Need for New Ideas, Even in a Time of Tight Cash


The collapse in oil price in the second half of 2014 has brought a sharp cash crunch to the industry. R&D spending in oil and gas rose over the last decade, following prices and as companies have taken on more complex and challenging projects. By 2013, leading researchers and developers in the oil and gas sector were spending over $15 billion annually, double that of a decade earlier.

Will oil company technology spending now be sharply cut as it was during the last sustained price collapse at the end of the nineties? That collapse led to a wave of mega mergers and cost cutting. A new wave of mergers (led by Halliburton-Baker Hughes and Shell-BG) may mean more technology projects will be canned. Shell was selling $15 billion of assets, even before its new acquisition, to pay for already significantly reduced capex and to maintain dividends. Like many other majors, it was struggling to grow reserves or production on its own before the price crash.

The UK is home to hundreds of businesses who supply oil and gas producers, as well as to some key global operators and a range of independents. Much expertise and many skilled jobs depend on this investment. As well as technology work in the larger enterprises, there is a strong interaction with academic institutions, mainly in research and in commercialising and applying key technologies. Nearly 200 oil and gas research projects are funded and spread across around 50 university programmes in the UK. In the tighter environment, where will investment in R&D now come from?

Lessons from the past

These cycles have happened before. Finding and development costs fell throughout the 1980s, driven in good part by improvements in technology. During the 1990s as that downward trend flattened, oil companies sought to prioritise investment by measuring the value that would be added by each technology. But this could be problematic in practice. For the majors, technology capabilities had often simply become an enabler, rather than a real source of value. Access is rarely gained by technology alone, it needs technology plus reputation and deal making confidence.

The price crash and the mega merger wave of 1998-2000 led to significant R&D cuts, including the closing of big technology centres, like those of Amoco, Arco, Mobil, Phillips, Texaco and Unocal. Some of this activity was not completely ‘lost’. A lot of technology development shifted to the service companies and their share of total R&D spend rose.

In the 2000s, the larger players steadily rebuilt their R&D investment. Companies shifted away from simply buying technology start-ups to developing their own technology capability in-house again. Integration between disciplines was seen as key to getting more from applying and connecting technologies. Internal and external teams (from leading universities and government labs) worked together. New research areas like biotechnology and then digital technology started rising up the agenda.

Same again?

It’s a different, more fragmented industry now which must confront this downturn. Technology priorities have changed, and some actors are different. Will service companies once again pick up the slack? Many parts of the service sector are under even more intense near-term cost pressure than the operators. They are losing both business volume and margin, as activity has dropped off a cliff. Deepwater rig rates have almost halved. Schlumberger and Weatherford, for example, each have announced reduced budgets and staff cuts in the thousands. More consolidation is likely. This time the service sector is unlikely to pick up so much of the R&D mantle—at least in the near term.

National oil companies and national champions (NOCs) control around 90% of conventional oil resources and 75% of production. Not traditionally at the forefront of R&D, leading NOCs have rapidly grown spending since 2005 (see chart below). By the start of this decade, Petrobras and PetroChina were matching and exceeding the traditional technology heavyweights, like Shell, Schlumberger, Exxon and Total. The NOCs, with different and often longer-term objectives, more driven by the economic and employment needs of their country, may start to play a stronger role in where key technology initiatives are focused. Many NOCs and governments look to Norway’s precedent, where the oil sector now employs around 10% of its workforce, around 20% of the country’s economic activity and nearly half of its export revenue.

