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with Rune Eng, President & CEO, Spectrum ASA

08.01.2013 / Energyboardroom

When you took over as CEO of Spectrum the business model had already started to change from proprietary seismic imaging into one focused on multi-client seismic data, with imaging as a supportive tool. What were the priorities that you set for yourself in the latter stage of this transformation?

Going over the origins, Spectrum is a relatively old company, founded back in 1986 as a seismic processing company. The main development in the last three or four years was entry onto the Oslo Stock exchange at which time the owners decided to transform the business model from an asset-oriented into a project oriented business. This led the company to start looking at projects in multi-client. Spectrum became an asset-light company and when I joined the company in 2010 my first objective was to divest a remaining vessel on our balance sheet.

Our next step was to speak to CGG Veritas about taking over some of their global multi-client 2D library. We gained this data last year and we will use this library to grow the company and fund new projects. Less than 10 percent of our revenue now comes from Norway, although we expect to grow in Norway in the coming years. Our new business strategy took around half a year to form and execute.

Spectrum was listed back in 2008 but was transferred to the main Oslo exchange this year. How supportive have the investor community been in Spectrum’s transformation?

The support has been very good. Investors in London, Norway and the USA appreciate the asset-light nature of the business model. TGS-Nopec is the largest multi-client provider in the industry and we have a similar business model to them. We are using technology to the extent that we want to enhance our multi-client data, though we have no major R&D spending. . The share price has reflected their appreciation of this strategy and it has built well over the last 18 months.

How did the CGG Veritas library acquisition redefine the position of the Spectrum?

In the deal with CGG Veritas, they took a major equity stake in Spectrum and at one point they were up at 27 percent. This makes them a strong partner of the company. They have focused their strategy on the high end 3D market and in the more frontier areas they have used Spectrum as a partner in the 2D seismic. We have completed several projects in collaboration with CGG Veritas and some of these have been using 4th generation Broadseis technology. In the 1950s and 1960s the industry started with 2D seismic and 3D seismic was born in the mid-1970s. The next generation saw 3D seismic shot with multiple cables and longer cables. The next innovation has been Broadseis which corresponds to the way that you tow a cable, which is a deeper than normal.

How far does the cooperation extend?

We are two different companies existing on two separate stock exchanges. There is a limit to how much we can exchange technology. We collaborate on projects but we do not exchange employees. They have one board member in our board and have 10 percent of the shares in the company.

Multi-client is a fast growing area in seismic. To what extent has this been driving your business?

2012 is a peak year in seismic and if you just analyze the multi-client investments, the global figure is around USD 2 billion. This figure accounts for the revenues from WesternGeco, TGS, CGG Veritas, PGS, Spectrum, and Dolphin Geophysical to some extent. This growth is thanks to the multi-client model becoming more widespread and accepted.

Just 10 years ago it was important for oil companies to own data. They were ring fencing their proprietary information to keep seismic as a competitive advantage. Since then, there has been a major cultural change, ushering in greater transparency and oil companies now prefer to compete on the interpretation of data rather than on the data itself. Owning data is expensive and going 20 years back oil companies used to have their own in-house seismic departments and assets. Oil companies are increasingly trying to streamline their operations and concentrate on their core subsurface assets, rather than supporting businesses such as seismic.

Today their competitive advantage all centers around innovative new play models and Norway has been leading the way in this technology. In an area like Johan Sverdrup there were already around 3-4 sets of seismic data on the area, the breakthrough came through a combination of new technology combined with new play models.

How are you targeting your multi-client projects in order to generate maximum interest?

It is a fascinating business as we have to be one step ahead of even the early exploration companies. We think and act very much like an oil company in the early phase of exploration. Spectrum has been going to areas like the Mediterranean, South America, and the North Sea to find areas which will eventually become interesting oil provinces. If you had asked anyone 5 years ago whether Lebanon or Israel would be hot spots for exploration, people would probably have laughed at you. Today this is truly a major E&P region thanks to Noble’s gas discovery in the Levantine basin estimated to contain more than 100tcf of gas. This can support the region with gas for a long time and Spectrum was in Lebanon in 2002 back when people were asking us why we were there.

