Last month, the CSEG Recorder looked at the impact of low oil prices on the petroleum industry in North America. In our second part of the series, we look at the repercussions to the Canadian geophysical sector.


It's just after spring break-up, and the one-hectare equipment yard of Enertec Geophysical Services Limited is still full. Over 100 trucks, vibrators and recording cabs, each decorated in distinctive blue paint and Enertec logos, sit in the southeast Calgary lot. "Two years ago, it would have been completely empty:" says Olson, President and CEO of Enertec.

Like so many other geophysical equipment yards around Alberta, the cause of Enertec's idle equipment is the calamitous price of oil. In early 1997, before increases in OPEC production and the collapse of Asian economies led to a chronic overproduction situation, West Texas Intermediate benchmark crude averaged US$27 per barrel. By February 1999, the price hovered in the $10 range (while WTl prices have recently recovered to the $16 range, few industry experts expect it to stay there long).

As the price of oil slid, so did cash flow. Petroleum companies scrambled to cut costs, and exploration and production budgets were the first to feel the pinch. Canadian exploration and production budgets slid from $13.5 billion in 1997 to $11 .5 billion in 1998, and the industry expects to spend less than $11 billion in 1999.

The impact on the various components of Canada's geophysical sector has been profound. At the beginning of 1999, Ken Lengyel, chairman of the Canadian Association of Geophysical Contractors, noted that members were running at 40-50% of last year's capacity. "Nothing has changed:" he notes in March. "We're not getting any last minute rush bidding."

The situation at Enertec Geophysical Services Limited is representative of the malaise within the geophysical sector's acquisition component. The Calgary-based company employs approximately 300 staff, including 75 geophysical professionals. Land data acquisition represents about 60% of the company's revenues, with marine acquisition accounting for about 25%, and processing the remainder.

Most of Enertec's downturn in business has occurred on the land acquisition side. "Activity really started to decline in November, 1997:" says president Murray Olson. "We had nine crews in the winter of 1998 in Canada. We now have four."

Enertec saw a large chunk of its work in eastern Alberta evaporate. "Low oil prices have had a dramatic effect on heavy oil:" says Olson. "Heavy oil uses a lot of 3D to help steer horizontal drilling. It was good in 1997 and 1998, accounting for about 20% to 30% of our business. It disappeared in 1999."

Many companies in the processing component of the geophysical sector have also been negatively impacted, including Kelman Technologies Inc. The Calgary-based company employs approximately 100 processors and 60 archivers in Calgary, and 10 processors in their Houston office. Last year, it lost $1 million, compared to a profit of over $5 million in 1997. "Basically, backlogs are way down:" says Brian Link, vice president and general manager of processing. "Last year, they were at two-and-a-half to three months, and now it's down to one-and-a-half months."

While revenues at Kelman are down 30% to 40%, the company hasn't had to lay any geophysical professionals off yet. "We are trying to get through the downturn any way we can."

Geophysical departments within oil companies, and professionals interpreting seismic data, have learned to do more with less. Beau Canada Exploration Ltd ., is a mid-sized independent petroleum company based in Calgary. They are active in northern Alberta, northeast B.C., and central Alberta. Principal exploration plays include deep carbonates and shallow clastics.

In 1997, Beau Canada's total E&P budget was 585 million, with $6.5 million slated for seismic. In 1999, total E&P budget is down to $70 million, with $4 mill ion earmarked for seismic." Like most companies, the low oil prices have affected cash flow, and we have less money for exploration:" says Hugh Pattillo, chief geophysicist for Beau Canada. "Money goes to reflect next year's cash flow. Seismic is being deferred. We cut the longer-term stuff, the regional shoots and larger spec shoots that we would have liked to participate."

Not All Doom and Gloom

Throughout the downturn, natural gas has been one bright spot for Canadian acquisition companies. "Exploration for gas has increased a bit, both shallow gas and very deep gas:" says Enertec's Olson. "The shallow gas plays are in southern Alberta and northeast Alberta. Companies looking for larger, deep gas reserves are exploring for stratigraphic and structural plays in the Foothills."

For processors, the lull in processing new data has been partially supplanted by secondary activities, like reprocessing. "When current work goes down, reprocessing goes up:" says Kelman's Link.

The companies that stand to benefit most from reprocessing business are those that are at the leading edge of technology. When a client does do reprocessing, they expect to get a significantly better result than experienced even a few years ago. "Good processing companies have strong R&D, and we've been continually upgrading," says Link. "We hope to see more reprocessing work in the second half of the year."

In addition, Kelman is experiencing growth in their archiving business. "Archiving is almost counter-cyclical," says Link. The counter-cyclical nature of archiving a rises from the fact that when money is available for new exploration, nobody worries too much about what to do with old tapes. " People have been so busy over the last several years that data management has lapsed."

The general lack of data management during boom times has created a headache now that new exploration has slowed down. "A lot of data is tied up in libraries," says Link. "Some geophysicists are spending 50-70% of their time looking for data in the data bases."

In addition, many companies are experiencing "stiction problems" - loss of data from tapes as they get old.

