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Content Revised 13 November 2013 by Request of Company to Remove their Named Reference

How the Market Has Changed and Where it is Headed After Q3 2016

If You Got the Money I’ve Got The Time ~ Willie Nelson Song

Today’s scientists have substituted mathematics for experiments, and they wander off through equation after equation, and eventually build a structure which has no relation to reality. ~ Nikola Tesla

In project management lexicon, there are three constraints which combine to determine the priorities, trajectory, and success of a project.  The triple constraint triangle legs are time, cost, and scope.  This triangle is also referred to as the project management triangle.  (Actually, the names of the legs of the can differ, as well.)  Fundamentally, however, the axiom holds that only two of the three constraints can be achieved for a given project.  If the requirement for the project is a high standard completed quickly, then the cost will be more.  If the requirement for the project is a fast time of completion and a low cost, then the scope or deliverable will be compromised.  Finally, if the scope requirement is high quality for low cost, the project will take longer.  This is predicated on the understanding that the constraints are fixed toward the goal and optimization to meet the scope requirements which fluctuates for each project.  The customer defines the priority of these constraints and because of this all grades of value creation are produced to satisfy the variety of customer priorities and capitalize on the current market.  The collapse in oil prices and their anticipated, albeit prolonged, resurgence has fundamentally changed customer priorities and how their interests are best served.  This is clearly the case with the marine seismic streamer market which is defined through the planning and execution of projects where equipment and personnel resources migrate from one project to meet one set of requirements and then to another project with different ones.  The market has changed dramatically and therefore so has the time and money equation.

Since oil prices plummeted in mid-2014, the current operating global marine seismic streamer fleet has been continually adjusting in pursuit of market stabilization.  Market stabilization would mean a global fleet of seismic vessels that would satisfy the global demand for offshore operator’s projects.  In such a market, operators would require enough seismic streamer survey services to keep vessels busy and allow service providers to make a profit.  (The industry is still awaiting this mythical balanced market.)  Truth is that dynamic markets driven by competition and innovation are always in flux.  Competition within the markets introduce new strategies and technologies, as well as new players.  The oil and gas industry is defined by boom and busts cycles.  A major collapse in the industry happened in the early-mid 1980s in the US.  However, there was not a substantial marine seismic fleet then.  Again, around 1999, there was also another down-cycle that affected marine seismic streamer vessel utilization.  So, the marine seismic streamer market has seen companies come and go.  In the past, companies have often absorbed vessels through mergers or acquisitions of fleets.  This had meant that the global fleet continued to increase overall while the number and names of service providers changed.  Technology improved, capability to drill in deeper water corresponded with more and larger survey sizes.  New vessels were introduced that could tow more streamer capacity and therefore complete surveys more quickly.  While oil prices topped over $100 USD / bbl in the expanding market, the low-threshold of $70 USD/bbl  was considered acceptable for growth.  Oil prices have remained well below $70 USD /bbl for over 18 months.

The market for marine seismic streamer surveys was expanding, which provided the incentive for new players and/or vessels to compete.  In this market environment, there was demand for marine seismic streamer services.  Also, new players and vessels were introduced which then provided operator’s more choices.  My first blog was posted 15-May-2015 and was titled The Seismic Vessel Over-Capacity Problem (originally posted on LinkedIn™ Pulse).  The article explains that too many marine seismic streamer vessels had entered the market which had already been changing prior to the collapse in oil prices in mid-2014.  Some market correction was inevitable when the rate of expansion and opportunities reduced.  New companies, as well as the established players, introduced new vessels, methodologies, and technologies.  However, in spite of the capital investments and improvements in capabilities and efficiency the profit margins for services decreased.  The time-cost equation for the pre-collapse market was built on a continuous areal increase in demand for marine seismic streamer services where time was the prioritized constraint.  The main expense for these services is the vessel day rate.  Essentially, all terms and conditions pivot around how many days a vessel will be needed to complete the project.  In this environment, increasing the vessel streamer tow-capacity meant that more area could be surveyed in less time.  However, there are different ways of looking at this.  The table below shows a rough estimate performance improvement with added streamers.  From Table 1, a vessel towing 10-streamers compared to a vessel capable of towing 14-streamers could  complete a survey in about 71% of the time.   Time is money.

