At the Denver meeting of the Society of Exploration Geophysicists last month, Mick Lambert, president of GX Technology, summed up the mood of the industry as ‘optimistic uncertainty’. This, he contended, is an improvement on the ‘pessimistic uncertainty’ of previous years! CGG president Robert Brunck contrasted the $3.3 billion revenues of the top four seismic companies with the $720 billion revenues of the top four oil and gas producers. Brunck spoke for many when he advocated a fairer share of revenues, especially at today’s high oil prices. Without this, the seismic business will experience a shortfall in R&D spending on new technology. Input-Output president Bob Peebler likewise bemoaned the disconnect between surging oil company revenues and the ‘struggling’ service sector.
The Q&A session revealed a generalized concern over what has been described as a ‘broken’ business model. ExxonMobil’s Bob Gistri ventured that R&D spend by oils and contractors alike needs to continue, but a dialog is needed to understand future challenges and how these could lead to profitable growth in the service sector. Peter Carragher (BP) intimated that this year would be different—with BP being more aggressive in field trialing of new technologies. These are funded at the group level, until their economics are proven. But Peebler insisted that the seismic industry is ‘good at coming up with new technologies and bad at getting paid!’ Brunck let out that seismics was a destroyer of value—and doubted that 4D would have a significant impact, because of the contracting industry’s lack of bargaining power.
The problem as we have discussed before is that, when the oil price is high the oil companies do well and the geophysical industry survives. When the oil price is low, oil companies do OK, but the geophysicists go to the wall. The upside for the investor in a geophysical concern (again, according to Robert Brunck) is an underwhelming 4% ROI. The downside is going bust!
All this discussion about business models and commercial success made me think about another industry that generally speaking does a better job of turning R&D into shareholder value—the pharmaceutical business. Here the model is simple; invest heavily in R&D, develop a drug that no one else has, and make a fortune. Why isn‘t the seismic business like pharma? There have been quite a few seismic candidates for company-making new technologies. But if CDP is the Aspirin of geophysics, where is the Bayer? Or, more appropriately perhaps, if Vibroseis is its Viagra, where is the Pfizer?
Those of you of a certain age will remember that both CDP and Vibroseis were actually patented by Conoco and sold under license to many different contracting companies. They therefore were not ‘company-making’ technologies in the way they might have been if a single contractor had invented them. In fact the geophysical business is complicated by the fact that, unlike pharma that sells direct, it plays second fiddle to very powerful buyers—the oil companies. And because of this, much technology is developed, not by geophysical companies themselves, but by various groupings, consortia and joint industry projects (JIP). While these are fun, and can assure good alignment of technology with users’ needs, they tend to spread the intellectual property rights (IPR) rather thin and wide. Conspiracy theorists will see an orchestrated campaign by the oils to keep contractors in their place—and assure multiple providers of any particular technology.
But whether this happens by accident or design, geophysics has indeed got suckered into the outsourced/subcontractor mode of operations. Just about everything is commoditized. From a square kilometer of acquired or processed 3D, through a high resolution 4D/4C survey and even to R&D itself (through the ubiquitous JIP) everything is offered by a multiplicity of suppliers at a competitive (value destroying?) price.
The problem is that the close relationship that geophysics has with the oil companies is a Faustian contract. By taking the oils’ money for R&D, a geophysical company sacrifices the IPR it might have had if it divvied up for the research itself. In the long run, he who risks the R&D reapeth the reward. A similar dilution of IPR happens when companies group together in a JIP, maybe with some taxpayers money thrown in. This may accelerate project start-up—but it ensures that no single company will walk away with the spoils and be in a position to make serious money from the new technology.
Not all of the oil service sector shares its IPR in this way. Logging contractors and well testing equipment manufacturers have a goodly chunk of ‘commoditized’ business—but they also regularly develop new tools and techniques. In their current quarterly reports, the major service companies cite new proprietary technologies for coiled tubing operations, stimulation or cementation. In seismic, Schlumberger’s Q technology is in the same category—and like the wireline hardware is closely followed by the investment community as a potential seismic game changer. So in a way, the ‘new business model’ has been here all the time. If your chosen path is that of selling commoditized services, you have to live with commodity prices. If you want to make big bucks like pharma—you need to develop your own, patented technologies and find some investors with deep pockets.
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