Content Revised 14 November 2018 by Request of Company to Remove their Named Reference
Differentiation and Commoditization in Upstream Exploration
Change is inevitable. Progress is optional. – Tony Robbins
An operator provided insight into the current situation in the marine seismic exploration sector which was written about in the post The Seismic Vessel Over-Capacity Problem. While geophysical exploration companies work to differentiate their products and services, in the end, these products and services seem commoditized. Commoditization occurs when products or services lack meaningful differentiation. When products and services become a common standardized technology this makes such products and services cheaper and sales margins thin. The operator also mentioned the exception being with multi-client products and libraries. This is likely a sentiment held by other operators. Therefore, it is perhaps useful to consider what is driving this view in the upstream oil and gas sector.
The paradox of choice is the view in marketing that more is less. Author Barry Shwartz explains this concept in detail within his book, The Paradox of Choice. (He also discusses the idea in his TED Talk presentation.) Choice is supposed to benefit customers by providing more options and freedom in helping them determine the best way to help them grow and prosper. However, in studies it is found that the opposite is true. Too many choices cause buyer anxiety and lead to consumer paralysis. Overwhelmed with so many choices, customers will decide not to make any choice at all. Decisions always hold risk. If one product or service is selected out of many choices, there will invariably be comparison with the product or service not selected. This impacts customer satisfaction because with so many opportunities provided to make the best decision, there is a higher threshold for satisfaction. The result of more choices is less sales and lower satisfaction.
Firstly, marine seismic acquisition and data processing projects are complex and multifaceted. It is in the interest of companies to reduce risks and commoditize required products and services by clearly defining expected deliverables. Innovation is not immediately embraced for a number of reasons. New approaches are unknowns and therefore increase risks through the eyes of some customers. Innovation cannot always be easily compared in terms of costs and outcome. The bid cycle must be objectively fair and competitive and is premised on having multiple providers delivering similar products and services for predicted outcomes – standardization. So, in this respect, key differentiators would likely be those that align with project constraints and reduce risks, such as time, cost, safety performance, and quality management. These are benefits of effective and efficient customer focused management systems with the aim of continual improvement that are closely aligned with sales and marketing. Simply put, customer procurement systems do not invite differentiation in the product or service and actually strive for standardization of the requirement. How the product or service is delivered is more likely the key differentiator.
In geophysical exploration services there truly is real differentiation; in approach, in instruments used, how they are used, and how the data which is provided delivers value. But, this is not so easy to convey. A study in Norway conducted over the past forty-years determined commercial offshore exploration success rates have remained constant at around 25%. This is surprising considering all of the technological advances during this period. Some believe that success rates remain the same due to the fact that as technology improves prospects similarly become more difficult to discover. Whatever the reason, apparently no technology or combination of technologies has performed significantly above this amount. The other issue is that the cost of exploration has continued to increase significantly.
To make a point, consider marine streamer broadband seismic data. For many years there was a known problem in marine seismic acquisition known as the ghost notch. The marine seismic experiment involves a seismic source, usually air gun arrays, and sensors to measure the earth response. The source and sensors are towed under the water surface. What happens is that the energy from the source reflects off the water-air interface interfering with up-coming energy and cancelling it out. This causes a notch in the recorded frequency bandwidth of the recorded signal which is related to the depths of the sensors and source. For stationary marine seismic acquisition, such as node systems and ocean bottom cable, additional types of sensors can be used. Since the notch occurs at different bandwidths for different sensors the different sensor components can be combined to provide broadband data. In towed streamer acquisition the sensors are not stationary and data was only recorded with hydrophones.
This was until there was an innovative technological breakthrough. A dual-sensor towed streamer was developed as a proprietary technology to offer broadband seismic streamer data. However, soon competitors revived or developed alternative techniques to acquire broadband data. This needed to happen on the one hand. Competitive operator bidding requirements cannot request a single provider solution. So, broadband became commoditized as an acceptable solution, but not a particular kind of broadband solution. Other companies also began offering broadband data using conventionally acquired data through applying innovative data processing techniques. So, now there are a variety of very different broadband offerings available to choose from that can all be accepted as meeting a generic broadband requirement. Obviously, each seismic service company is trying to show the value in the solution which they have developed and some offer several techniques.
The choices do not stop after the geophysical data has been acquired. Data needs to be processed and imaged. The different combinations of equipment and acquisition techniques lend themselves to an even greater variety of data processing and imaging methods to choose from. This too is commoditized into a requirement of an imaged volume of data. Some of the processing methods are proprietary and only allow operators the ability to see the result, but not all of the processes which produced it. In a proprietary geophysical data acquisition survey the operator is responsible for many of the choices and decisions to optimize data since it is being acquired for them. Each decision incurs risk.
Another business model approach used is multi-client. With the multi-client model the geophysical service company plans and manages surveys that are believed to be of general industry interest. In this model, data is sold to operator companies with restricted data user licenses. The cost of acquisition and data processing can be spread out over time. For multi-client, the data acquisition and processing techniques are often aligned to showcase the optimal solution utilizing the equipment and techniques available within that company. The multi-client model reduces the amount of choices that operators need to make about acquisition and processing.
The reality is that customer problems are becoming increasingly complex. Procurement decisions are not always made with consideration to the current technological and operational advances, but fall back on previous technology and requirements that are better understood. Global markets mean that decisions must consider the constraints of environmental, geopolitical, multicultural, and multi-disciplined perspectives. This sales environment is described in Jeff Thull’s book, Mastering the Complex Sale. Operators cannot always recognize high-value solutions without help. This means that the decision making process must be made simpler at the same time when the different solutions are necessarily more complex.
Every decision has a risk component. To manage these risks effectively, the different solutions need to be clearly understood, yet this is not always the case in a high-technology and rapidly changing environment. Thull points out that customers first and foremost must decide that change is necessary. Operators must believe that the change will improve their business. This is juxtaposed against the fact that with the higher risk of the decision comes a greater resistance to change. There is a progression in how customers accept change reflected in terms of how satisfied they are in their current situation. These can range from very satisfied and comfortable to immediate change is required for survival. Operators will still need to find opportunities to grow their reserves. At a time of great flux both in technology and in the upstream sector committing to change is difficult. But, not committing to change may be even more perilous in the long term. The paradox of choice creates decision paralysis. Growth requires acceptance that change is necessary.