The Gulf of Mexico has long been kind to seismic contractors. Friendly leasing terms have meant that oil companies are desperate for subsurface information, particularly since the region regularly has turned up huge discoveries since the 1940s. It was the proving ground for multiclient seismic surveys, a business model that works better in the Gulf of Mexico than anywhere else in the world.

All of that went away on April 20, 2010. And even though the worst seems to be over and the cleanup efforts have been successful, the Gulf of Mexico is a very different place than it was April 19.

Home sweet home
According to Bill Herbert, an analyst with Simmons & Co. International, six months ago the planets were aligned for geophysical contractors in the Gulf of Mexico. Rig count was rising from 30 to an estimated 40 to 45 rigs. The appetite for multiclient data was strong, giving contractors the cash flow necessary to support wide-azimuth campaigns and “soak up some high-end capacity.”

It was the second-largest rig market in the world, lagging only behind Brazil and far ahead of West Africa and Norway.
Now, Herbert said, a few things are clear:
• Liability caps are going to rise;
• Regulations and costs are going to rise;
• Mid- and large-cap independents will be marginalized;
• The deepwater Gulf of Mexico likely will become the exclusive province of supermajors and national oil companies; and
• The Gulf of Mexico will become an emasculated market relative to its pre-Macondo status, more closely resembling Norway and West Africa in terms of the number of deepwater rigs than its own robust former self.

“Contractors are going to be playing defense,” he said. “I think seismic is one of the more challenged sectors in the business right now.”

However, recent quarterly earnings calls reveal that the international marine industry is proceeding apace, and it is unlikely that the industry will reach the 70-vessel mark by the end of 2011 as many had originally speculated, he said, reducing concerns about overcapacity.

The current market is oversupplied by five vessels, with none in the Gulf of Mexico (usually there are about five) and only one currently operating offshore Brazil. But that is likely to change – Petrobras recently launched a tender for vessels for 2011 and likely will be keeping the marine seismic market busy since it is looking for as many as 12 additional deepwater rigs.

Additionally, several vendors reported surprisingly strong multiclient sales in the Gulf of Mexico in August following a poor June and July. In a note following the CGGVeritas conference call Sept. 10, Herbert noted, “In the category of wishing and praying, hope is building for a March lease sale, but it’s an aspiration at this point.” He also said the current oversupply means bidding for jobs next year promises, at best, breakeven margins at the project level and negative returns on a fully loaded basis.

Further, he added, according to a PGS investor relations presentation, streamer count since early 2006 has expanded from less than 300 worldwide to 450, or by 50%, and is forecast to expand to 500 by mid-2011.

Huge hurdles
For contractors who remain in the Gulf of Mexico, things will not be as easy. Marc Lawrence, formerly of Fairfield-Nodal and still with the International Association of Geophysical Contractors (IAGC) as it addresses recent events, said the industry needs to grasp the magnitude of the problems ahead.

“We’ve always thought that the offshore production for the Gulf of Mexico was essential to the nation, and because of that we were protected,” Lawrence said. “We’ve had a good professional relationship with the technical people who regulate us, but that’s going to change.” Added Chip Gill, president of IAGC, permits were shut down completely for awhile, and as of mid- September, only one new geological and geophysical (G&G) permit has been issued. “Some of the delays result from the new BOEM (MMS’ successor agency) having to take into account how the spill has changed the Gulf of Mexico environmental baseline,” he said. “But it could also be a reaction to lawsuits by environmental groups as well as signaling a policy shift by the Obama administration.”

Reactions to the Macondo incident already have been mirrored elsewhere. Lawrence said the UK immediately tried to double the number of inspectors it had on offshore rigs, and even onshore US players are likely to feel the heat.

In the US, the House of Representatives passed a measure that would have impacted everything from offshore drilling to onshore fracturing, but Gill said its chances of passing the Senate are uncertain. Meanwhile, the Senate is working on its own version of the bill. With the entire House of Representatives and one-third of the Senate up for reelection in November, Lawrence said their focus in the next couple of months probably will not be on energy legislation. But a lame duck session post-election could reduce potential political backlash. The US could see the fury of energy opponents included in the Senate energy bill, he added.

Unfortunately for the industry, repercussions from Macondo also are resulting in litigation aimed against marine seismic activity in the Gulf of Mexico. A Notice of Intent to Sue the US Department of the Interior was filed May 14, 2010, by the Center for Biological Diversity (CBD) targeting lease sales, E&P activities, and G&G operations. The notice alleges that the government has “ignored marine mammal protection laws” when approving offshore operations and is in violation of the Marine Mammal Protection Act and the Endangered Species Act. The lawsuit has yet to be filed.

A separate lawsuit that has been filed comes from the Natural Resources Defense Council, the CBD, the Gulf Restoration Network, and the Sierra Club. This lawsuit targets G&G activities, particularly seismic surveys, and alleges that the government “has failed to adequately analyze the substantial impacts of seismic surveys on the Gulf’s marine environment before permitting activities there, in clear violation of the National Environmental Protection Act.”

The IAGC has joined the American Petroleum Institute, the Independent Petroleum Association of America, and the US Oil and Gas Association to intervene in this suit. The court has approved this intervention, and the lawsuit is expected to go to trial later this fall.

Regardless of the outcome of the suits, Lawrence is hopeful for the future of the Gulf of Mexico but believes the future will not resemble the past. “It’s going to be a sea change for the way things operate,” he said. “It probably won’t be the same, or even close to the same, ever again.”

Any good news?
Those hoping for better subsurface illumination could soon get their wish. “History has shown us that new technology comes to the forefront during economic down cycles,” Lawrence said. “I see seismic being a part of the solution here – it could be more useful in pore pressure prediction from a drilling perspective, for instance. We’re already seeing seismic surveys with longer offsets and more richness of azimuths to provide better imaging of the deeper subsurface. Multicomponent seismic could provide more information about the subsurface than we currently get with compressional waves.” Most of this technology already exists, he added – it just is not being used widely.

Herbert added that based on recent news from the major seismic companies, things are expected to improve gradually. But while geophysical contractors have been in tough spots in the past, and they usually seem able to weather the storm, there is no doubt managers are hunkered down in board rooms plotting their survival strategy. They will need every weapon in their arsenals.

Offshore