Seismic activity now lags drilling rigs, analysts say

Rather than being a leading indicator of US drilling activity, the seismic business has become the "lagging result" of drilling activity because improved processing and data gathering technology has created a backlog of drillable prospects, say analysts with Raymond James & Associates Inc.

In the past, increased seismic crew activity typically indicated that drilling activity would follow soon after, said Raymond & James authors J. Marshall Adkins and James M. Rollyson.

They said exploration and production companies would invest in seismic data, then use that information to develop and ultimately drill prospects. Up until 1995, the seismic crew count typically moved up in advance of drilling activity. But as seismic crews began to outpace the number of rigs drilling, the backlog of drillable prospects rose high enough to begin driving the drilling rig count. The backlog of prospects then began shrinking when the rig count increased during 1997.

Seismic companies continued shooting seismic data for their own spec data libraries through 1998, when the rig count began to fall early that year. From early 1998 to mid-1999, an "incredible build" in seismic data grew, as did the implied build of drillable prospects.

"If we assume a constant efficiency relationship between seismic crews and drilling rigs, then the excess amount of drillable prospects should be running out right about now," said Adkins and Rollyson.

Instead, improvements in data processing technology, such as improved computer horsepower and advanced processing algorithms, have allowed exploration companies to process and reprocess more data in less time, meaning that more prospects can be developed per active seismic crew. Advanced data gathering technologies, such as more streamers per seismic vessel, allow more data to be gathered per crew or vessel. The emergence of multiclient data is giving more companies access to 3-D seismic data at lower costs, allowing more prospects generated for the same amount of seismic data.

At the same time, Adkins said that overall drilling efficiencies have deteriorated. "As we continue to try and exploit our mature basins and reservoirs in the US, you're seeing a clear trend of looking for smaller pockets of reserves that are deeper, even though rigs are more efficient and drilling faster."

Their efficiency, which is measured in their ability to generate new oil and gas production, has dwindled as finding larger pockets of oil and gas becomes difficult. "You're going to get more prospects per seismic crew, but the ability of the rigs to drill prospects is still declining."

"It is the combination of these improved seismic efficiency trends that lead us to believe that it will be late 2001 before the seismic business will see a meaningful increase in the number of active crews," the analysts said. They predict that exploration companies will spend more money on processing and existing data libraries to generate drillable prospects for an "exploding level" of drilling activity. "Even though seismic efficiency gains are likely to continue into the future, we are convinced that substantially higher levels of drilling activity over the next five years will lead to a meaningful increase in the number of seismic crews."

Because of the improved seismic crew efficiencies and "tremendous" backlog of data and drillable prospects, Adkins and Rollyson predict that the industrywide seismic crew count wouldn't improve until late 2001. But instead of foundering late next year, seismic companies will probably see gradual improvements in their overall business activity levels over the next 6 to 12 months, the analysts said.

The near-term outlook is favorable for seismic companies due to increased processing and reprocessing of data and the sales of existing library data, but they said it might take several years before the industry seismic crew count returns to 1997 levels. Adkins and Rollyson expect "an exploding drilling rig count" to eventually work off of the high backlog of prospects and lead to meaningfully higher demand for seismic crew activity over time.

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