PGS regroups for a new year

Strandenes: Let me recap just a little. We had a 10-month period this past year planning for the Veritas merger. That was a difficult period for the company and employees because we were restricted in our communication with the market due to SEC regulations.

The financial markets reacted very negatively to the merger cancellation, which put the company into a difficult situation. We regrouped and prepared for a standalone future. After the stock price plummeted, Jens Ullveit Moe of UMOE Invest AS bought 10.8% of the stock. This was a very positive thing for PGS, having a serious industrial leader in Norway believe and invest in the company. Shortly thereafter, he called for a general shareholder meeting and proposed a new board of directors. The new board was elected, marking the start of a new era.

The company has some financial challenges ahead; we have a large debt with some significant maturities in 2003. The good thing is that the underlying business is healthy. All our assets are in full production, both in the geophysical group and the production group.

OS: Can you tell me about the Atlantis project?

Strandenes: This is a subsidiary that holds acreage in the Middle East. We are working act-ively to divest this asset.

OS: Is the company planning cutbacks?

Strandenes: We have an ongoing cost reduction and streamlining program. That was started as part of the requirements for the merger, put in place by the old board. But, all our competitors have to do that (reduce costs) too. It is a part of everyday operations.

OS: What is the direction planned by the new board of directors?

Strandenes: The board's first action was to consolidate the corporate headquarters to one location. The Houston, London, and Oslo corporate offices were merged into the Oslo, Norway, location. This will have no effect on ongoing operations, and we will continue to have a strong presence around the world as before.

The board's immediate focus is to restructure and stabilize the financial side of the company. Once this is achieved, the company's new CEO, Svein Rennemo, together with the new board of directors, will set the next direction for the company.

OS: How does your production group figure into the situation?

Strandenes: PGS Floating Production secures the company's cash flow and stabilizes the fluctuations in our other businesses. Banff has been a challenge for us. We have fixed the technical problems with the vessel, which is now working very well, but the reservoir is producing only around 10,000 b/d. The vessel has a capacity of 95,000 b/d, so it is clearly underutilized.

There is potential for increasing production. The operator is currently drilling a new well that is expected to come onstream early next year. In addition, we are looking at the possibility of tying-in other production from the surrounding area. However, the three other FPSO assets are performing very well.

OS: What about the geophysical side?

Strandenes: We have been able to get a satisfactory part of the high-end portion of the seismic market (4D, 4C, large streamer count). We also have a reasonable backlog of work ahead of us. On a worldwide basis, we have outstanding awarded contracts of close to $300 million. However, there is still some overcapacity in parts of the market.

OS: What do you see in the near future for the marine market?

Strandenes: One area that will come in the Gulf of Mexico is 4D seismic projects for monitoring production. This is already a strong part of the North Sea market and we expect it to carry over into the Gulf, as well as other mature basins around the world. Depending on the field, 4D projects require shooting at least once every two years. We have also seen a large increase in the 4C market for the first time this year, and we expect that this will constitute a reasonable part of the marine seismic market.

OS: Does the industry need to reduce the number of vessels?

Strandenes: As mentioned before, there is still some overcapacity in the market, meaning that the world fleet may still be too large. How-ever, from an individual service company point of view, this question very much depends on the market position and distribution of the fleet, as well as technology.

PGS has been able to maintain a satisfactory position in a difficult market through our innovative business models and technology focused strongly on efficiency. Also, the seismic markets are seasonal in the various geographical regions, and small shifts in the location of the world fleet may influence the supply-demand situation quite significantly. For the time being we see that we are fully able to utilize our fleet on healthy projects.

OS: Do you intend to upgrade your vessels?

Strandenes: We have a continuous review of technology developments. There is a very careful evaluation before developing new technology because we want to make sure it will be a good investment. We need to have a good return on the effort.

We will be more conservative in the future with technology risk. We still intend to be a leading technology company, but we want to be sure that when we develop and implement technology that gives us a good return. Technology should be used to generate profit.

OS: Have you had any interest from the industry in permanent bottom sensors or downhole seismic systems?

Strandenes: E-fields are a very interesting area. It is something that the industry is looking at, but it is still a developing technology. This is a technology for the future, and currently there is a challenge reducing the cost for these types of projects. However, developing these systems is not a task for the service industry alone. Once an oil company is prepared to actively pursue this technology and invest into it, we are ready to contribute. But there needs to be a business model that distributes the technology risk and commercial rewards between the oil company and the service company.

OS: What new projects are on the table?

Strandenes: On Aug. 1, PGS took over the operatorship of North Sea production license 38, including the Varg field. Operating the field is an interesting project and shows some of the flexibility in business models that PGS can offer. We were producing the field with the FPSO PetroJarl Varg for Norsk Hydro when they decided it didn't really fit in their portfolio any longer. We applied to the authorities to be an operator on the Norwegian shelf, were approved, and took over license 38. We now have a 70% interest in the license through our wholly owned subsidiary Pertra, with Petoro holding the other 30% interest.

The Varg field is good project for us and is delivering more oil now than forecasted when this deal was put in place. The operatorship gives us flexibility in how we manage our FPSO assets and securing the tail-end production from Varg through this arrangement has been good business for PGS. We acquired a sophisticated 3D survey over Varg to enhance the value of the field and are pursuing many interesting options to release further value from the license. We were able to offer both the production and geophysical assets to exploit the field. There are other potential reserves in the license that we are examining as well, including Varg South, which can be tied into the FPSO.

OS: This is an unusual situation with PGS acting as a license owner.

Strandenes: We only do this when it is agreed between PGS and the oil company that it is a good thing to do. We would never apply for exploration acreage in direct competition with oil companies. If there is a win-win situation for both parties, we will keep the field producing, develop the field, and tie in other fields, if available. In short, PGS as operator provides more flexibility in the business solutions we can offer to the industry.

OS: Do you see a risk/reward imbalance in the industry?

Strandenes: The service industry, which pioneered 3D seismic, hasn't been able to harvest its share of the added benefits that it has brought to the oil companies. The single most important issue to be resolved between oil companies and services companies is how to distribute risk/ reward in commercial projects as well as in developing new technology. A situation where the service industry takes on the major risk, and the oil companies harvest the main reward, cannot continue.

It is well known that the seismic companies have not been able to recover their investments in technology and equipment over the past 10 years. There is a need to discuss the role distribution between oil companies and service companies to resolve this issue going forward.

OS: What do you see for the future?

Strandenes: The high-density 3D streamer market is part of the future, especially in connection with 4D proprietary seismic projects. The ability to acquire denser data over producing fields will enhance the value of those fields. We are well positioned to take advantage of this growing market.

The oil industry will see a lot of changes going forward. New players and new business models will appear. The reason for this is that the super-majors hold less than 10% of oil resources of the world; national oil companies and other entities hold the rest. So, many new players will enter the international oil game to expand the client base.

Many US independents are stepping into the international arena. Globalization and privatization will also bring some new players to the game. Some will want technical alliances with geophysical companies.

PGS wants to be a dynamic company with the ability to adapt very fast to the changing environment. The spirit in the company is strong. We still have very good technology and we still have very good people. They are eager to show everyone that we are still here, able to be a serious player, and will be here for a long time.

For information, contact Sverre Strandenes. Tel: +47 67 52 64 00, fax: +47 67 53 68 83, email: [email protected].