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Increased tendering and upcoming licensing rounds buoy seismic vessel market

Thu 28 Sep 2017

Increased tendering and upcoming licensing rounds buoy seismic vessel market
Polarcus CEO Duncan Eley says the company has reduced its cost base significantly and tender activity has increased from previously low levels

Leading marine seismic survey companies Polarcus and PGS have spoken of improved tender activity and greater optimism about the market next year

Depressed demand for marine seismic activity is usually the first sign of a downturn in the offshore oil and gas market. Equally, improved demand for marine seismic projects often signals the beginning of an upturn in the market.

Both companies have described increased levels of tendering activity, and both have significantly reduced their cost base in recent months. Polarcus said overall marine seismic activity is picking up, and PGS has described an increase in demand for multiclient work of the type in which it specialises and in production seismic projects.

Speaking at the recent Pareto Securities Oil & Offshore Conference, representatives of leading marine seismic firms Polarcus and PGS both had cautiously optimistic things to say.

Polarcus CEO Duncan Eley noted that the oil price has stabilised and oil companies have been sanctioning projects based on their capex guidance at the beginning of 2017. It said tender activity has increased from their previously low levels, and Q3 2017 saw Polarcus receive the greatest number of tenders since Q2 2015.

The company said there has been a 50% increase in square km of surveys tendered to date in 2017 compared to 2016. “Activity is returning to new and dormant basins,” said the company, noting that this year has also seen the most West African tenders issued since 2014, and elsewhere, the Guyana-Suriname Basin continues to draw interest from major oil companies.

Polarcus believes it is well placed to respond to new tenders having reduced its gross cost of sales to an all-time low level in Q2 2017. In that quarter, its gross cost of sales fell 10% compared to Q1 2017.

In a presentation at the conference, the company said E&P companies were now consistently cash positive. It also noted that seismic vessel supply has continued to reduce as tender activity increased.

For its part, PGS said its focus on multiclient business had brought greater stability to its performance despite the highly cyclical nature of the market. The proportion of its work that is multiclient will continue to increase going forward, and its revenues are currently dominated by multiclient projects.

The company said it “retains flexibility to leverage a recovery in the marine contract market” as oil companies invest more in producing fields and fields under development.

It anticipates that the number of production seismic (4D) projects will more than double in 2017 compared to 2016 and is expected to increase further in 2018. PGS said 4D activity is increasing in the North Sea, West Africa and Brazil, and it will conduct more than 50% of global 4D surveys for 2017. PGS is well positioned in the 4D market, and around 35% of 2017 contract revenues are expected to come from 4D.

PGS said it was working on a number of encouraging leads for development in 2018 with growing demand for marine seismic being driven by positioning for strategically important licence rounds, seismic commitments in E&P licences, a significant increase in production seismic – especially in the North Sea, West Africa and Brazil – and ongoing growth in multiclient activity, which is expected to continue to increase.

In the introduction to its most recent seismic vessel register, Clarksons Research noted that weak E&P spending continued to negatively impact the seismic survey vessel market, with around 29% of seismic and geophysical survey vessels laid up as of the beginning of June 2017.

However, as it also noted, strategically significant licensing events off Norway and in the Mexican sector of the Gulf of Mexico, among others, are expected to provide some support to the market in advance of more general market recovery.

“After some very strong years during the boom period 2011–14, the slump in oil prices produced two successive years in which oil companies cut E&P spending by in excess of 20% per annum,” said Clarksons. “This caused a severe downturn in the seismic vessel market, which resulted in substantial vessel idling, a number of company restructurings and perhaps some fundamental structural changes to the way the market operates.”

However, it went on to say that, despite the extremely tough period for the segment, there does now seem to be some possibility that the market may be approaching a turning point.

“Oil companies are likely to spend in the region of 7% more on E&P in 2017,” said the research arm of the well-known shipbroker. “The underlying picture is more nuanced than this, since the bulk of the increases in spending will be in onshore shale basins.” Several of the large oil majors are likely to decrease spending on offshore for a further year. However, even given this challenge, there has been a shift offshore from a situation where essentially nothing new was happening to one in which companies are prepared to consider exploration and project sanctioning, if cost reductions and scope redesign has been sufficient to make investment seem viable.

This is important for the seismic industry, since it means that there has been some improvement in sales leads, tendering activity and even slight upticks in companies’ backlogs.

The time horizon for secured backlog at most companies is still relatively short: oil companies, given plenty of available fleet capacity, do not have to plan ahead as much as they might have in the boom. However, the summer season of 2017 offered some positive signs when compared to a year earlier.

“There are several key areas where oil companies have shown interest in contracting seismic work to position themselves for future licensing rounds,” Clarksons said. “These include surveys connected to Norway’s 24th Licensing Round. This will include 102 blocks, 93 of which are in the Barents Sea, but with other potential promising acreage in the Norwegian Sea. Similarly, there has been interest in the relatively underexplored areas off Newfoundland and Labrador (the majority of seismic data for the region was surveyed more than 30 years ago), which are likely to be included in Canada’s Scheduled Land Tenure licensing process over the next few years.”

Such pre-licensing round survey activity tends to be an example of multiclient survey work – a means of contracting and vessel employment that, as highlighted above, has become increasingly common over the last couple of years, the change in business model having been promoted by the downturn.

Clarksons said that, at the peak of the 2007–2008 offshore boom, around two-thirds of the seismic companies’ business (in revenue terms) was generated by contract seismic work: conventional time charter of a vessel to produce a survey. However, seismic companies have had to adopt a different model as oil companies have cut back. In 2016, around two-thirds of revenue came from multiclient work. This has helped to support survey activity off Mexico, for example, given the interest in seismic acquisition now that Pemex no longer has a monopoly over field developments.

However, despite the more optimistic signs, seismic vessel owners remain challenged – in June 2017, CGG filed for Chapter 11 and 15 bankruptcy protection. Although these proceedings were planned, the occurrence of further debt restructuring in the sector demonstrates the challenges still faced by market players.

 

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