The One Company Oil Majors Need

12/12/2011 10:15 am EST

Focus: GLOBAL

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

You can’t get the oil and gas if you don’t know where to drill, and this company makes the best imaging systems in the world, writes Elliott Gue of Energy Strategist.

Seismic services involve the use of sound and pressure waves to map underground rock formations that could contain oil and natural gas. As with most energy-related services, seismic work has become increasingly complex and technologically advanced in recent years.

Drilling deepwater wells is extraordinarily expensive. Day rates for the rig alone can top $600,000 per day, and a single well can take 90 or more days to drill. In addition to the rig and crew, producers must pay services firms to handle a host of tasks, including drilling, logging and testing the well, and managing the drilling fluid. Drilling alone can cost well north of $1 million per day.

Given this expense, it’s no surprise that seismic services account for roughly one-quarter of all spending on exploration—high-quality seismic information enables producers to identify the areas in a basin that are most prospective for hydrocarbons.

Trial and error is part of the energy business. However, producers in the deepwater are willing to invest in high-quality data to avoid dry holes, or wells with no commercial value.

And the need for seismic work doesn’t disappear the minute a new field is identified and drilled. Companies increasingly rely on seismic data to determine how best to develop a field over time and exactly where to sink wells.

Modern seismic data offers a three-dimensional (3D) image of the formations in a particular field. Computers and sophisticated data analyses enable companies to identify the most prospective regions and plan where to sink their wells. Then, four-dimensional (4D) seismic data includes a time element, allowing operators to monitor how hydrocarbons move through a field as it’s in production.

Petroleum Geo-Services (Oslo: PGS, OTC: PGSVY) provides higher-end seismic solutions to deepwater operators, a segment of the market that offers superior returns. The company’s high-density 3D data products account for 70% of new orders, and demand should continue to pick up as exploration and production (E&P) firms target increasingly complex deepwater fields.

Brazil, home to some of the biggest offshore discoveries, accounts for 15% of the Norwegian firm’s revenue. Petroleum Geo-Services has amassed one of the largest libraries of 3D seismic data in Brazil, giving it a leg up in this rapidly growing market.

Petroleum Geo-Services’ proprietary GeoStreamer platform differentiates the company from the pack. By towing these advanced streamers further beneath the surface, the company reduces noise and weather-related disruptions, providing a sharper image and deeper penetration than conventional techniques.

This technology is particularly useful in the North Sea and other markets known for their harsh weather. The company continues to hone this technology to improve accuracy and efficiency.

About half of Petroleum Geo-Services’ vessels are equipped with GeoStreamers, up about one-quarter from a year ago. By the end of 2011, this technology will be deployed on two-thirds of the fleet. All the company’s ships should be outfitted with the technology by some point in 2013.

Management estimates that the company earns a price premium of more than 12% when clients opt for GeoStreamer-based solutions rather than conventional products. And this price premium appears to be growing. Customers are willing to pay up for high-quality data, boosting Petroleum Geo-Services’ profit margins.

Petroleum Geo-Services’ leadership in 4D seismic technology also bodes well for future growth. The company is testing seismic equipment that’s permanently installed on the seafloor and provides a detailed glimpse of how the field’s characteristics change over time. This information enables producers to enhance their production methods and maximize ultimate recovery rates.

With E&P outfits expected to invest heavily in deepwater exploration in 2012, Petroleum Geo-Services should win its fair share of work.

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