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

Innovation, Differentiation and the Future of the Marine Seismic Streamer Market

Ah, I’d love to wear a rainbow every day, And tell the world that everything’s OK, But I’ll try to carry off a little darkness on my back, ‘Till things are brighter, I’m the Man In Black. ~ Johnny Cash, Man in Black

Reason is the natural order of truth; but imagination is the organ of meaning. ~ C. S. Lewis

An oil and gas operator company’s SVP of Exploration visits a convention where there are two geophysical service contractors.  Employees from one service contractor always tell the truth, and members of the other service contractor always lie.  The SVP enters at the doorway of the venue and needs to know how to navigate to avoid the service contractor that will provide a very costly and high risk project.  Of course, the SVP wants to choose the contractor that will allow the operator to plan a very efficient project that the operator company needs to be successful.  The operator’s future viability is at stake and rests upon the projects outcome.  At the entrance is a representative of each service contractor, but the SVP cannot tell which contractor each belongs to.  What question should the SVP ask to find the path to project success?  The SVP only needs to talk to one of the service contractor representatives.  What is important is that the SVP phrases a question such that the response will be the same from both service company representatives: a question that incorporates how a representative of the service company not answering would respond to the same question.  The SVP could ask one of the service company representatives: which way would the other service company representative tell the SVP to go to get to the booth of the honest service company?  If the SVP queries the representative from the honest service company, the representative would reply the other service company would tell you to go to the booth on the left.  If the SVP queries the representative from the dishonest service company, the representative would reply that the representative from the other service company would also tell the SVP to go to the booth on the left.  The SVP knows to visit the booth on the right, where the honest service company representatives are.  The key to risk mitigation is asking the right questions more so than just accepting the answers to the questions themselves. (Some readers may recognize the O & G operator company focused story as a rendition of the classic Island with Truth-tellers logic problem.) 

From reading the recent article, Seismic Specialists Sense Light at the End of the Tunnel combined with another article (not related to the marine seismic industry), Optimists and Pessimists, I considered how to frame an analysis of the current marine seismic market.  Optimism and pessimism are risk-based views that are both subjective and contextual.  Optimism and pessimism should both be fact-based views.  What may seem dangerous to one decision-maker may be viewed as an opportunity for another.  The substantive facts of the situation can be the same, but the viewpoint is different based on the separate realities and perspective of decision-makers.  Optimists see opportunity where pessimists don’t.  When the traditional market is not revealing opportunity, optimists will look to change that reality through some kind of market disruption. There is power in positive thinking, but the importance of thinking – strategy and planning – cannot be understated.  True optimism or pessimism must be grounded in reality and the strategic vision to navigate through that reality.  Hollow predictions based wholly on hope or despair are more lottery than strategic vision.

Within the article, Seismic Specialists Sense Light at the End of the Tunnel, the CEOs share their views on the future of the marine seismic streamer market These two companies have also been the focus of marine seismic streamer market analysis which I have written and posted on LinkedIn™ over the past year.  Both are pure play marine seismic streamer data acquisition and processing service providers with the same customer base, in many respects.  However, since the dramatic drop in oil prices the marine seismic streamer fleet has been decimated.  The majority of the reductions have come from the companies that once commanded the largest fleets.  CGG and Schlumberger’s WesternGeco (WG) significantly reduced their presence in the marine seismic streamer market and made the largest slashes to their fleets.  However, both still do continue to operate smaller fleets of marine seismic streamer vessels.  Dolphin Group ASA (Dolphin) collapsed into insolvency.  Dolphin had operated chartered vessels from GC Reiber and Sanco Shipping ASA.  Dolphin Geophysical is now a subsidiary of vessel owner GC Reiber.  BGP had operated a modest seismic streamer fleet in comparison prior to the price collapse.  They have maintained their fleet, but also like Schlumberger and CGG had been more diversified beyond marine seismic streamer services.  Marine seismic streamer vessels are expensive to operate and maintain.  The decline in oil projects precipitated by the decline in oil prices reduced the number of deep water exploration projects substantially.  This impacted the companies with the larger fleets especially hard.