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In the future, instead of striving to be right at a high cost, it will be more appropriate to be flexible and plural at a lower cost. If you cannot accurately predict the future then you must flexibly be prepared to deal with various possible futures. ~ Edward de Bono

Obviously, the highest type of efficiency is that which can utilize existing material to the best advantage. ~ Jawaharlal Nehru

Another incentive to completing a project more quickly, of course, is that there is reduced exposure-time risks from delays.  There are some geographic areas where there are defined windows that only allow successful operations to acquire quality data that can be used for imaging the subsurface.  This may be because of weather, currents, or marine life migrations, to name a few.  Regardless, when streamers are operating, the equipment needs to be monitored and maintained.  Ideally, seismic streamer operations want to have customers paying for their vessels and streamers as many days as possible.  The geographic location of one project to the next is important because it costs both time and money to move vessels, equipment, and other resources from one location to another and start new projects.  This transit time is expensive, especially in a low profit margin environment.  Vessels are using fuel but mostly are not operating as seismic data acquisition platforms, which is their value-creation function.  In the expanding market, service providers fleet size mattered.  To reduce the expense of vessel transits project campaigns could be planned regionally.  For instance, there are always anticipated migrations southward from northern climes, such as the North Sea, to projects in the warmer and milder south each year.  Because of the extra cost due to transits, the expanding market also made it more difficult for companies operating smaller fleets to compete because of the costs incurred going to new projects.  A series of short duration projects would most affect service provider’s through additional transit costs. 

Offshore operators may not admit it now, but service providers were actually optimizing both the project time constraint and cost constraint prior to the decline in oil prices.  This was due to the hyper-competition brought about by the vessel streamer capacity that was being added into 2014.  In fact, several companies, including, WesternGeco (WG), and Dolphin Geophysical (Dolphin) all added high-capacity vessels into their operational fleets following the collapse in oil prices mid-2014.  (CGG had also acquired relatively new capacity through their acquisition of Fugro Geoscience prior to the collapse.)  Table 1 shows that the project time benefit from towing 12-streamers rather than 10-streamers (20%) is more than the respective gains of towing 14-streamers rather than 12-streamers (16.7%), and the actual gains are even less for 16-streamers versus 14-streamers (14.3%).   The new-builds added to the global fleet were high-capacity vessels, but each addition of two-streamers tow capability yields less efficiency benefit.  In a low-margin pricing environment tow-capacity offered a pricing buffer.  If the table is considered as cost rather than project time, then a vessel capable of towing 14-streamers had a 16% cost buffer over a 12-streamer vessel to work with.  Of course, there were increased operational costs with added streamers as well.  Aside from just the actual cost of the streamers themselves, the cost of peripheral positioning equipment which accompanies the streamers is significant.  Operating and maintaining larger spreads with a variety of specialized equipment adds costs.  Operationally, wide spreads require vessels with a lot of power to tow many streamers and also larger deflectors to maintain the width and separation of individual streamers during the project.  The main cost for marine seismic streamer operation are the vessels themselves.

The increase in the global fleet’s vessel streamer tow capability effectively reduced the duration of projects for customers.  However, the net-benefit of the additional tow-capacity is reduced as the number of towed streamers increases, especially when considering the cost of new streamer along with all of the required peripheral equipment.  The net-benefit is also reduced because of the operational and maintenance issues, but perhaps this is balanced out by less environmental exposure risks, especially in the realm of health and safety.  It is the equipped vessel which commands the rate.  This equipment includes the streamers themselves along with the positioning – navigation – equipment.  The seismic and positioning data needed for processing and imaging the subsurface is the customer deliverable.  This is what’s acquired with the vessel and other equipment.  As streamer-spreads have become wider and longer, equipment improvements in maintaining streamer and source positioning, along with the way such copious amounts of data are recorded and stored, have been simultaneously developed and improved.  The objective for all of these improvements is to acquire data which will provide information to direct drilling campaigns.  It’s about the data.  To this end, another problem that is exacerbated with towing wider spreads is the loss of near-offset data.  Seismic data is imaged by the mid-point between the seismic source (i.e., air guns) and the seismic sensors within the streamers.  As the extent of the seismic streamer spreads got wider, this mid-point increased as well thus losing the ability to image well between the source and front-end receivers, or near-offset data, needed for the imaging of shallow targets.  Also, in congested areas, fields with infrastructure such as drilling platforms, larger spreads may be problematic for maneuvering the vessel and streamers.

When our maps do not fit the territory, when we act as if our inferences are factual knowledge, we prepare ourselves for a world that isn’t there. If this happens often enough, the inevitable result is frustration and an ever-increasing tendency to warp the territory to fit our maps. We see what we want to see, and the more we see it, the more likely we are to reinforce this distorted perception, in the familiar circular and spiral feedback pattern. ~ Professor Harry L. Weinberg

Knowing where things are, and why, is essential to rational decision making ~ Jack Dangermond, Environmental Systems Research Institute (ESRI)

 

Time efficiency has paralleled cost efficiency in the marine seismic streamer acquisition market, thus incentivizing adding new-builds capable of wide-tow/large spreads.  In an expanding market with limited vessels, service providers could charge a time premium on their wide-tow capable vessels.  However, in an over-capacity market with several wide-tow capable vessels to choose from, cost efficiency is prioritized.  Cost efficiency boils down to the value of time versus the savings in costs.  If vessel cost base paralleled the project time gains in Table 1.0, then customers would be willing to pay 16% more in vessel costs for a completing the project 16% faster.  This would make time neutral, which may happen with a short project.  Since the collapse in oil prices mid-2014, cost has certainly become the more dominant constraint for most customers.  New vessels are expensive.  In reality, there is no parallel between cost and time, not even within a single seismic service provider, much less between competitors.  Cost base is essentially cost of operating a vessel.  Newer vessels likely cost more than older vessels.

