Vol. 58 No. 4

April 2006

John Gibson, Executive Chairman and Chief Executive Officer (CEO), Paradigm

You have been with Paradigm now since April 2005. What changes have occurred at the company since then?

The first three or four months I was here, I was just a director. Then I began to get more excited about what was possible here, and I migrated to being Chairman, then Executive Chairman, and then Executive Chairman and CEO. So I have been in that role about 6 months. What really excited me about the company is that we have tremendous researchers, great scientific products, and an opportunity to make a real difference in the industry with our technology.

The owner, the employees, and I all believe that there is a lot of opportunity for Paradigm, and we have organized ourselves to take advantage of that opportunity. We have made a lot of changes, all in light of trying to grow the company to become the number one provider of high-end tools in the industry. We have brought in a tremendous executive team over the last year. We brought in new sales leadership, marketing and financial leadership, and development leadership. We have made a tremendous number of changes, but at the same time, we had a record quarter for software in the fourth quarter. So it is a case where we think we have taken the wings off the airplane and gotten them back on while in flight without doing any damage to the passengers.

What are Paradigm’s leading-edge technologies?

The industry has tremendous data-management solutions for corporate data management that are already in existence, and we see our competitors doing a very good job of supporting multiclient data access. We also see tremendous offerings from competitors in reservoir simulation, and fluid flow and simulation is an area already covered. So you ask yourself, “What is it that really needs focus in the industry?” And that is what Paradigm’s strength is. I think that over the next 10 years, you are going to see tremendous advances in geophysics and petrophysics coming together. It is taking microdata at the borehole scale and combining it with macrodata such as seismic and making sure that you have the right correlation and the right attribute model to carry into reservoir characterization. So we are integrating petrophysics and geophysics, which really gives us a leadership position in rock and fluid interpretation.

What is Paradigm’s growth strategy?

The industry’s move toward optimizing production means that petrophysics becomes a real driver in every decision on every desktop, and we have a leadership position in petrophysics. And when you leverage it with the geophysics, you give the petrophysicists the ability to see across the whole reservoir and the geophysicists the opportunity to incorporate rock and fluid analysis from the borehole. As the industry tries to enhance recovery, to get another 8% or 20% or 2%, it is those two disciplines combined on the front end for interpretation of the rock and fluids in their spatial positions and how they are changing dynamically over time that is really going to bring all of the value in the industry. Our growth will be a result of that becoming the focus.

Where do you see Paradigm 5–10 years from now?

We will be the university of the industry, I believe, particularly on the interpretation side. We will have the best and the brightest. Another thing that attracted me to this company was that it is an international company, not a U.S. one. This is truly an international group of talent, and our culture will continue to support that.

You have worked as an executive at both large and small firms. What particular challenges does a company like Paradigm face in the marketplace?

We are on the right-hand side of the decimal place compared to our two large competitors. We are not a threat to those companies, but in terms of size, we are the third-largest software company in the oil and gas industry in an industry where going from third to fourth is a big drop. So we are a significant player. It is our only focus, so we are not distracted by allocating capital to field activities. Our focus is on human capital rather than fixed assets. That means you have a different approach to how you work with people and the kind of people that you attract, and that will give us an advantage competitively in the long term because intellectual capacity is what is going to drive value, and we have a unique advantage there.

It is more difficult to work here than in a large firm because you have all of the same problems and none of the infrastructure. You don’t have the extra staff, so you literally have to solve many of the problems yourself. You have to have far more talent to run an international company of this size than you do to run a large company because you have the exact same difficulties with little support. A big portion of the blood of our industry is tied up in mid- and small-cap companies that are operating globally, sometimes through sheer will.

How is the industry handling this period of high commodity prices? Should it be doing anything differently?

I am concerned, and I think the industry needs to do more. We are about to infuse billions of dollars of capital into our industry in building new equipment, new rigs, new analysis equipment, new tools, etc. And we are building that equipment without truly having a plan as an industry about what our needs will be in 2025. The average age of equipment in our industry, if you just look at drilling rigs, depending on what class, is between 17 and 25 years. If everything we are building today will have to service the middle of the bell curve of activity in 2025, are we seriously thinking about, understanding, and designing for the problems we will have to solve 2 decades from now? Unfortunately, we are not, in my opinion. And it is because we have gotten so accounting-driven and quarter-to-quarter driven that it is difficult for the industry to put teams together in collaborative ways to address longer-term issues.

I would hope to see, if prices stay in this range, more collaborative activities in the industry to allow us to address problems we see a decade out, not just in the next 3 months. Right now, it is mainly just “work as hard as you can,” and everybody is at full capacity. So how do you free up time to think of the long term when, at the moment, we are completely consumed by the short term?

The industry tends to spend large quantities of capital sporadically. The last huge injection of capital would have been in the late 1970s/early 1980s, hence the reason that so many rigs are about 20 years old. So here we are again about to inject another large quantity of capital over the next several years. We are likely to go through another cycle, and then we will drop our capital budgets, except for maintenance, for a decade or so. That is under the assumption that the commodity price tends to be cyclic, and I lean that way.