The Global 3D Marine Seismic Streamer Fleet

While it is true that both serve the same customer base, there is no simple apple-to-apple comparison between these two companies.  While trust is an essential criteria for any SVP of Exploration (fictional or real) to consider when contracting a service provider, there are different solutions being offered to solve the operator’s particular problem which includes several specific components of consideration.  There is no simple binary – true/false – answer in choosing between two principal companies to solve a complex problem.  Add to this that there are several alternative solutions available.  For simplicity, however, these two companies can provide different perspectives of the marine seismic streamer market to extrapolate from.  The stark differences in how these two companies approach this current market are first apparent from looking at their fleets and different operational strategies.  The classic delta-shaped hull of the Ramform design, which defines one fleet, contrasts with the X-bow™ design of the the other fleet.  The one design looks made for wide-tow operations.  The back decks are equipped with many streamer reels.  (Actually, these reels mostly are to accommodate HD3D acquisition.)  In HD3D acquisition more closely spaced streamers are towed for a denser dataset.  Wide-tow acquisition is more so facilitated through the use of “doors” which are towed to the port and starboard of the streamer spread to maintain its width.  Polarcus actually has operated the widest, and largest by area, spread.  Polarcus’ Xarray™ solves the data density equation through employing fewer streamers and adding more sources.  Interference from the more closely spaced shots are removed through data processing.

Efficiency innovations arise in industries that already exist. They provide existing goods and services at much lower costs. They are not empowering. Efficiency innovators become the low cost providers within an existing framework. ~ Clayton Christensen

Progress is measured by the degree of differentiation within a society. ~ Herbert Read

Operating more streamers in the water has been at the crux of the marine seismic streamer operational efficiency equation.  Maintaining the proper relationship between source and receiver requires additional technology to maintain the geometry of the streamer spread.  Marine seismic spread positioning – navigation – has also developed over the years.  More streamers in operation also require more in-sea equipment to control the spread.  This additional equipment must be monitored and maintained during acquisition, along with the streamers themselves.  Prior to 2007, streamers contained single-component hydrophone receivers.  Two-component dual-sensor receiver changed this norm.  The combined attributes of the hydrophone and particle-velocity sensor is what ushered in the broadband revolution.  The reflected energy from the air-water interface cancels signal creating a notch (ghost-notch) of lost frequency content.  The ghost-notch is depth-dependent, but occurs at different bandwidths for different type sensors.  In response to the development of dual-sensor towed streamer technology, other contractors developed depth-varying hydrophone-only solutions employing the improved streamer control equipment.  Data processing techniques to accommodate the new geometries were also created with the improvements in computer power and algorithms. Now there are four-component streamers (WG/IsoMetrix™) in the market.  More equipment in the water has created more noise to affect the streamer sensors.  Multiple sensor streamers are especially sensitive to a greater range of signal-impacting noise and therefore streamers must be kept clean and free of foul/barnacles.  Larger spreads also require more fuel usage due to the added drag from more equipment.  Less equipment to manage in the water also can reduce HSEQ exposure risks.  Polarcus is reducing in-sea equipment and fuel usage and forwarding environmentally conscious efficiency.  Traditional players maintain traditional geometries and data-rich (two-component) datasets.  This demonstrates fundamentally differently solutions to solve customer problems.

There was over-capacity in the marine seismic streamer market prior to the collapse in oil prices.  However, profit margins were competitively lower than service companies would have wanted them to be to operate their expensive fleets.  Because of the expense of operating marine seismic streamer vessels, the survey vessels themselves became larger and capable of towing more streamers.  This translated into acquiring more geophysical data within less time.  The cost savings of operating an expensive vessel for less time could be passed onto customers.  This proved to be a winning solution when the price of oil was around $100 USD/bbl and there were a pipeline of exploration projects.  However, the equilibrium that the marine seismic streamer sector has been seeking for is there to be an ample number of projects being tendered or data sets required to keep the operational global marine seismic streamer fleet busy working for profit.  When oil prices declined, so did the required projects.  There were not enough projects to occupy a large global fleet which led to seismic streamer vessel owners cold-stacking (de-rigging and parking) vessels to balance the vessel supply with the declining demand for surveys.  There are less surveys in the pipe-line, while at the same time seismic streamer companies are asked to complete surveys more quickly.  This has led to innovations pressing the thresholds of operational capability, but also financial losses.  Completing projects quickly simple means there needs to be more jobs in the pipe-line for balance.  This has not happened.

Cold stacking high-capacity marine seismic streamer vessels and keeping them out of the market is not the same dynamic as if the vessels were not actually built and capable of operating within weeks.  There is so much flex-capacity in the market right now that it makes the supply side of the market elastic.  There will for some time be personnel that can be on-lined relatively quickly.  People who have worked five-week on/off vessel rotations for years do not forget what they once had mastered in months.  It can take months or years to design and bring a new-build into the market.  (CGG averted this waiting window through acquiring Fugro’s fleet.  In fact, much vessel capacity has been acquired through purchase of companies that had originally contracted for the new builds.)  Dolphin had only recently chartered high-capacity new builds before the price collapse and their subsequent insolvency.  WG had also introduced Amazon Class new builds into the market.  But, most notably, four high-capacity marine seismic streamer vessel new-builds were introduced into a more balmy and bright market outlook.  Several players introduced new builds into the marine seismic streamer market following the oil price collapse.  There remains a lot of idle capacity.