One seismic players high-end price for a new-build (2013) high-capacity vessel capable of towing 18-streamers at 100 meter separation was in the neighborhood of $285 USD million.  The same company also signed a lease-back agreement for and older 10-streamer vessel for $80 USD million.  Table 1 shows that older vessel would take approximently 1.8 the amount of time to complete a project, but the cost (base) of the high-capacity new-build is about 3.56 the amount of the older vessel.  These new-builds were contracted when the market was expanding whereas the older vessel was leased-back following the plunge.  So, do the vessels that were contracted to be built in an expanding market still hold the same value after the collapse?  Probably not.  Nevertheless, vessels were purchased on the high-side of the curve.

After the market collapsed, service providers began to take the older and less expensive vessels out of the market and cold-stacked them.  They did not sell-them (and flood the market with low-cost competition).   Dolphin was the newest player into the expanding seismic market and the first to enter into insolvency after the crash.  Dolphin was expanding and had leased two new vessels, Sanco Sword and Sanco Swift, from Sanco Shipping ASA (Sanco).  Polarcus was able to purchase the streamer package from insolvent Dolphin for a song.  Cost is a priority.  Even though there are many fewer vessels in operation than there were at the start of 2014, several tabled projects have been due to prior license agreement commitments.  Offshore operators do not want to throw money away and likely want the “best data” that they can™.  However, as I wrote about in, Upstream Exploration and the Paradox of Choice, many strides have been made in both the acquisition and processing/imaging of seismic data.  The main milestone, in my view, has been the commoditization of broadband marine seismic streamer data.  Most of the innovative acquisition techniques are accompanied with designed processing and imaging.  In the world of competitive bidding, commoditization of requirements comes at the expense of differentiation such that cost remains a priority.   Even though service provider’s have reduced their fleet sizes, there remain limited deep water projects planned.  There needs to be a sustained period with oil prices over $70 USD/bbl for any real jump-start demand for marine seismic streamer surveys.  The global fleet had been growing faster than the rate of opportunities into 2014.   The fleet will continue to grow until Ramform Hyperion begins operations Q1 2017.  Streamer capacity utilization will be the most important performance indicator for service provider’s.  In a mixed fleet of 2D/3D and varied streamer tow capacity, vessel utilization alone is not enough to benchmark performance.  For instance, a 2D vessel working and a 12-streamer vessel stationary could be described as 50% vessel utilization.  The only benefit of a wide-tow vessel is if it is towing its maximum capable capacity.  If a vessel does not achieve that, then it is under-performing and not using its performance buffer.  A better indicator of fleet performance would be fleet streamer capacity utilization as mostly reflected by the use of the high-end and wide-tow fleet – the newer and more expensive vessels capable of towing more streamers.

Since cost is such a priority and so much of marine seismic streamer acquisition is directly related to the large streamer vessel, there is more interest in other marine seismic acquisition techniques, such as ocean bottom cable and nodes.  This reality has influenced an already staggering marine seismic market.  However, if time no longer is a premium or priority, these methods offer alternatives especially in areas where the operational time advantage is not as beneficial, especially congested areas.  More bang for the buck is what is needed.  Polarcus’ XArray™ reduces streamers and adds a source which reduces the tow-weight and drag from streamers for one thing.  The principle of reciprocity ensures that the point images between source and streamer receiver is the same as the point streamer receiver and source.  The ability to remove subsequent shot data in processing allows for additional sources with reasonably spaced shot intervals.  CGG can utilize less expensive older vessels to tow the source in the middle of the spread and accompany the streamer vessel in their TopSeis™ technique to help image near offsets.  So, there continue to be many new offerings for customers to consider.  However, many operators are skeptical of tendering new technologies in general because of the risk.  Strong EM pulses have been known to disable or destroy electronic systems.  This is what I studied in college.  Towed EM, which acquires data simultaneous to seismic data, would have fundamentally different electronic geophysical and positioning measurement systems operating at the same time.  What noise or interference one system imposes on the other would need to be evaluated.  Gravity data has already routinely been acquired with seismic.  Introducing multiple seismic sensors, now 4C with WG IsoMetrix™, into a towed streamer has showed the benefits of broadband data.  At the same time, each sensor introduces new types of noise, maintenance, and data processing issues.  Solving the same issues between EM and seismic means multiple geophysical data sets simultaneously and shows great promise.  In the expanding market, many new methods and technologies were developed.  The challenge in a cost sensitive environment is to employ the new technologies in an effective way to reduce the cost and risks to offshore operators because few will want to take additional risks with so much market uncertainty in the horizon already.

History in its broadest aspect is a record of man’s migrations from one environment to another. ~ Ellsworth Huntington

 There are three types of innovations that affect jobs and capital: empowering innovations, sustaining innovations and efficiency innovations. ~ Clayton M. Christensen