With the stage set for substantial long-term growth in offshore exploration activity, particularly in frontier regions, deeper waters, and below complex geological structures, the marine seismic market is poised for a strong multiyear recovery.

Recent advancements in seismic acquisition and processing have allowed explorers to see presalt and deepwater formations much more clearly, and these enabling technologies should continue to fuel the oil and gas industry's transition towards more complex (and expensive) offshore operations. Some of the most significant discoveries of the past decade have been facilitated by new methods of seismic imaging.

Largely in response to this, 58 ultra-deepwater rigs have been ordered since October 2010 as higher expected drilling success rates have greatly improved the economics of presalt and deepwater exploration.

Given that deepwater wells can cost upwards of US $100 million and historical drilling success rates are roughly 30%, operators are expected to increasingly rely on seismic as the deepwater spending cycle unfolds. Dahlman Rose estimates annual marine seismic spending growth of 10% to 15% through at least 2014, reflecting a recovery in the US Gulf of Mexico (GoM), the long-term positive outlook in Brazil and West Africa, revitalized interest in the North Sea, and compelling prospects in East Africa and the Arctic. Demand for 3-D seismic has grown by more than 70% since 2006 in terms of acreage shot and should be the primary driver of future spending growth.

Regional interest

Operators showed a higher-than-expected commitment to the deepwater GoM in the recent central licensing round, which attracted $1.7 billion in high bids. The optimism ahead of the upcoming five rounds of central and western GoM lease sales is a positive for the seismic industry, which should benefit from a recovery in vessel demand to pre-Macondo levels and higher multiclient sales. In the three months prior to Macondo, 15 3-D vessels with six or more streamers were active in the region, compared to the five vessels active in 1Q 2012. Following the disaster, nearly 20% of the 3-D vessel capacity exited the GoM and put negative pressure on day rates as the vessels entered the international markets. Due largely to the positive outlook in the GoM, Dahlman Rose expects demand in the GoM to reach eight to 10 vessels by early 2013.

The recent announcement for Brazil's 11th licensing round, which includes 87 offshore blocks and is likely to occur in May 2013, should add several vessels to the seven currently operating in the region. Additionally, there is clearer visibility that the Brazilian presalt round will occur in November 2013, which will provide an additional boost to multiclient sales and a further tightening of the high-end vessel market.

The market in Angola strengthened in 1Q 2012 with the commencement of a large 10-block multiclient program for Sonangol being split between WesternGeco, TGS, and PGS. There are currently eight 3-D vessels operating offshore Angola and Nigeria, and interest also is growing in surrounding offshore regions, including Liberia, Sierra Leone, Ghana, Cote d'Ivoire, and South Africa. Exploration in several of these regions will be focused in the Transform Margin – a relatively new play spearheaded by Tullow Oil.

Significant North Sea legacy discoveries in 2011, notably Lundin's Johan Sverdrup, have revitalized exploration interest in the region. In late June, Norway formally launched its 22nd licensing round, offering 86 blocks in frontier regions in the North and Barents seas, most of which lie north of the giant Skrugard and Havis discoveries from the past year. The current North Sea season has experienced higher demand and utilization than the peak levels seen in 2007 and 2008.

Higher demand for surveys in Greenland, Baffin Bay, and the Russian Arctic should require incremental vessels over the next several years. Norway estimates offshore exploration investments will increase to US $7 billion (NOK 40.7 billion) in 2013 from US $5.6 billion (NOK 32.4 billion) this year, which should support seismic demand growth of at least 15% in 2013 and 2014.

The industry is ramping up exploration activity in frontier regions, including East Africa, South Africa, Guyana, and Uruguay. Massive discoveries off Mozambique by Anadarko and Eni, an expected offering of deepwater blocks off Tanzania later this year, and interest in offshore Kenya should draw additional vessels to East Africa.

The Indian market faced an especially weak season in the beginning of 2012, with only one 3-D vessel active in the region compared to the 11 3-D vessels active in 1Q 2009. The region is poised for moderate improvement following the North Sea season, driven by incremental demand from ONGC and Reliance.

Capacity

While seismic demand is expected to grow meaningfully over the next several years, vessel supply growth should be much more modest. Following three years of seismic vessel overcapacity resulting from poorly timed newbuild decisions and subdued demand stemming from the financial crisis, the seismic vessel market is finally returning to balance in 2012. Looking forward, there are seven high-end vessels scheduled for delivery through 2014, representing 3-D supply growth of only 9% from current levels. Given the 24-month to 30-month lead times for new vessels, the $200 million to $250 million construction cost (including seismic equipment), and the unlikelihood of vessel conversions due to the heightened power and technology requirements for modern seismic vessels, upside to this forecast is unlikely.

Vessel day rates, which tend to move rapidly during changing market dynamics, remain meaningfully below 2008 highs and are poised for a strong recovery through at least 2014. Current industry backlogs provide visibility of a tightening market through early 2013. The companies best positioned to benefit from improved high-end pricing are CGGVeritas, WesternGeco, and PGS. Combined, the companies have an approximate 65% share of the high-end vessel market, with fleets almost entirely equipped with proprietary broadband technology.

Technology advances

The advent of broadband data acquisition and new and faster methods of data processing have been game-changing developments that have opened the doors to presalt exploration and elevated the barriers to entry in the marine seismic business. Broadband acquisition, which usually commands a 10% to 15% pricing premium over conventional 3-D seismic, is able to capture pressure and velocity waves and thus can provide a higher quality, more accurate, and deeper subsurface image. Broadband is expected to account for 25% of 3-D seismic demand by yearend, up from 5% in 2010.

Multiclient libraries

In spite of an improving contract market, multiclient investments are growing in advance of the multitude of upcoming licensing rounds. CGGVeritas expects to invest US $380 million in its multiclient business in 2012, compared to $230 million in 2011, while PGS plans to increase its multiclient investment more than 40% in 2012. Through its strong performance during the last down cycle, TGS demonstrated the value of multiclient as a standalone business and has influenced more focused multiclient operations throughout the industry.

Strong evidence exists that the current seismic upcycle will extend beyond 2014, driven by a more balanced vessel market, recent technological developments that have elevated barriers to entry, and the structural shift in demand toward deepwater and presalt exploration.

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