Business as usual for marine seismic

‘Everybody knows the dice are loaded, everybody rolls with their fingers crossed’. The opening lyrics of one of the most poignant recordings by singer-songwriter Leonard Cohen perfectly encapsulate the forlorn quest that has driven countless enterprises in the marine seismic contracting business, virtually from day one.

Ever since the mid-1980s and the first consolidation in the face of an industry downturn, marine seismic companies have been trying to defy the odds stacked against establishing a viable long-term concern. All the time, they have laboured under the handicap of adhering to an obviously dysfunctional business model.

Unfortunately it looks as though Polarcus, in its current form at least, has proved unable to turn the tables. At the time of writing, its lenders had foreclosed on its vessels and all employees have been terminated while management explores what options exist for the company to continue in business.

The ungarnished truth (everybody knows) is that none of Polarcus’s predecessors over several decades has ever been able to sustain a profitable business. A few savvy corporate and individual investors/speculators have managed to come out on top financially and generations of geoscientists have enjoyed rewarding careers in a technologically enthralling industry at the cutting edge of oil and gas exploration and production. The debt everybody but especially the oil industry owes to the geoscience community for the discovery and supply of abundant hydrocarbons over several decades has never been properly acknowledged, and with energy transition now topping the agenda, it will probably never will be.

The corporate casualty list along the way has been legion. In the 2001 2^nd edition of the SEG publication Geophysics in the Affairs of Mankind (Lawyer, L.C., Bates, C.C. and Rice, R.B.) – still the only history of the exploration geophysics business and its personalities – one section of the book features the ‘survivors’ of the 1986 oil industry recession. Even back then, the commercial market was viewed as a battlefield, and the unrelenting attrition has continued ever since. A partial list of companies that have been entities in the vessel-operating marine seismic contracting business since the 1980s, some admittedly extant for a very short period, would include: Aker Geo, Armada Seismic, Arrow Seismic, Bergen Oilfield Services, CGG, Digicon, Dolphin Geophysical, Fugro, Geco-Prakla, Geosource, GSI, Halliburton Geophysical Services, Merlin Profilers, Reservoir Exploration Technology, Scan Geophysical, Schlumberger, Seiscom Delta, Seismograph Service, Teledyne Exploration, Veritas DGC, Wavefield Geophysical, Western Atlas, Western Geco and Western Geophysical.

The last companies standing are PGS and Shearwater GeoServices, both with issues to resolve. PGS has a record of operations going back to the early 1990s but not for the first time is looking fragile. The company recovered from a Chapter 11 episode in 1993, today it has five vessels active, six idle and a current net interest debt of $1 billion. The largest operator is Shearwater GeoServices, only established in 2016. Its fleet is based on the purchase of inventory from Schlumberger and CGG consisting of 19 seismic acquisition vessels of which five or six are active. Current public debt for this privately held company is running at over $400 million, the total is likely more. The only other significant provider of marine seismic services for the international market is the Chinese company BGP. It has four vessels, none matching the technology heft of PGS and Shearwater.

Obviously the Covid-19 pandemic, collapse of the oil price and drying up of oil company E&P spending has dealt the near lethal blow to global marine seismic fleet operations and claimed a casualty in Polarcus - just when there were signs of some stability emerging in the market. Yes, these circumstances have been exceptionally problematic, but they still resemble the boom-bust cycle going on for decades. The business has always been at the mercy of fluctuating demand for oil and gas and the spending priorities of the oil industry, i.e., factors out of their control.

Time and time again it has been shown that ownership of vessels in a period of recession is extremely challenging given the overhead involved. That’s one reason why consolidations and business failures have been the norm each time demand for seismic services has dipped. Yet, as soon as there has been any sign of a turnaround, we have seen a rush to bring vessels into the market, often encouraged by shipping interests that see an opportunity to lease vessels on profitable long-term charters. Frequent over-supply has been the result. It has allowed oil companies to take advantage of the competition and control the pricing of seismic services. This has limited contractors’ ability to extract an adequate return on their investment in boats and technology to sustain them through the bad times.