How do high commodity prices affect operators’ interest in acquiring new technology?

There is more demand but at the same time a difficulty in deploying it because they are so busy. One of the dilemmas with new technology is that you have to stop long enough to absorb it. So how do we work with them to help them bring in new technology at the same time they are keeping the highest levels of productivity possible with their work force? We have to build technology that is easily absorbed, so we are working on human factors, improved user interfaces, automation, and concurrent processes—anything that can speed up the learning process and the productivity for users because they are faced with such tremendous workloads as it is.

Do you believe that service companies are working with operators early enough in the technology development process?

I see some great examples of that out there. One great example of a collaborative company is Total. They are very focused on having the best tools, the best work force, and being equipped with technology that makes a difference. It is exciting to work with Total. They are a good customer of ours and a good customer of our competitors, and they are really investing in leading technologies. We see the same in markets in Asia, in China, very much so in Latin America at Pemex, PDVSA, Petrobras, and Repsol.

What upstream technologies do you think have the potential to significantly increase revenues and/or cut costs over the next decade?

The industry is still adapting to visualization. It has taken us a decade to learn how to see huge volumes of data, but we are now moving beyond seeing. It is a shift from seeing to perceiving, from visualization to perceptualization, where we are analyzing huge volumes and beginning to extract knowledge from those volumes instead of just seeing them. At one time, just seeing was enough. But now you have to be able to analyze and vet. We are looking for small anomalies that reside within huge volumes, and without mathematical rigor we are going to miss those anomalies. You will see us move rapidly in that direction.

We are going to see a lot of geostatistics. That is the reason that researchers and human minds are so important. Because it is not just going to be creating tools for people to look at; it is going to be about creating analytical tools to enable people to actually go and find small anomalies in large volumes in a faster, more efficient way.

This will be a very technical industry in another decade. It is already one of the leading technical industries in the world today, and I see no possibility that the technology is going to stop. It will become more quantitative, more rigorous, and we are going to need better and better scientists to use this technology, to understand the algorithms and the parameters that drive the algorithms. And those algorithms and parameters will be used to automate processes. We need better mathematical geologists and more rigorous analysis going forward.

How will that affect the workforce?

This industry is going to go through a tremendous change just because of the average age in the industry. The new work force will be smarter, better educated, and more quantitative than the work force of the past. This has been a very technical industry that will continue to become more technical because the reservoirs we are trying to exploit are more complicated, the wells we are drilling are more complex, the extraction methodologies and the chemistries that we use will be more complex, and the interactions between the fluids and the tools we use to make measurements are going to be better known. Everything is escalating to higher levels of technology at reasonable costs. That is another thing—technology is getting less expensive over time, so we can continue to add technology to our extraction methodologies without adding cost.

How should the services industry face demographic challenges, particularly in terms of attracting young people to the industry?

For us, we are losing a lot of our middle-aged people, men and women in their mid- to late 40s, to our customers. But we realize that we are bringing in a lot of new hires, and we are bringing in seasoned people. We are blending those together, and that is building the next generation of interpreters.

I wrote one of the first papers on the demographic challenge facing the industry and drew the graphs showing the age distribution. I happened to be talking to a group of Human Resources people on an airplane, and I started asking more people questions and I saw that it was a serious issue, but that each company was dealing with it independently. But now I am not too worried about it. I see enough young people coming into the industry, the productivity improvement we are getting through new tools, and the number of student memberships in our professional societies. There is a lot that makes me far more confident today that we will be able to address the problem. As we look internationally and stop thinking about it in a U.S.-centered way, it is not an issue.

Training is an issue because there is an experience gap as opposed to insufficient people. You used to give people 7 years of experience in 7 years. Somehow, we have to take our software tools and give them 7 years of experience in 7 weeks. So how do you do that? We don’t have the wall-clock time, but we have the people. And so let’s take those people and keep them from having to spend the next decade acquiring certain sets of knowledge.

What are some technologies currently available that could reap real production and economic benefits?

4D seismic is a big topic today. 3D seismic is 4D seismic at time zero—we have always collected 4D seismic. When you have logged a well and you go back and run a cased-hole log 10 years later to see how fluids move behind pipe, that is 4D. All you are trying to do is understand the dynamic motion of fluids in the subsurface. How often we need to collect that data, we don’t know yet. It is not economical to collect it every day. 4D will certainly help us improve production and recovery from fields, but it is underused today. We have to continue to work on the cost issues. It will have tremendous value for the large fields first, which can carry the burden of cost and return the investment much faster than the smaller fields, so we will see it work its way down.

What are the biggest challenges facing Paradigm in the short to medium term?

We have great technology, so our challenge is execution. We have to go and tell people about our software and about how it adds value to their business. Our challenge is making our customers successful because if they are successful using our tools, then we will be successful.