Oil Companies Can’t Innovate?

I have just returned from two digital-operations conferences in Aberdeen. There was a common complaint among technology providers. They complained constantly that oil companies are slow to make decisions and don’t innovate (or specifically – buy their products). Some vendors even suggested that oil companies were 20 years behind the curve – that there are proven technologies available and in use in other industries that are yet to be deployed.

Of course, this is demonstrably wrong. Other than space and defence, I cannot name many other industries that can do something comparable to placing a drill bit 3KM into the earth in a water depth of 1KM with an accuracy of a few tens of meters. Engineers do this with real-time information from the drill-bit being beamed across the globe to operations centres thousands of miles away. That’s pretty amazing.

In truth – much engineering innovation comes from service companies rather than oil companies. Lots of technology and information processing is applied to exploration and drilling, a lot less in production-operations. The split in innovation from oil company to service company can be traced to decisions in the 1970’s and 80’s, the efficiencies and breakthroughs arose from companies such as Schlumberger, Gearheart and Atlas. However, the super majors such as Shell, BP and NOC’s (National Oil Companies)  like Aramco still undertake loads of research and have come up with solutions – such as polymers, de-ionised water for injection and their own seismic interpretation algorithms.

Still the point is valid – the 4th industrial revolution will mainly affect industrial operations. There is a distinction between operations within the business of oil-field services, and operations within the production of hydrocarbons. Both have the opportunity to become more efficient. Despite the opportunity, I’ve witnessed the complexity of buying and lack of progress in technology adoption within oil company operations, and it’s very frustrating.

I had a conversation with a senior exec at one of the new independents. I asked him why new ways of working were not being adopted.  His answer was very interesting. He told me that his team had just completed a new well on an old field. The well cost about £20m, took about 8 weeks from spud to completion, and was flowing at 3-5K BBl/day. It was simple, quick, contained, could be purchased as a work-package and was very much business as usual. No disruption to the organisation. That’s a return of more than 100% pa, a payback period of less than a year, and simple.

New technology implementation (the types of activity I was proposing) couldn’t promise that sort of percentage (or absolute) return, sounded complex and would – inevitably – require significant change to implement within the organisation. He had a point.

But that’s not an excuse. One day, and it may be soon, the sort of margins available on wells will disappear. There will be fields where the lifting cost exceeds the sale price for crude – but where there are still significant hydrocarbons left in the reservoir. In these situations, the impetus to reduce the cost of operations will be provided by the opportunities for profit. Somebody will be interested.

Look at what happened with shale in the USA. Fracking is not a new idea. The innovation of shale came from the combination of planning drainage patterns, drilling accurately, hooking up without interruption and – crucially – increasing the rate of development while dramatically reducing the per-well cost. Once this approach to development was established, it was game on.

When the big boys bought in – I was at BG we bought into Exco [link] – they didn’t come to the low-cost shale drillers and tell them to adopt the big-oil processes. The ponderous decision making and bureaucratic approvals required for $100m HTHP that takes 6 months to plan and drill, would have been impossible to handle the programme needed for a campaign of sub 100K 4-day wells required for shale.

It’s going to be the same again. With the late-life fields and new players, someone is going to figure a way to get the operating costs per barrel in a late-life field down below $10/Bbl and the big-boys are going take notice and learn.

The innovation required is going to come from low-cost technologies combined with an efficient operating model. Clay Christiansen in his book The Innovators Dilemma [Link  ]examined the disk drive industry and how the “big-oil” of storage were out competed by start-ups with sub-performance (but cheap) technology. Once a foot hold was established in the market – the performance of the new technology rapidly improved to the point where the big buyers switched. This left the previous big providers to decay into obscurity.

The North Sea oil industry was a pioneer in offshore development and much of the current techniques for long-reach directional drilling, FPSO and sub-sea originated there. With the business opportunity afforded to entrepreneurs by late-life field extensions, now is the time for innovation in how to operate cheaply. On-shore Middle East can produce oil sub $10 / Bbl the Offshore North Sea is $45. It’s time to innovate that gap away. (link):

(OK, I know the figures aren’t that simple due to capex and taxes but the principle stands!).

Image credit: https://jillwallace.com/vignettes/2017/11/8/pimple-on-the-ass-of-elephant

 

 

 

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upstreamgareth

Entrepreneur, Management Consultant, Technologist - Interested in all things Upstream Oil and Gas, New Ventures and Projects.