We have recently been opening up Brazil‘s Northern Margin, which will likely come up in the 11th licensing round. In fact, Brazil, which has not had a licensing round for about 6 years, has announced 2 sequential rounds so we expect our data to generate a high degree of interest.
Over the next year, North and South America will become more important, Brazil will remain strong, as will West and East Africa. The Mediterranean is also a strong area, although it is still overlooked in terms of oil resources. Northwest Europe in the Barents Sea has also been growing in significance, thanks to some key discoveries and the settlement of the grey zone between Norway and Russia. The government in Norway is shooting a lot of seismic to map the area and they will continue to do this until they announce the next licensing round. There will also be some collaboration regarding the blocks on the border with the Russian side.

Our total multi-client investment in 2012 will be between USD 70 and 80 million and this looks set to increase in 2013. This year we have had 52 companies in our client list and we again expect this figure to grow next year.

Within the client base how do you see their attitude to risk?

The industry has a tendency to crowd together to avoid risk. A lot of this is down to the oil price. Oil price almost always correlates to the number of exploration wells drilled. When the price was at USD 20-30 per barrel, there was a tsunami of M&A transactions which reshaped the industry and everyone was thinking alike. Fortunately, I think that the industry has come to realize over the last few years that it is better for value creation to channel investment into exploration rather than into a well-timed acquisition. Nonetheless, the players will start to cut E&P spending if the oil price falls below USD 80. Low prices create resistance to moving into deep-water and pre-salt areas in the Gulf of Mexico, Brazil and West Africa.

What can we expect to see from Spectrum in the coming years?

We aim to be number one in 2D seismic data. We will grow in multi-client 2D and we have projects from Asia Pacific, to Africa, Brazil and the Mediterranean. Spectrum will also step into the 3D market. In terms of the cost differentiations, a 2D shoot costs around USD 1 thousand per kilometer including the processing; a 3D shoot costs more like USD 10 thousand, to process one km2. In revenues this move will push up the top line of the company and it is important for us to be in this market. We have already acquired our first Multi Client 3D and we will acquire more 3D data.

Most important is our vision. We want to differentiate ourselves in the 2D market so that we are delivering companies prospects rather than data. We have to be able to give them the results of previous wells and tell them why they were dry. We have to come up with our own exploration stories and think like an oil company. To this end, we have employed three former exploration managers from oil companies. They are the “storytellers” in our company and they have more credibility having worked for the oil companies.

What is the next step in the development of the company?

2012 is not going to be a record year for very long. 2013 will be better and this is thanks to us having good visibility on projects and on the people who work for us. Our industry is based on skilled people. 2013 will be the first full year where the new organizational structure is tested, where we now have dedicated people to take care of various regions from Africa to Asia Pacific. This will have a major impact on the growth of the business.

I want our customers and the industry to look on us not as a seismic company, but one which sells prospects to oil companies – a type of prospect generator company. We use 2D, 3D and EM as tools to inform the oil companies on where they should go.

Having spent many years with other seismic players, what did you see in coming to Spectrum?

Spectrum was an established company with the same global footprint as other major seismic companies. The only place missing from our global operations was Rio De Janeiro which we have been establishing. This company had a good reach but needed to be taken the next level and I wanted to go back to something more entrepreneurial.

My vision for the company is that the client enters our interactive room with a global map of seismic data. They will ask for information on a region and we will call in our relevant expert who will have an encyclopedic knowledge of the region. We aim to astound the client with our in-depth analysis of seismic data around the world and deliver the client prospects. I see the seismic value chain as starting with airborne gravity magnetics, moving to 2D lines, infilling those lines, then 3D seismic, we want to be at the end of this value chain. If there was a hybrid company that sits between seismic companies and oil companies, that is Spectrum and we are getting there.



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