R&D Spending by Global Oil and Gas Producers and Service Companies, 2003–2013

chart

Achieving these objectives will come in part through investing in new technology, just as Norway did, for example, with Statoil’s flagship R&D centre in Trondheim and incentives for in-country R&D. This will position some NOCs as creators rather than consumers of technology. Already, Saudi Aramco, Petrobras, Petronas, and the Chinese NOCs have in-house R&D capabilities and academic collaborations. Saudi Aramco is aiming to become a leading creator of energy technology by 2020. Last year, it announced it would triple its R&D spending. It now has two in-country R&D centres and also collaborations in Scotland, the Netherlands, the United States and China. Petrobras in Brazil has long leveraged its own and foreign universities, developed in-country research centres and collaborated with BG, GE, Schlumberger, Baker Hughes and Halliburton in various local R&D entities and capacities to address the challenges of deepwater drilling.

Newer producers, such as Ghana and those in East Africa, will want to follow countries like Trinidad in developing their universities, research capabilities and vocational training in oil and gas disciplines to provide more, better-qualified people to support their industry, especially when they eventually want to operate their own developments and producing fields.

Technology priorities in a fragmented industry

The number of R&D players may be growing, but there remain a number of common themes of cost, risk and productivity for majors and NOCs alike:

  • Costs have eaten significantly into margins over the last few years despite high oil prices. Getting breakeven points down below $40 to $50 per barrel is a priority in higher-cost basins. Drilling and development costs, especially in deep-water locations—from Brazil and Mexico to the Far East—are still prohibitive, and that is causing project deferrals.
  • Improving productivity and recovery of maturing resources in a lower-price environment is also a common theme. As older fields start to mature, there is an increasing need for better reservoir monitoring, modelling and management of flows. Secondary and tertiary recovery, including steam floods, will be of growing importance. Companies have underinvested in enhanced oil recovery (EOR) technology, perhaps because results are less striking and immediate. However, EOR matters greatly to NOCs. Some, like ADNOC in Abu Dhabi, have set ambitious targets for ultimate recoveries as high as 70%, but have yet to gain the wherewithal to achieve that.
  • Average field productivity is now only 60% in some mature areas like the North Sea. The excessive downtime is driven by failing equipment and so unplanned, reactive maintenance to fix or replace it. Sometimes, around 70% to 80% of operating costs are for equipment or services provided by outside contractors. Simplification and standardisation to more Lego-like modules and smarter management of supply chains and inventories could have enormous impact. So too could digital and other technologies.
  • The search for new reserves leads to a common demand to find ways to de-risk new plays and reduce finding costs. In any basin, the spoils go to those who can drill fewer, better-targeted wells while spending less. This means acquiring more-focused seismic data and a capacity to properly integrate data from key technologies. The challenge will be significant in basins that are little explored, hard to reach, and/or hard to develop, such as in China, India, Myanmar, Africa and Latin America. Here there will be need for faster and cheaper approaches, like airborne surveys (for example, airborne gravity gradiometrywhich has been used with success in East Africa), that can reveal key structures in new basins at sufficient resolution to highlight where to focus much more-expensive seismic analysis.
  • The need for diversity of supply at lower cost is also major goal for growing economies short of their own energy resources. For some—as in Asia and Eastern Europe—the cost of imports is an issue, and developing viable alternatives, including shales where possible, could be important. In China and other areas with dry remote basins, another challenge involves finding ways to get shales to flow where water is scarce.

Recognising the impact of technology and technical expertise

Views vary on how long prices will stay low. The current cash crunch may last into 2016. Geopolitical events, business innovation and technical breakthroughs will still happen—even though they may surprise markets. But whichever scenario plays out, more energy will be needed in the future, as more people want better jobs and better lives. Technology will be key. Those companies—whether leading operators, service suppliers or forward-thinking NOCs—that have planned ahead and nurtured a scarce and valuable resource—their key technical people and capabilities—will be in the strongest positions.

Less investment in R&D by traditional players offers a good opportunity for the increasingly capable national champions and their association research and academic institutions to focus on areas they can do something about and, as the Norwegians have, build up their own resources of exportable expertise. The need to better manage reservoirs, drilling and logistics systems—and to waste and pollute much less—may stimulate new thinking from fresh minds to develop more effective ways to supply and make good use of energy.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.