First Break: Seismic shift in technology
When accused of regularly forecasting a gloomy future for the marine seismic business as currently set up, this column is guilty as charged. There is no reason to rehearse all the reasons why the current economic model does not work. From a shareholding perspective over a couple of decades, there are only one or two companies that have consistently made money on the acquisition side (where the big money is to be made). Their formula for success can be summarized in the two words ‘asset light’. Others have profited from the highs of the good years but not enough to offset the lows of the cycle.
Despite this financial malaise, a feature of the period in question, and earlier years, has been the extraordinary inventiveness of the community of geoscientists which serve the industry. The hall of technology fame would include 2D, followed by 3D and then 4D marine seismic, controlled source electromagnetic (CSEM) surveys, ocean bottom seismic including permanent reservoir monitoring, and solid streamers. Not many industries can claim this level of innovation, and the list excludes the less capital-intensive changes in acquisition methods such as broadband, dual sources, and wide-azimuth. It also leaves out the huge advances made in seismic survey navigation and positioning, the use of massive computing power to process phenomenal volumes of data, plus imaging, visualization and other interpretation/data integration aids.
The trouble with much of this enterprising technology has been the near prohibitive capital cost and the inability to reap sufficient rewards in an over-supplied, highly competitive and volatile marketplace. Arguably a catalyst for a necessary disruption to the business model is nigh. It is coming from technology that has been with us for a long time but conforms almost perfectly to the 30 year rule, i.e., three decades to reach full adoption by a notoriously conservative oil and gas industry.
We are of course talking about ocean bottom seismic (OBS), which is finally shaking off its niche status. The obvious evidence is the number of OBS projects underway or being commissioned worldwide. The percentage share of OBS in the marine seismic survey market has in fact been creeping up over the last ten years or so. However, we are now seeing a much sharper increase. In 2005, the share was no more than 5%, which rose to over 15% by 2015. This was followed by a dramatic dip in 2016 attributed to delays in tendering, permitting and mobilization. However, 2018 looks like being a bumper year with some analysts predicting a 30% share by 2020 and still rising. That would be a market approaching $2 billion in value. Compare that with the towed streamer market which analysts estimate to have been worth a little over $3 billion in 2016.
There are currently eight bonafide seabed seismic survey operators of which Seabed GeoSolutions (SBGS), the joint venture between Fugro and CGG; FairfieldNodal, WesternGeco, BGP and Magseis, a relative newcomer to the big time, are the main players. More on the fringes are Geokinetics, OceanGeo, a subsidiary of ION Geophysical, and SAExploration (SAE). To this mix should be added Geospace Technologies, a significant supplier of nodes and cables, and inApril. This latter Norwegian company is bidding to enter the market as the first independent supplier of a low cost automated node deployment and recovery system.
The scope of current OBS surveys is unequivocally worldwide meeting a variety of E&P oil company objectives. Applications also vary in scale and water depth confirming growing oil company confidence in the technology and its economic viability. Some highlights of recently completed, current or commissioned work for FairfieldNodal include offshore Trinidad for BP, Shell and EOG, offshore Brazil for Petrobras (Libra), in the Gulf of Mexico for BP (Mad Dog) and various North Sea projects for AkerBP; SBGS has projects for Petrobras (Libra and Buzios) plus a likely contract for Shell’s Bonga field, offshore Nigeria, in addition to historic long term work in the Middle East; WesternGeco has been heavily involved in the Gulf of Mexico for Pemex, and will be on Oseberg (Statoil) this summer; BGP has a large scale BP survey offshore Indonesia; and Magseis continues a long term project with BGP in the Red Sea for Saudi Aramco and did recent work on Eldfisk in the North Sea for ConocoPhillips.
In 2018 more OBS contracts, likely involving more of the available players and equipment suppliers, are expected to cover some notably large scale and/or long-term projects, in the Middle East, South America, the Gulf of Mexico, West Africa and the North Sea. The rise in the fortunes of OBS is the result of big improvements in the operations and equipment and more acceptance of the technology from oil companies. This perfectly coincides with a significant shift in the requirements of the oil and gas E&P sector operating in the ‘new normal’ lower oil price environment. Even in the early days of ocean bottom cable (OBC) and ocean bottom nodes (OBN) in the 1990s, there was never any doubt that placing recording sensors on the seabed would produce an imaging result far superior to anything towed-streamer could provide. The problem for both systems was the cost, low speed, complexity and reliability of seabed operations. Early on, the processing of multi-component data was also considered a challenge. However, the value for limited reservoir characterization and monitoring projects was at least recognized and some bigger oil companies availed themselves of the limited options.
It remained the case that if OBS could ever develop rapid deployment and retrieval of equipment from the seabed at a reasonable cost, it would be a killer application for oil companies. For a long time, however, a technology debate raged over the virtues of cable versus node thereby confusing a risk averse, potential oil company clientele.
