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Content Revised 14 November 2013 by Request of Company to Remove their Named Reference

Even before the latest drop in oil prices, the marine seismic service sector was facing challenges.  The number of marine seismic vessels and crews available to perform surveys was more than adequate for the number of surveys planned.  In such a competitive climate the industry had responded with new technologies and techniques to bring more value, standout, and otherwise entice customers.  And then the price of oil dropped – quickly.  This was followed by reductions in exploration spending and more tentative market conditions.

That’s the place where marine seismic service companies find themselves now.  There are less surveys being planned along with a surplus of vessels and capabilities available.  There is little doubt that shared spending and resource allocation to onshore activities, such as hydraulic fracturing, have had an impact on offshore exploration expenditure.  The Macondo catastrophe in the Gulf of Mexico also impacted US domestic offshore exploration programs.  But, the marine seismic sector especially, and the geophysical exploration industry in general, has never been stable.  Exploration has always followed the peaks and troughs of oil prices.  And right now – again – the geophysical exploration cycle is in a trough.

Geophysical exploration is regarded as an essential part of the oil and gas value chain.  Seismic data remains the most common and preferred data and so activity in this sector provides an indicator of upstream spending and priorities.  Marine seismic acquisition is not inexpensive, but it is generally much less expensive than any subsequent drilling operations.  This is especially the case if the drilling results in a dry hole.  While seismic surveys by no means guarantee discovering commercial quantities of oil and gas to exploit, it is even less likely without such data.  To punctuate this point, in 1982 the most expensive dry hole in history was drilled in the Mukluk region offshore Alaska.  Explorationists at the time predicted the new Prudhoe Bay.  In the end, around 1.5 billion US dollars was spent on a dry hole.  Nothing can humble an industry more or justify risk averse behavior than a cataclysmic commercial failure.  Oil and gas exploration and exploitation is inherently risky and expensive enough to justify caution.

The vessel over-capacity problem is most visible in the 3D seismic streamer sector.  Since the drop in oil prices, many marine seismic contractors announced fleet reductions in anticipation of reduced oil company exploration budgets.  Not all of the marine seismic streamer contractors have provided details with respect to which vessels will be taken out of commission, they have provided broad indications.  CGG will reduce their fleet to 11 vessels from the 18 in operation at the end of 2013.  Schlumberger’s WesternGeco also announced a fleet reduction from 15 down to 9 vessels.  Polarcus is reducing their fleet from 7 vessels to 6.  Another seismic survey vessel owner announced it will be stacking two of its vessels after the North Sea season, reducing their 3D fleet from 12 down to 10.  On the other side of the coin, Dolphin Geophysical recently christened a new vessel bringing their fleet up to 8 vessels.  BGP manages two 3D capable marine seismic vessels and Seabird Exploration one.

Global marine seismic contractors with fleets large enough to service different markets simultaneously have indicated that they are removing older and less efficient vessels from their fleets.  Schlumberger’s WesternGeco added two Amazon class seismic vessels capable of towing 18 streamers in 2013 and 2014.  CGG acquired additional capacity through their 2012 acquisition of Fugro Geoscience.  Two large capacity vessels capable of towing up to 24 cables each were introduced to the seismic streamer market during 2013 and 2014.  Dolphin Geophysical has also expanded their fleet by adding and upgrading three vessels capable of towing 16 streamers in 2013 and 2014, and also christening a vessel capable of towing 22 streamers in 2015.

Clearly, the new builds were planned prior to the latest drop in oil prices and therefore it is likely that some retirements were also already planned.  But, the scale of fleet reductions seems to indicate a bearish outlook on exploration longer than anticipated.  The big question is, are these fleet reductions enough under prolonged weak market conditions?  While the number of vessels taken out of service appears to be large, the capacity of new builds is more than double some of the older retirements.  Is there enough square kilometers planned to be surveyed when newer vessels can complete over twice as much area in less than half the time?

Certain marine seismic contractors have been more forthcoming about these details than others.  However, from making a list of vessels along with their age and streamer capacity, most all of the remaining vessels will be able to tow at least 12 streamer configurations.  Planned work that may have kept two older 8 streamer capacity vessels busy can now be completed in less time by a single newer high capacity vessel.  But, even some newer 12 streamer capacity vessels are being stacked.  So, if there is an upward turn in market conditions toward the end of the year, some of the high end stacked vessels could quite easily be brought back into production.  This is a difficult time to navigate the market.  Older fleet vessels will be stacked in mid-late Q3 2015.  However, two more high capacity vessels will be added to global fleet in Q1 and Q3 2016.  In 3D marine seismic efficiency is generally considered by what area can be surveyed over a certain time.  The incentive has been to tow as many streamers covering as wide an area as possible.  From this perspective, inefficient vessels are the ones that are capable of towing the least number of streamers (recognizing that in some cases it may be preferred to tow fewer cables for technical or operational considerations).  But, the number of operational vessels must also be considered in terms of the residual change in active streamer capacity.  It is a balance between reducing vessels with lower towing capacity while introducing newer vessels capable of towing more streamers.  Since scheduled new builds are not all completed and relatively new high capacity vessels are being stacked, this makes for a richly competitive and uncertain market dynamic.

Vessel availability is only one part of the exploration equation for operator companies.  Marine seismic contractors differentiate themselves through new technologies and capabilities in addition to cost base structures to be competitive and win the work.  How much premium operators are willing to invest into these differentiators is likely on the minds of all the marine seismic service providers during this lull in spending.  The competitive market conditions over prior years has inspired step change technology advances.  The quality of subsurface imaging available has improved through new advances in acquisition instruments and systems, innovative acquisition geometries, and more sophisticated data processing and imaging capabilities.  Operators do not want raw unprocessed data.  Differentiation in terms of these added products and services must obviously come into play when determining which contractor is commissioned to conduct a survey.  But, since seismic data acquisition cost much more than processing the data, the cost of data acquisition is a likely a key differentiator in a competitive market.  On the one hand, this is the best time for operators to invest in surveys for future growth.  But, the dramatic drop in oil prices has reduced the amount of capital readily available to do this.  How long oil and gas operators keep the tourniquet on offshore exploration and development, as well as how this will be balanced with any resurgence in hydraulic fracturing is critical and at the core of the seismic vessel capacity problem.