Kelman pioneered an electronic storage system that allows companies to not only safely store the data permanently, but to find exactly what they're looking for quickly and efficiently. "With interactive technology, you have speed of access, availability and you know what you've got."

For Kelman, what was essentially a sideline has turned into a solid, bottom-line performer. "Archiving certainly helped us level out the downturn," says Link." In 1998, archiving was around 16% of our total revenues."

Lower seismic acquisition costs associated with the lull in new exploration has been a bonus to oil companies. "Our 1999 costs were a lot more reasonable," says Beau Canada's Pattillo. "Most seismic contractors working for us haven't changed their prices much, but there's been a big change in shot-hole drilling costs, line clearing costs and line preparation costs."

Exploration companies are also looking to stretch their geophysical budget as far as possible by scouting out deals. "Some of the large data bases, like Mobil's, Amoco's and Chevron's, are being sold to marketers," says Pattillo. "We expect they'll be marketed at substantially less per kilometer than what the companies would have sold them for, possibly as much as 50% less."

Changes Foreseen in the Sector

Enertec's Olson predicts an imminent shakeout in the acquisition component of the geophysical sector. "The market is oversupplied in terms of capacity," he says. "When that happens, profit margins disappear."

"Channel count" is often used for measuring capacity in the acquisition component. A channel is a set of geophones plugged into a line and gathered at one location. "One crew can handle 200 channels in 2D seismic, and several thousand channels in 3D," says Olson.

Up until late 1997, capacity was being continually added. "In North America, there is a total capacity of at least a quarter million channels," says Olson. "We were at full utilization in the winter of '97, and it was last close (to full utilization) in the winter of '98. Now, however, we estimate excess capacity in North America of 100,000 to 125,000 channels."

Olson expects capacity will be reduced through bankruptcies and mergers.

"We are merging with (Houston-based) Veritas in 2-3 months," he notes. "Our merger is motivated by strength-to-strength. Enertec and Veritas have been the two leaders in the Canadian market for a good number of years. We are both strong financially, but capacity must be reduced."

Kelman's Link predicts that Canadian processing companies will have to look internationally to shore up their business fortunes. "People bounce numbers around, but I've heard that there's about $100 million in (processing) business in Canada, and $1 billion to $1.5 billion in the U.S."

Link thinks Canadian companies have much to offer. "Canada has expertise in land processing, particularly 3D work," he says. "We've grown up in the Foothills, and our ability to do complex structural imaging is a strong point. Being able to handle surface topography is also critical."

Link cites other factors that make Canadian processing companies more attractive internationally. "The Canadian dollar relative to the U.S. dollar and costs makes it a good deal to work with Canadians," he notes. "Internet-based browser technology also allows a client to do quality control work remotely, eliminating much of the need for proximity."

Kelman is putting its money where its mouth is by pursuing an international expansion program. Since opening a Houston office in 1995, the company has experienced strong growth in the American market. "We are extending to the marine market," says Link. "It's a rarity for a Canadian-based company to be doing worldwide marine, but we've had quite a bit of success offshore the East Coast of Canada, and our goal is to become viable and well respected as a marine processor. You just need the software and the people."

One area of marine work that Kelman is focusing on is ocean bottom cable (OBC). "We've done a number of large OBC projects off Trinidad and Venezuela," says Link. "It requires the same types of 3D land expertise, which has been a major advantage for us."

Petroleum companies foresee protracted low oil prices, and are positioning themselves accordingly. "The future is on the gas side in the Canadian basin," says Beau Canada's Pattillo. "You only have to look at how many U.S. facilities are switching to cogeneration. Our company is going through a fundamental shift from heavy oil to gas. Three years ago, we were 60/40 oil to gas, now it's a 25/75 split."

Pattillo hopes that the price of gas will remain sufficiently strong to forestall any layoffs. "We have four geophysical professionals, and we haven't let anyone go. If you go through layoffs, you lose ideas and expertise-it disrupts the flow of the company."

Better Times Ahead

Kelman's Link is cautiously optimistic about the future of the industry. "If OPEC sticks together, the demand-side picks up and $15 per barrel range is sustained, then fortunes will turn quickly," he says. "We will start to see plans for field acquisition, and we're positioning ourselves for the recovery. Hopefully, we'll have a good position for growth, especially in the Houston office."

Beau Canada's Pattillo sounds a more cautious note about the future of the petroleum industry, however. "Personally, I think you'll see short term firming of the oil price, but I don't think OPEC will hold to their quotas," he says. "Companies should live within their cash flow and wait until they've got the money in the bank before reinvesting. If gas prices firm up over the summer and into Q3 and Q4, however, you'll see more spending on the gas side."

Murray Olson at Enertec offers a philosophical view of the geophysical sector's fortunes, "Our business is used to working with cycles-it grows and contracts," he says. "Right now, we are in a period where contraction in acquisition and processing will occur rapidly in the next quarter or two, then the sector will get ready to expand rapidly. But it will take one or two quarters of stable oil prices before the exploration and production companies will start spending again."



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