In the meantime, the towed streamer operators managed to muddy the waters, so to speak. They were able to undermine the claims for OBS by satisfying the demand for 4D seismic with much cheaper monitoring and repeat data acquisition using towed streamer technology. Oil companies were therefore prepared to forego the better quality data promised by far costlier seabed seismic options. Many of the same cost-benefit arguments applied when oil companies began to balance the benefits of towed streamer against OBS for wide-azimuth surveys to image complex geology. Towed streamer again tended to win out. It is hard to pinpoint exactly when oil company perceptions about OBS began to change. The most significant technology breakthrough was probably persuading oil companies that OBN solutions were the way forward. Deploying and retrieving nodes compared with cable was shown in most applications to be more flexible, less complicated and include a healthy element of redundancy in case of node failure. In fact, nodes have proved to be almost 100% reliable and are no cause for concern.
Today virtually every tender for OBS specifies a node solution. This also reflects the R&D investment by OBS operators and equipment manufacturers. This has been focused on providing the most cost-effective deployment and recovery of nodes. The resulting improvements have come at just the right time for oil companies. Because of severe budget restraints and the adequate supply of crude worldwide, their short-term strategy has typically concentrated on optimizing production from existing resources and near field prospects which, if developed, can be tied into existing platform, pipeline or other export facilities. This is exactly the market which OBN is best suited for. With every step forward in efficiency and competitive price, the prospect of OBN becoming a serious rival to towed streamers in the exploration field looms larger. One or two OBN-related companies clearly see as an end game a scenario where towed streamer will only be the preferred option for large seismic exploration projects, which are already less common. FairfieldNodal, SBGS, Magseis and inApril are developing asset light portable solutions that can operate from a vessel of opportunity. inApril already markets its, as yet untried, Venator equipment as a complete, off-the-shelf, fully automated OBN system available for installation on a variety of vessels. SBGS (Manta), FairfieldNodal (ZXPLR) and Magseis (MASS), which has a research agreement with Shell, are in their different ways heading in the same automation direction in order to drive the costs down.
TGS, which has already had experience with OBS, is said to be looking at more multi-client projects, so it is game on with regard to the exploration aspirations of the OBN operators and suppliers. The surprise is that none of the major towed-streamer seismic contractors have entered the OBS market. Right now lack of finance for R&D or technology acquisition may be hard to justify to stakeholders. WesternGeco is the exception to the extent that it is renting node equipment for specific projects, some of which require a hybrid approach employing both towed streamer and OBS to provide full coverage. But parent company Schlumberger is not thought to be developing a solution of its own.
PGS withdrew from the OBC market many moons ago and now only retains a seabed seismic interest in fibre-optic solutions for permanent reservoir monitoring (PRM). The PRM market remains problematic. A popular view is that nodes will be able to provide the requisite life of field reservoir monitoring without the need for recording cable buried in the seabed with all the associated reliability risks.
Encouraging perhaps for PGS is that Geospace Technolgies, the provider of all the conventional seabed cable PRM systems worldwide, says the only potential projects being talked about will be fibre-optic based. In the meantime, FairfieldNodal recently bought WGP from Thallasa Holdings, which provides the monitoring service for most existing PRM projects.
As part of the deal, the company agreed to purchase a 20% stake in an acoustically operated ‘flying node’ seabed seismic project being developed by WGP sister company Autonomous Robotics (ARL). Fanciful though this concept may be, it suggests that OBN has a previously unanticipated profitable future.
WesternGeco sued ION and one of ION’s customers for patent infringement in 2009. In 2012, a jury issued a verdict in favor of WesternGeco and awarded WesternGeco damages for reasonable royalties and lost profits. The lost-profits damages were based on the use of ION’s products outside of the United States. On appeal, ION argued that WesternGeco was not entitled to lost-profits damages for two reasons: one, that under applicable law, WesternGeco cannot recoup lost profits for the overseas use of ION’s products by ION’s customers; two, that lost-profits can only be recouped from a direct competitor, and that ION and WesternGeco are not direct competitors in this market.
WesternGeco filed a petition for a writ of certiorari asking the United States Supreme Court to review the Court of Appeals’ ruling, and on January 12, 2018, the Supreme Court granted WesternGeco’s petition. WesternGeco and ION will now submit briefs to the Supreme Court on the merits of the Court of Appeals’ ruling. We expect that the Supreme Court will hold oral argument in April 2018 and will issue a decision by the end of June 2018. ION firmly believes in its legal position on this issue and that the Federal Circuit made the correct decision. If the Supreme Court upholds the Court of Appeals’ decision, the case will be over and ION will owe no further damages.
Other proceedings may have an impact on WesternGeco’s ability to recover lost profits damages even if WesternGeco prevails in the Supreme Court. ION was a party to a challenge to the validity of WesternGeco’s patents by means of an Inter Partes Review (“IPR”) with the Patent Trial and Appeal Board (“PTAB”). While the patent infringement lawsuit was pending on appeal, the PTAB invalidated four of the six patent claims that formed the basis for the jury verdict in this case. WesternGeco appealed that decision to the Court of Appeals for the Federal Circuit, which is scheduled to hear oral argument on January 23, 2018. If the Court of Appeals affirms the PTAB’s invalidation of the patents, that may provide a separate ground for reducing or vacating any lost-profits award. In addition, there may be additional bases for challenging the amount of any lost-profits damages, which remain to be litigated in further proceedings.
“This agreement will continue to leverage the core strengths and expertise of both parties,” stated Duncan Eley, Polarcus CEO. “Polarcus acquired over 15,000 sq.km of high quality broadband 3D seismic data for TGS during 2017 and the collaboration will further drive vessel utilization in 2018.”