The seismic segment is slowly rebounding from the price crash of 1998, but at a much slower pace than might be expected considering the fact that oil companies have increased their exploration spending considerably in the past couple of years.
Hart's E&P recently chatted with Nigel Thorburn of Sercel Inc., Tim Probert of Input/Output, Carl Hutchins and Dennis Jordhoy of Veritas DGC Inc., Bert Chenin of CGG Americas Inc., Jeff Cunkelman of Thomson Marconi and Walt Lynn of PGS. Jim White of WesternGeco offered his comments at a later date. The first question concerned how consolidation had affected their businesses.

Thorburn: Consolidation really hasn't had a major impact on us. We still deal with the same three or four major contractors.
Probert: I was checking a couple of statistics, and I think I'm correct in saying that in 1994 there were 26 publicly traded seismic acquisition and equipment manufacturing companies, and today there are about 15. So consolidation is nothing new. We've been seeing consolidation over the last 7 or so years, and the impact to this point has been minimal. Over the 1994-2000 time frame, equipment sales represented about 12% to 15% of total acquisition and processing spending, and that hasn't changed a whole lot.
Hutchins: We certainly have one company with a larger market share than we've had in the past. That's lent a new dynamic to the way things are bid, especially regionally. It tends to be more domination now by one player in all regions. We have a much smaller fleet compared to the top dog. We just have to select our areas a little more carefully so that we don't get into a price war.
Jordhoy: I think there's been a bigger crystallization between the four top-tier players and the niche players. I think it's become more obvious that there are two real tiers; the gap has widened.
Chenin: The last consolidation in the seismic industry created a very large company, WesternGeco, that has the capability to serve all the markets in the world, and they will be a fearsome competitor. But consolidation does not only occur on our side; it's occurring on the customers' side. And that's having a lot more influence on our business than the consolidation among the seismic contractors.
Hutchins: I might make one comment here about fleet size. When you have a large consolidation where one company suddenly has 44% of the marine fleet and another company has 7% of the marine fleet, you can't expect the person with 7% not to go after some of that market share. So I think the people with the biggest fleets are going to have to reduce their fleet size. I don't think anybody here will ever let the top company keep all the market share.
White: There's definitely too much capacity in the industry, both land and marine. We need further reductions before we will see a positive movement for our bottom line.
Cunkelman: We've definitely seen an effect from consolidation. I don't know if it's good or bad yet, but it's definitely changed our strategies on how we approach the business. We had some very close relationships, and with some of the consolidations there have been changes on their philosophies about how they address R&D and equipment sales. We're still massaging that particular question.
Lynn: I think of consolidation in two ways: amongst competitors in the service companies and amongst our clients. The latter has had a dramatic impact on data sales and the transfer of licensing fees. Even though there is one service company now that is dominant, and none of us will underestimate WesternGeco, none of our clients want to see a monopoly, and for that reason alone there will be room for other companies.
Another issue with consolidation is the issue of R&D. That's had a tremendous impact amongst the oil companies. I can only think of a few companies today that have bona fide R&D functions, let alone departments. In the service companies today, we do very little R. It's mostly D. As we have developed new technologies, we are faced with a commodity mentality in our clients when we try to sell it. Few of our clients today are eager to take the risk to get the new technology, in part because a lot of the champions - people that understand and promote the technologies - are leaving the industry. It is generally not enough for us as service companies to try to sell a client new technology; they want some independent corroboration. They'll first look internally to their champions, and then if they don't have those they'll look outside. We're losing our champions just through age and attrition.
White: Ten to 15 years ago we were service companies providing term contracts to our customers, the oil companies. However, we felt we were not getting enough margin. So we moved to a turnkey environment, taking on more risk but succeeding well at bringing in higher margins for that risk.
Unfortunately, the oil companies got wise and put severe and stringent operating specs on our field crews. And due to the competitive nature of the business and the move to grow the number of field crews, we never really sought a proper price for the added risk. So now we're providing term crews to the oil companies under turnkey contracts. It's not a good scenario for us to be in.
Chenin: Our customers are changing their organizations. Most of them are based around asset teams, and they have a totally different structure. And now that their asset teams are responsible for the business, none of them are specialists. They have to be knowledgeable in seismic, log evaluation, all the various disciplines that are involved in profitability, where before you always had the chief geophysicist, and if you had a gizmo in your toolbox that helped you process data better than the other guys or do quicker acquisition, it would make the difference. Now they don't see the difference. They know they can get it for $1,000 per square, and if your price is $1,001, they'll go to the other guy.
Probert: That's very much the same as other parts of the oil service sector - the specialists have disappeared. Even the petrophysicsts are disappearing. It's almost like a natural progression, and maybe seismic is the last in the chain. Generalists are replacing specialists.
