Making a good recovery
`from: Offshore Engineer
`by: Andrew McBarnet
`Monday, March 14, 2005
`
`After so many false dawns over the last five years, the marine
`seismic market is finally showing signs of revival. Andrew
`McBarnet reports on the challenges that increased demand may
`present.
`
`
`
`In fact the rehabilitation process has been under way for quite some time. The
`major players in marine seismic have been turning in some dramatically improved
`2004/05 results, backlogs are at their highest for some years, and sharp rises in
`stock price are in progress at Schlumberger (70% owner and operator of
`WesternGeco), Petroleum Geoservices (PGS), Compagnie Générale de Géophysique
`(CGG), Veritas DGC, TGS Nopec and Fugro.
`
`Increased spending in 2005 by E&P companies, variously estimated by analysts at
`between 5% and 15%, is expected to fuel the current surge in demand for marine
`seismic surveys. Experience suggests that this will carry over at least until 2006.
`Seismic business people must obviously wonder what has changed to bring about
`this change of emphasis, if only to check whether it will last. It has been open to the
`oil companies, with the profits from higher oil prices, to have focused on more
`exploration any time in the past few years. Instead, a jaundiced seismic sector has
`sensed that impressing the stock market through asset deals to increase reserves,
`streamlining their businesses, and buying back their own shares, have been the
`priority for oil companies.
`
`Particularly during the last couple of years when it defied logic for oil companies to
`hold back on exploring for new reserves, seismic companies have just had to keep
`telling themselves it had to happen sometime, if only because there is a limit to how
`much can be squeezed out of existing assets. Indeed, realizing that they were
`fighting a losing battle with regard to pure exploration spending, geophysical
`contractors have been concentrating on developing technology such as 4D seismic to
`show that their expertise can be used to optimize reserves recovery from existing
`and future oil and gas developments. Reservoir seismic has as a result come on in
`leaps and bounds, but it is still not mainstream.
`
`PGS in a recent investor presentation showed a calculation by Enskilda Securities
`which demonstrated that there was a 49% mismatch in the historic correlation
`
`between exploration and development. It concluded that the ‘under-investment’ in
`exploration was evident from the low levels of drillable prospects available, failure by
`oil companies to reach production growth targets, and a declining reserve]
`production ratio. Enskilda forecast that exploration activity would continue to rise to
`address these issues, which is what appears to be happening.
`
`WESTERNGECO Exhibit 2112, pg. 1
`PGS V. WESTERNGECO
`IPR2014-01475
`
`WESTERNGECO Exhibit 2112, pg. 1
`PGS v. WESTERNGECO
`IPR2014-01475
`
`

`
`If we are looking for the catalyst in all this, global strategic considerations
`highlighted by the war in Iraq have raised some red flags for the oil industry. A
`combination of Middle East tensions and supply worries, anti-US sentiment in many
`countries, and increasingly fierce competition from China and India for E&P
`concessions and production contracts around the world, is beginning to cause
`consternation. It doesn't help either that the Middle East and Russia between them
`appear to hold much of the world's future oil reserves, and that national oil
`companies control far more oil and gas resources than all the Majors and
`independents put together.
`
`Best recent example of the mindset comes from David J O'Rei||y, chairman and CEO
`of ChevronTexaco. He told the recent CERAWeek conference in Houston that ‘the era
`
`of easy access to energy is over. In part this is because we are experiencing the
`convergence of geological difficulty with geopolitical instability. Although political
`turmoil and social unrest are less likely to affect the long term supplies, the
`psychological effect of these factors can clearly have an impact on world oil markets,
`which are already running at razor-thin margins of capacity.’ Rather scarily, O'Reil|y
`went on to outline the more robust strategy which the US should adopt to ensure its
`vital supplies of energy.
`
`Richard Price, vice president of marine seismic operations at Veritas DGC, speaks for
`many when he says that the recent upsurge in marine seismic activity is
`'sustainable'. In theory, it should not take too much of an uptick in demand to
`stretch the world's marine seismic fleet, particularly at the high tech end of the
`spectrum. Over-capacity, the cause of so much trouble, is certainly less marked than
`it was. WesternGeco led by example in reducing its fleet size from nearly 30 vessels
`to 12 3D vessels, slapping some strongly worded covenants on the retired units to
`ensure that they did not reappear under a new flag a few months later. PGS
`maintains its six Ramforms and three other 3D vessels; Veritas has a fleet of five 3D
`vessels as does CGG (plus a substitute for the Mistral which was lost in a fire). Fugro
`and Multiwave Geophysical also have some 3D capacity, and that's about it.