The history shows that only in the last few years has chronic over-supply in the market been acknowledged as the persistent fatal flaw in vessel-operated marine seismic contracting. The turning point surely came when Schlumberger decided to quit the fray, followed by CGG, both on the ground that the business was unsustainable. Their conclusion was that processing and marketing worldwide of geoscientific multi-client data was the lucrative way forward, while commissioning surveys as needed from the pool of available seismic vessels, most likely at advantageous prices. Of course everybody knows that TGS understood that ‘asset light’ was the best strategy all along. The company’s only aberration was in the temporary boom period of 2007-8. At that time it feared a shortage of available vessels for its projects and made an offer to buy the Wavefield-Inseis seismic fleet. The merger never went through, and CGG eventually bought the boats just as the market took a downturn.

Numerous strategies have been employed by contractors hoping to outmanoeuvre their competition. At different moments Halliburton, Schlumberger and CGG built up what looked like a dominant position in the market based on fleet size, among other things offering the possibility of dictating the contract price of surveys to the oil companies. It proved a miscalculation, because there were always enough rivals out there willing to provide the service to oil company customers at a cheaper rate.

We come now to the most disappointing and frustrating aspect of the whole story. Not unreasonably geophysical survey companies convinced themselves that technical differentiation could win the day. Obviously oil companies would opt for the most advanced technology available on offer so as to obtain the best imaging results, wouldn’t they? To which the answer is not that simple.

It turns out that the best was not always the optimal commercial option for oil company clients. Rightly contractors wanted a premium to reward their research and development (a function and expense that after 2000 had largely devolved from oil companies to the service sector). Remarkable advances made in vessel design, 3D and 4D seismic, towed-streamer counts and spread sizes, broadband, single point receiver recording, onboard and remote processing, etc. have sometimes appeared to have vaulted one contractor ahead of the field. But such leads have been short-lived. A notable characteristic of the geoscience community is that it has never tolerated been outsmarted for long. One suspects too that the geoscience companies got ahead of themselves, e.g., creating demand for new products that oil companies may not have particularly cried out for but were happy to see introduced.

In its withdrawal from the marketplace, Schlumberger explicitly recognized that technology differentiation was not worth the cost and effort. It also suggested that acquiring seismic data was no longer so crucial, because so much could be achieved post survey with modern processing techniques. In other words, the dreaded day has arrived when marine seismic surveys have been truly commoditized. The market reflects this development. Multi-client, asset light companies now dominate the order books. In addition, oil companies have come to like the multi-client model. It keeps the cost and risk of surveys down while they still have the data, the quality of which can be vastly enhanced at the processing and interpretation stage.

Arguably, Polarcus should have been able to keep its place in this new market scenario rather than have the field left to just two players. Being based in Dubai outside the home of the marine seismic community in Norway may not have helped. Ironically its debt ratio at foreclosure was probably proportionately less than its competitors. It was also edging towards a revenue-earning stream of a seabed seismic offering where the field is less crowded field, has growth potential, and is one so far disregarded by PGS.

The birth of Polarcus itself had an extraordinary back story. In the wake of the 2008 oil crisis when the global of fleet of seismic vessels was thought to be in need of renewal, a group of Norwegians backed by Zickerman shipping interests set up Eastern Echo. The company’s intention was to build four seismic research vessels at a Spanish shipyard using the innovative type X-Bow SX 124 design from Ulstein Design. Plans were scarcely underway when Schlumberger stepped in and bought the company and its project. It saw this as a quick and convenient way to build new, state-of-the-art capacity.

Weirdly they put no restrictions on the personnel involved in Eastern Echo. Very soon a new company called Polarcus was launched again supported by Zickerman, with many of the same management team. Its mission was to introduce six (eventually eight) X-Bow design vessels with a differentiating vision - environmentally friendly (underlined by dazzling green ships), equipped to operate in arctic regions (hence the made-up Polarcus name), able to meet increasingly exacting safety standards demanded by oil companies, and not over-priced.

The market winds briefly blew in favour of Polarcus, although its initial technology advantage was soon overtaken. In no time competition and lower oil prices from 2014 took their toll. Oil companies just wanted to acquire data as cheaply as possible. To its credit, the company continued to provide a safe and professional service throughout, but as on so many occasions in the past, it could not service its borrowings to the satisfaction of its stakeholders. Everybody knows …

‘Handicapped by adhering to an obviously dysfunctional business model’

‘Geoscience is a community that has never tolerated been outsmarted for long’