brazil, but the demand vs. capacity issue will result in a dramatic drop in vessel count there as well, and another round of retirements is expected.
Almost half of the marine fleet is expected to be retired from service during the next 3 years.
Marine streamer will not be the multicomponent answer offshore and may not be the 4D solution either, so technology is not expected to revolutionize the business so much in the next 3 years that retirements are not inevitable. Contractors' balance sheets cannot withstand the need to retire uneconomic vessels. No one wants to blink first, but the retirements must be done. Several contractors already have started, and it must continue.
The value is in the data, and there is an obvious need to have a large library of good quality data. But like musical chairs, no one can afford to be the last one standing. In this market, ownership of a vessel is not a requirement to owning data. That realization alone could force some retirements.
The industry must instill financial discipline. One or two companies operating at or below cash costs cause all companies to compete at that level to optimize fixed-cost coverage. But the industrywide financial damage by such actions is significant, and in the long term it affects everyone.
This segment of the industry has been more responsible than any other for the improvement in oil and gas fundamentals during the past 10 years. That said, at the beginning of that period, few companies showed a profit. Levels of activity in 1997 showed most of the industry could be profitable if times were good.
The segment needs to show it can generate adequate returns on investment through the course of a full cycle of the business. To do this, it needs to continue the retirement of overcapacity even before the vessels have reached a state of technical obsolescence.