`According to an internal PGS marketing analysis last year, PGS and WesternGeco
`between them were responsible for over 60% of the total contract and multi-client
`3D seismic acreage shot in the 12 months of the study (split more or less 50:50).
`CGG and Veritas each shot around 10% with Fugro and others making up the
`balance.
`
`A sustainable recovery implies more than strong demand. It is nice to have clients
`queuing up for vessels, but contractors still have to improve margins and not chase
`the market down. Last August, CGG raised some eyebrows by sealing a contract with
`ONGC of India to carry out 19 separate surveys over 13,000km2, mainly in the
`Bombay High Basin, with a bid of $103 million, understood to have been well below
`the competition.
`
`The grumblings may have just been sour grapes, but the fear of market discipline
`breaking down is clearly real.
`
`word from TGS-Nopec in its financial reporting last month was encouraging on the
`pricing score. The company suggested that vessel contract rates in general have
`already increased 10-20% from the ‘trough’ levels of 2002 and 2003. TGSNopec is
`worth heeding. It was the smart company which escaped the maladies affecting most
`of the marine contracting companies with its business model of leasing vessels on
`
`WESTERNGECO Exhibit 2112, pg. 2
`PGS V. WESTERNGECO
`|PR2014-01475
`
`WESTERNGECO Exhibit 2112, pg. 2
`PGS v. WESTERNGECO
`IPR2014-01475
`
`

`
`short-term charters and not owning them, and by focusing exclusively on well(cid:173)
`supported multi-client surveys.
`
`Even in this more buoyant market, the challenge for the marine seismic business is
`to extract full value to reflect Its capital investment, technology and expertise. The
`lurking danger is the 'commodity' word. Following the market slump of the late
`1990s, when contractors would buy jobs in order to keep their vessels working
`rather than laid up, It was easy for oil company clients to get the idea that 3D
`surveys were much the same whoever did them, It was just a matter of picking the
`cheapest. It is said that plenty of national oil companies still think this way,
`especially as many want to keep costs to the minimum and may lack the In-house
`expertise to be more discriminating.
`
`WesternGeco, under the guidance of Schlumberger, has to be respected for the way
`that it has spent an inordinate amount of money and research resources on
`technology to differentiate itself from Its competitors. Last October the company
`added the Western Regent as the fifth vessel in its growing fleet of QMarlne seismic
`vessels for which it is able to charge a premium price. No one seriously doubts that
`Q-Technology, claimed to be the only fully calibrated, point-receiver marine seismic
`acquisition and processing system, has the potential to produce excellent image
`quality and repeatability. This makes it especially attractive to companies carrying
`out 40 seismic survey work using towed streamers. Last autumn, Petrobras selected
`WesternGeco to carry out the world's largest 40 seismic project to date over the
`Marllm complex, offshore Brazil. The five month survey was to be carried out by the
`Western Pride towing 10 cables each 6000 m long with SOm streamer separation.
`
`WesternGeco's revenue from all QTechnology applications (including land) grew from
`$79 million in 2003 to $162 million in 2004 with similar growth predicted for this
`year, according to Schlumberger's most recent financial reporting on the company.
`Interestingly multi-client sales (mainly in the Gulf of Mexico) also contributed
`substantially to WesternGeco's return to profitability in 2004 with a pretax operating
`income of $124 million compared with a loss of $20 million In 2003.
`
`The over-Investment in multi-client marine seismic to keep boats busy, and the
`wildly optimistic accounting of the value of multi-client libraries, were a contributing
`cause to the problems felt by most of the marine contractors a few years ago. Yet,
`there was never anything fundamentally wrong with the multiclient idea, especially in
`the Gulf of Mexico where the licence areas are too small for the commissioning of
`proprietary surveys. Aggressive marketing of multi-client libraries and some new
`surveys can be expected from all the main contractors. PGS, Veritas and CGG all
`have significant multi-client data and can be expected to be on the look-out for
`suitable opportunities to add to their libraries, more often than not with special
`processing packages to bump up the value.
