What happened to oil and gas R&D?

Oil IT Journal editor Neil McNaughton back from the European Association of Geoscientists and Engineers reflects on how R&D used to be and how it is now. Are petroleum engineers really an endangered species? Why do oils lag so far behind other industries in R&D spend?

Once upon a time, large oil companies were hard to get into, but once inside, there was, how should I put it, an easier atmosphere in the workplace. Companies tolerated independent thinking not to say eccentricity. They financed research—often with their own laboratories investigating most everything from palynology of continental slope deposits, through time series analysis for seismic prospecting and downstream to catalysts for refining. In fact the old approach to R&D way was in many respects rather like the ‘new way’ as exemplified by the easy going attitude of Google and other dot coms—with their indoor basket ball games, pizzas delivered to every cubicle and an open attitude to research on the basis that something useful may turn up from even the craziest seeming projects. Well maybe not, but you get the picture...

The special EAGE R&D session on research (see page 6 of this issue) showed just how much the picture has changed in the thirty years or so since the halcyon days I refer to above. Today, it is hard to categorize, let alone understand the situation regarding R&D in the upstream. On the one hand, large oil companies have been through a long phase of reorganizing, of acquisitions and mergers that has turned established in house research inside out when it has not simply been wiped out. On the other hand, governments, looking to reduce costs of universities have rationalized out of favor subjects like geology and petroleum engineering and encouraged the financing of the remaining research programs by industry.

On the face of it, this should have led to a perfect match between a new, outsourcing paradigm with oils migrating their research effort into universities and consortia. But if Pat Corbett, professor of petroleum geo-engineering Herriot Watt university is to be believed, this is not what has happened at all. In fact Corbett thinks we may even be on the edge of a Petroleum Engineering ‘mass extinction.’

A Financial Times survey this month* discovered that despite a 16% hike in R&D in 2007, western oil majors lag behind other industries, with ‘strikingly low’ expenditure of less than 0.3 per cent of turnover—compared with 15% for technology and pharmaceutical. The big R&D spenders are Shell, Exxon, Total and Schlumberger.

I’d think that the R&D enigma is symptomatic of a wider malaise in the way large oils have been managed over the last few decades. In the latter half of the 20th century, the industry was pretty profligate across the board, with decades of growth into virgin exploration territory and rising oil prices in the 60s and 70s. The wheels came off in the late 80s and 90s as the oil price collapsed to around $10 per barrel. Which opened the way for a new approach to management. The cost cutting era began with huge losses in the workforce. Consultants made promises of economies from outsourcing. Benchmark studies showed that oils performed like dogs when compared with banking and financial services and later with the dot coms. The key performance indicator (KPI) era began with the notion that financial improvement could be driven from the shop floor.

Meanwhile the majors turned their attention to ‘giant hunting,’ only looking for really big stuff and began to divest non core assets. I’ve never really understood giant hunting. Its a bit like Coke saying, ‘We don’t care about selling bottles—we’re going to focus on selling tanker loads.’ And non core? To divest the smaller stuff says, ‘Despite our huge investment in IT, our outsourcing and cost cutting, we are not a very efficient operation and can’t really sweat the small stuff.’

Bottom line is, all the benchmarks and KPIs in the world won’t tell you what the oil price in going to be tomorrow. Investors understand that a share in an oil (or service company) is essentially a bet on the future oil price. Cost cutting, whether it is in R&D or in IT, is a bet on a low oil price and vice versa. The trouble is that companies have been slavishly following the cost cutting approach for so long that they are continuing with it even during the current boom. There is a lot of inertia in management fads unfortunately.

But there is light at the end of the tunnel, thanks to the destructive and creative forces of capitalism. As big oils have shed their staff many have gone on to work with or create independents. According to a PFC Energy study quoted in the Financial Times this month, recent exploration successes have been ‘mostly limited to small E&P specialists and national oil companies, which now control three-quarters of worldwide reserves.’ Ironically, the startups are ‘aggravating the talent shortage faced by large oil companies’ as experienced executives jump ship and form their own start-ups.

Are they financing R&D? Probably not to the same extent as the majors used to. But some independents are pretty active in the application of cutting edge technology. It makes for a great differentiator and is a great tale to tell the investors too!

R&D can be viewed as a bell weather of oil and gas activity at large. During the last downturn most majors were wrong footed. BP’s stance on R&D has gone through a complete cycle since the 1980s when its world class R&D center was closed and the job was largely left to contractors. As Michelle Judson explained, BP now has returned to a more hands-on approach with ‘flagship areas’ selected for in-house technology investment preceding outsourced ‘at scale’ implementation.

In the end it’s probably impossible for majors to go counter cyclical in a any significant way, although their current failure to replace reserves should be a warning against the cost cutting across the board mentality. It’s not just that NOCs have the oil, it’s also that they have a more recession proof game plan than the western majors. For governments the picture is different. Governments have shorted oil in the past as they closed geology and PE departments. Geoscience funding is now targeting global warming and it’s easier to get funding for research on pre Cambrian weather systems than on maximizing oil recovery!

* www.oilit.com/links/0807_5

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