The geophysical industry hopes oil companies will start treating them with a little more respect.
I spend a lot of time visiting with folks who work for geophysical contracting companies, and invariably I'm reminded of the line from the 1976 movie Network - "I'm as mad as hell, and I'm not going to take this anymore!"
They're mad for offering a service -
3-D seismic - that their clients routinely tout as the single most important technology for lowering finding and development costs and yet expect to drop continuously in price. They're mad because that client base is shrinking and using its economies of scale to leverage the price of seismic data down ever further. And they're mad because, after 6 consecutive years of dismal economic returns, nobody believes them when they complain.
That may be about to change. The International Association of Geophysical Contractors (IAGC), a trade organization that represents the seismic industry, has made it a stated goal to "draw attention to the serious consequences facing future oil and gas exploration and production if this downward trend continues," according to a recent press release. This is a pretty tall order for a trade association. But being as mad as hell does tend to motivate people to higher callings.
How is it that this industry has fallen on such hard times when it delivers such an indisputably valuable product? The answers are numerous, and IAGC President Chip Gill admitted seismic contractors bear some of the blame due to cutthroat competition and fire-sale desperation when times are tough. Exploration and production companies have been only too happy to capitalize on these dropping prices, but unlike the drilling industry, the seismic industry seems unable to raise prices when exploration budgets are swollen. Unlike day rates for offshore rigs, which can reach obscene levels when commodity prices are high, the cost for a square kilometer of seismic has dropped and stayed down.
This has affected the proprietary and nonexclusive sides of the business, Gill said. On the proprietary side, contractors are being asked to take on more risk without being adequately compensated. In the nonexclusive end of the business, oil companies routinely ignore license terms when they license data. This leads to millions of dollars of lost revenue for the seismic contractors when their rights are not recognized or when companies merge or take on partners.
The result is a cumulative loss in excess of US $2 billion to the industry and a reduction in the number of players through consolidation and companies exiting the sector. While some argue the seismic industry has needed to consolidate, Gill warned that the industry may not like the ultimate resolution if the situation continues.
The IAGC's goal is to send a wake-up call to the exploration and production industry. "Something will have to change," Gill said. "I think the bottom line on all of this is that it will resolve itself; it's just a question of how and when.
"But I think the E&P industry has to ask itself what it wants out of the seismic service sector, and what it's willing to pay."
Association members tackling the problem on two fronts: by communicating the critical role of the geophysical industry and by developing and publishing for the industry's use statements of principles that represent consensus industry views of how the most contentious areas of the commercial arrangements between geophysical companies and their clients should be approached.
I asked Gill how oil companies can help the situation. "What can they do? Recognize data owners' rights and be respectful of those rights," he said. "I would ask the executives to ensure that their organizations are well educated on these issues.
"On the data acquisition side, the industry needs to recognize the difference between operational risk and exploration risk. When risks are not quantifiable, foreseeable or managable they should be classified as exploration risks and either borne by the client or appropriately priced."
He added geophysical contractors are sophisticated companies that know how to handle risk, but they need to be compensated accordingly. "When the E&P industry uses its concentrated purchasing power to force situations under these contracts which are not fundamentally healthy, something's got to give," he said.
Will things change to the satisfaction of the seismic contractors? Gill expects the backing of the IAGC to benefit the argument. "Hopefully the fact that these are industry consensus positions adds some weight," he said.
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