A portion of the Gulf of Mexico's 3D speculative seismic coverage. Western Geophysical's library of coverage is significant off Louisiana (Image courtesy of Energy Graphics, Inc.).
Non-exclusive 2D and 3D seismic surveys (speculative or spec seismic) have allowed oil and gas companies to explore vast regions of the Gulf of Mexico at a fraction of the unit cost (dollars per common depth point) than is possible using proprietary surveys.
This expanded capability comes at a price - ownership of the seismic data. That tradeoff came to the fore as a result of merger activity between oil and gas producers over the past year and the resulting transfer fees required by existing licensing agreements. This issue was explored in detail at the International Association of Geophysical Contractors meeting during and following a presentation entitled "Current issues in non-exclusive geophysical data - The exploration tool of choice" in Houston last month.
Joe Foster of Newfield Exploration cited the many benefits that inexpensive speculative 3D seismic brings to the Gulf of Mexico oil exploration theater:
- Diversity of companies (more independents)
- Improved subsurface detail
- Higher drilling numbers
- More discoveries
- Quicker field depletion.
The availability of "cheap" seismic has created a strong, competitive Gulf of Mexico exploration market, when compared to other exploration theaters. That competition is now being tempered by merger activity. Mergers are reducing the number of potential clients for the seismic contractors and their future potential data licensing fees.
The Master Licensing Agreements (MLA) that oil companies must sign to use spec data are based on a business model that requires a certain number of data license sales for the seismic contractor to break even. To capture a portion of the lost sales potential associated with a merger, the MLA requires a transfer fee to be paid to the seismic contractor or the surviving company can return the data to the contractor. The latter requires the destruction of all derivatives produced from the seismic data.
Most companies want to retain the data and avoid any transfer fees if possible. Some oil companies consider the license an asset and that it should become part of their data libraries without additional fees. The problem is the MLA. Most agreements are written so that the agreement expires if the licensed company is merged with another. The oil companies suggest that other forces need to be considered:
- Rapidly changing world oil market
- Intense competition that is forcing mergers
- New entrants into the exploration market
- Need for greater efficiencies
- Growing world oil demand
- Need for higher quality seismic data.
The seismic contractors counter that they need to protect future sales of their data as well as make a profit on the surveys they have gathered. Spec seismic was created in the Gulf of Mexico and the business model has been extended to other major oil exploration theaters. What happens in the Gulf of Mexico will set the tone for other world areas.
As this situation evolves, the industry will have to deal with cost of ownership and exclusivity issues. Proprietary surveys are expensive, but the buyer gets exactly what is ordered, to exact specifications. Buyers also get total control of their data.
By outsourcing ownership, the industry is able to view and use significantly more data than it could with proprietary surveys. If the demand continues for inexpensive readily available 3D seismic data, the petroleum industry sector that makes the data possible will have to be considered. This consideration is even more important in less competitive world regions.
The IAGC has a new model licensing agreement that addresses the major concerns, and is making copies available. The discussion on these issues is likely to continue at upcoming regional and annual geophysicists meetings.
How Western views transfer fees for seismic data
Jim White
Western Geophysical
It is an extremely chaotic time in the oil and gas industry, in part due to the increased activity of mergers and acquisitions taking place. And nowhere is the impact more significant for seismic contractors than in the issues of data transfers.
Although most contractors have a signed and binding data use license agreement in place with the respective licensees, the issue of negotiation of the transfer of the data to the recipient company has become somewhat clouded, with both sides voicing opinions and conclusions regarding compensation. However, the facts are straightforward in the language of Western Geophysical's general license agreement:
"This agreement and the use rights hereunder shall automatically terminate in the event the ownership or control of Licensee materially changes by virtue of merger, acquisition, consolidation, buy-out, or the like unless Western has given its prior written consent to assign or transfer this agreement and the data licensed hereunder to the successor in ownership or control, provided, however, that this agreement and the use rights hereunder shall not terminate, and Western's consent shall not be required in the event of a wholly internal corporate reorganization whereof Licensee's parent causes a restructure or realignment of the various companies in the corporate family. In the case of such internal reorganization, restructure, or realignment, the corporate organization assigned the responsibility for exploration or production responsibility for the area covered by the data shall be considered as the Licensee under this agreement. Western's consent to assign or transfer may be conditioned upon the payment of a transfer fee."
The important point to consider here is the statement "may be conditioned upon." The actual compensation for the transfer will be determined by taking into consideration the following: total data volume, licensed price, present value, and levels of spending (historical). After analyzing the information, Western will initiate negotiations on a compensation package acceptable to both players. As well, it is important to understand that we cannot initiate these discussions prior to the deal closing without the consent of both oil companies involved. Obviously, a joint discussion has historically produced the smoothest negotiations for the transfer of data. It is the most preferred route, and is the one we pursue.
Another important point to understand is that once a merger or acquisition is finalized, the data use license agreement terminates unless prior written consent has been given. Therefore, a grace period is usually offered, in good faith, to allow for such time to negotiate the data transfer. However, if it is apparent that the oil company involved has no use for such data, has protested any compensation, or cannot resolve their interest in a timely fashion, then we simply request that all data be returned immediately. This is the least preferred route, and, if at all possible, the one we try to avoid.
In summary, the issue of transfer fees is obviously a hot topic. It is apparent that some companies fully understand the data use license agreement and its restrictions. However, there are some companies who do not fully understand them and are left with an impression of "paying twice for the data."
Author
Jim White is Vice President of Worldwide Multiclient Data for Western Geophysical