`
`Always up with the game, TGS-Nopec Geophysical, which deals only in multiclient
`surveys, last year added NuTec Energy, a Houston processing house, to its armoury.
`Hank Hamilton, CEO of TGS-Nopec, said at the time of the acquisition that NuTec's
`tools would enable the company to provide custom 'add-on' depth imaging solutions
`for existing data licensing customers.
`
`More or less unannounced, PGS has vessels to a form of solid streamer. This is
`differentiation of a sort, in that solid streamers are said to provide a more stable set-
`
`WESTERNGECO Exhibit 2112, pg. 3
`PGS v. WESTERNGECO
`IPR2014-01475
`
`

`
`up for seismic acquisition, better performance in marginal weather and less hazard to
`the environment compared with liquid filled cables. Western Geophysical some years
`ago was the first company to adopt the solid streamer using technology from
`Australian company Thales Underwater Systems, which developed the Sentry and
`Guardian cables and is now into a third generation.
`
`However, the solid streamer route has not been pursued by WesternGeco, which
`inherited Western Geophysical vessels in the 1999 merger. Instead, it uses its own
`proprietary cable for Q-Marine. Up to now, Veritas has been the most enthusiastic
`advocate of solid streamer technology. Four of its five 3D vessels have been
`converted to solid streamer, not a cheap investment. CGG‘s highly profitable, seismic
`acquisition system manufacturing subsidiary, Sercel, offers a solid cable, but CGG
`has not so far converted any of its fleet, probably on the grounds of expense.
`
`PGS working with Teledyne Geophysical Instruments, a US-based cable
`manufacturer and repair specialist which has produced all PGS streamers in the past,
`has got round some of the cost issues by effectively filling conventional cables with a
`gel mixture to give them the performance characteristics of solid streamers. So far
`just one vessel, Atlantic Explorer, has been refitted with the RDH solid streamer, but
`the plan is convert the entire fleet in due course. Bill Kikendall, Teledyne general
`manager, says the conversion is timely. ‘Given the useful life of streamers, I can see
`that in the next three or four years, there is going to be a general industry need for
`major capital investment in new streamers.‘ Currently an average towed array of
`conventional streamers, with all the instrumentation which goes with them, for one
`vessel probably costs in the order of $15-20 million.
`
`In its pitch for towed streamer seismic survey work, PGS likes to emphasize its HD3D
`acquisition system, which promotes the value of high trace density recordings and
`superior wavefield sampling. It argues that at a much reduced cost, the closer
`streamer separation used in HD3D can achieve much the same result as Q-Marine in
`terms of high quality imaging. Andrew Long, technology manager, PGS Geophysical,
`says ‘more and more surveys will be customized at the acquisition stage to provide
`the best platform for specific processing technologies. That has been a major push
`for us in driving the HD3D market, in other words a better platform for processing in
`a very cost-effective and robust manner.‘ Long adds that better spatial sampling on
`its own is not necessarily enough. PGS has been working with multi-azimuth
`streamer surveys with more than one shooting direction to improve illumination, for
`example below complex salt bodies in the Gulf of Mexico.
`
`Veritas is taking much the same approach as PGS in its belief that a package of
`acquisition and distinctive processing can separate it from the pack. The company
`has also built up something of a reputation for sub basalt imaging using long offset
`techniques, for example in the northeast Atlantic margin. Where the company has
`stolen a march on all its competitors has been in its involvement with the UK
`government's Promote licence round designed to encourage new players into the UK
`offshore exploration activity who can work up prospects without all the commitments
`of a full licence. Veritas advised the UK Department of Trade & Industry on the
`setting up of the licences and currently has 100% interests in 11 of the 21st and
`22nd Round Promote licences covering 12 blocks in the UK central North Sea. In the
`last few months it has come to agreements with Kerr-McGee North Sea and Maersk
`Oil (UK) on farm-ins for two different blocks in the central North Sea on the basis of
`work carried out by Veritas.
`
`WESTERNGECO Exhibit 2112, pg. 4
`PGS V. WESTERNGECO
`|PR2014-01475
`
`WESTERNGECO Exhibit 2112, pg. 4
`PGS v. WESTERNGECO
`IPR2014-01475