Confidence isn’t optimism or pessimism, and it’s not a character attribute. It’s the expectation of a positive outcome. ~ Rosabeth Moss Kanter

Pessimism and optimism are slammed up against each other in my records, the tension between them is where it’s all at. It’s what lights the fire. ~ Bruce Springsteen

The caution for a balanced market can be phrased in this way: when the market does turn the corner, there will likely not be a long a period of low survey vessel supply to allow higher price margins for a long enough period of time to recoup the substantial losses that have been incurred following the collapse in oil prices. (Sorry to be the man in black.)  On the demand side things are also not looking too positive, as there doesn’t appear to be much movement toward the magic market equilibrium either.  However, I believe that this business model has become less advantageous in a low project demand and high vessel supply environment that has defined the market since the collapse.  Further, the operating capacity has been reduced through the cold-stacking of some relatively new and high-capacity vessels.  These vessels are just looking for the right conditions to be re-introduced into the market.  Many of these vessels are specialty built for seismic data acquisition and can therefore be re-introduced and also meet stringent customer HSEQ requirements.  When money can be made from the vessels in dock, they will compete the current global fleet.  When the profit margins are very low or non-existent and simply minimizing losses, of course there is no reason to commission the vessels into operation.  Only when profits are again achievable will there be an incentive to re-introduce the idle capacity.  But, that point is not universal.  The cost-base for profit of one company may be very different for that of another.

On the project supply side of the equation, the overall O & G industry is awaiting stabilization in oil prices for a reasonable continual time-frame.  Oil prices dipped below $40 USD/bbl for the first time since April 2016.  Exploration has always been tied to oil prices during previous cycles.  Most exploration and field development in offshore-deepwater projects recently has been tied to prior offshore license commitments.  The oil majors have posted losses.  Their new reality is explained within Here’s How Exxon Mobil, Royal Dutch Shell, BP Are Affected by Low Oil Prices The article predicts that a recovery is not anywhere near.  The main customers of marine seismic streamer services are looking to cut costs and benefit from the synergies of acquisitions and merges.  In the past, companies have been able to offset losses in the upstream segment through increased activity in downstream segment.  But, there is an oil glut that has oil-tankers filled with crude waiting for some destination to offload the stuff!  The incentive for exploration under these circumstances is not too great.  When capacity is in stable demand, projects can be planned and tendered well in advance.  But, when prices are unstable and there is enough marine seismic streamer vessel capacity waiting for projects, operators do not need to tender and commit to projects too early.  In the past, depending on requirements, projects would be tendered 3-6 months in advance.  Now, there is less lead time coupled with uncertainty if there will even be a project tendered.  For the marine seismic streamer market to come into balance would require more projects to be planned for the upcoming Q3/Q4 2016 period compared to the Q1/Q2 2016 period.

As for the prediction of seismic specialists who also happen to be CEOs, the view of the market must be one that entices the investment of both capital and patience.  On the other hand, this analysis arrives from the viewpoint of an objective consultant who knows the industry but is not beholden to be a cheer-leader either.  The marine seismic streamer market has endured a tempest.  The destruction is visible in its wake: stacked vessel capacity, losses and debt, and disenfranchised workers.  There will be no quick or easy return to how the market was before mid-2014, just as the new-roof will never look entirely as the old roof did before the storm blew it away.  The market dynamic is forever different moving forward.  Both the business model requirements and technological solutions have changed.  Only prices need to stabilize within a reasonable (but, what’s reasonable?) range for over a quarter to be useful in the corporate planning world.  Demand for projects will be the bear-minimum until then.  On the other hand, operators will need to consider the variety of technologies and balance them with long-term objectives.  Oil companies also being short on capital will make them favor low cost-base service providers.  Marine seismic service providers will need to show the value that will be realized and change the view of the cost-base formula.  I predict a slow rise in oil prices which will translate on almost stable demand.  But, since new vessels are still being introduced, it will equate to slightly less demand for the global fleet.  The main concern for service providers will remain vessel utilization rates which will be stressed due to customer’s favoring operational efficiency with derivative being lower cost to them.  There is sun and a rainbow, but the clean-up is only just beginning.  As for which contractor the SVP of Exploration should choose?  Simple, the one that demonstrates trust.

After every storm the sun will smile; for every problem there is a solution, and the soul’s indefeasible duty is to be of good cheer. ~ William R. Alger

When did the future switch from being a promise to a threat? ~ Chuck Palahniuk