Hutchins: When you said we were losing the champions inside the oil companies, I think that really goes all the way to this problem. We're all slaves to Wall Street; there's no question about that. That's been a big change in this industry in the last decade. Within the oil companies, it's the "business unit." They're separated, and each has to make its own profit. So everybody's worried about profits, and there's really nobody out there saying they'll give us more work to build a better widget.
Probert: The independents' returns relative to the majors' have been quite weak. I've been reminded on a couple of occasions that part of the asset focus that we have right now is a direct function of that. But if you're focusing just on an asset you're not as concerned about the long term; you're focused on how that asset performs in the short term.
They're also trying to match their revenue and expense much more closely than they historically have done, so the cycle time can shrink. They are not going to shoot some 2-D lines and then shoot some 3-D 2 years from now and then drill the prospect a year hence - it's a lean manufacturing approach.
Lynn: The problem I see in this cyclical nature is that with the technology dependency falling more and more on the service companies, we don't have those cash reserves to sustain us through these down cycles. We just can't keep all the people that we normally would keep, even knowing full well that 2 years from now we'll come out of the cycle.
So it gets back now to some of the business models that we have with our clients. If they want to see this technology sustained, even through the downturns, we have to have some means to stabilize the revenue during these periods.
Jordhoy: The opportunity is to build a new business model to focus more on the production side. I think our business model for exploration and acquisition is broken industrywide. It's been commoditized and destroyed. But one of the exciting things for the future is that there is opportunity for a new business model.
Cunkelman: From a manufacturer's standpoint, I can now count the majors on one hand and the minors on the other hand, and when we start looking about developing that next technology, who's going to pay for it? WesternGeco now has big in-house capabilities. They may or may not want to participate. And you have a different idea at PGS vs. at Veritas, and all of a sudden we have four different solutions we have to address. Any one of them won't pay for the development.
Probert: It's what I call the "jumbo jet" effect - Airbus and Boeing have been wringing their hands about whether they can or will develop the next-generation jumbo jet. It's kind of getting like that on the supply side. The scope of the developments is so significant. These jumbo jet projects are very difficult to fund without a much more participative kind of approach. That has to encompass the contracting industry and the oil companies as well.
Cunkelman: Productivity is driving all of this development effort. If we don't provide something that has more productivity, we can't sell it.
Hutchins: That's why we're going to the solid streamers. We're hoping for big gains there because anything that will help us shoot in marginal weather will improve our productivity.
Cunkelman: We have to get a return on that investment. When we started looking at the number of players dwindling, everybody wanting a separate solution and a lack of return on investment, we scratched our heads and wondered, is this a business that we want to pursue?
Hutchins: As a contractor, a real concern of ours is if you get down to one supplier, that's pretty significant.
Jordhoy: The WesternGeco merger raises that ugly specter.
Probert: If you've got a smaller number of manufacturers and a smaller number of product users, then the level of interdependence has to go up if people are going to get what they need. I don't think there's any shortage of ideas, and I don't think there's any shortage of technology in the pipeline.
Cunkelman: But if you look at these projects, they're 24 to 36 months to get them to fruition.
Lynn: I think that's the biggest problem right there. Because of this quarter-to-quarter mentality, we don't always have the luxury to invest in something that's not going to show a return for 2 or 3 years down the road. One component of research is failure; people learn from failure. But we don't have the luxury of failure.
White: This is a tough issue. We feel we spend more than our fair share on new technology. However, we're in a commodity business, and pricing drives down our market share. It's too bad - we don't get anywhere near the return on the value we provide.
Cunkelman: This has made it very difficult for the equipment manufacturers as a whole. At least the contractors can sell their crews at cost and keep them operating. With the manufacturers, if there are zero requirements, you shut down the shop. And then you have zero income, you can't afford to pay R&D, and it's a vicious cycle. This is what we're trying to come out of right now.
Thorburn: When the contractors bleed, we hemorrhage.
Lynn: Let me ask - what will the industry look like 10 years from now? One scenario is that the service companies eventually reach a point where they can't afford to take on the risk for long-term technical development, and with the periodic downturns, we just can't keep all the people. An outcome is that 10 years from now we're nothing but a commodity industry. Another possible outcome is that we have some breakthroughs and buy-in from oil companies on the reservoir characterization and monitoring, and the e-oilfield becomes something that blossoms.
Hutchins: There's another scenario that's not totally out of consideration - 10 years from now, with the consolidation continuing in the oil industry, we may end up with several supermajors, and they may ally themselves with certain contractors, which is like having your own in-house seismic company again.
Chenin: The challenge is for us to make a new market. This market we have created is broken. We probably broke it ourselves.
Hutchins: $10 oil will do that.

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