A new regime for innovation and technology management in
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Transcript A new regime for innovation and technology management in
A new regime for innovation and
technology management in the E&P
industry
McKinsey Research Project
July 2001
010731Technology in E&P-main pack.ppt.ppt
The E&P industry is technologically one of the most
advanced
The E&P industry has been,
and still is at the leading
edge of many technologies.
It was the key driver behind
the explosive growth in
computing power during
the 70’s and 80’s…
… and many high-impact
new technologies (e.g. 3D
seismic, horizontal wells,
FPSOs) fully penetrated the
market in the ’90s.
Today it continues to
integrate advanced
software, material science
and robotics.
1
010731Technology in E&P-main pack.ppt.ppt
Independent studies conclude that new technologies have
created significant value in the industry
EU study: Reserves
gains 1990-1997
Shell study: Total pre-tax
benefit in 5 Shell units
Billion boe oil and gas reserves in
UK, Norway and Denmark
US$ billions (1991-1993)
Subsurface
Seismic
Drilling
Floaters
Other
Well
4,1
Facilities
3,8
32
8.3
~45
0,5
X
Reserves
1990
(minus
prod
90-97)
Due to Other
Reserbetter factors ves
tech1997
nology
Source: EU Energie publication, OGJ, EIA
Operating
cost
1991
X3,3
Total
benefit
from
new
technologies
Total
cost of
R&D
and
impl.
Op.
cost
1994
2
010731Technology in E&P-main pack.ppt.ppt
However, too many potentially high-impact technologies
have failed to materialise
Text
February 28, 2000
The volume
of
transactions
conducted
on-line is
growing
rapidly, but
some sectors
are likely to
outstrip
others.
The volume
of
transactions
conducted
on-line
Financial
institutions
will spend
more on
electronic
commerce
Financial
institutions
will spend
more on
electronic
commerce
technology
than on
branch
technology
in the Year
2001.
Financial
institutions
will spend
more on
electronic
commerce
Now it’s the
turn of the
small
companies ecommerce
promised a
level playing
field. Now
it’s the turn
of the small
companies ecommerce
promised a
level playing
field.
Direct Hydrocarbon
Indication and
slimhole drilling
cuts exploration
cost by 70%
Financial
institutions
will spend
more on
electronic
commerce
Now it’s the
turn of the
small
companies ecommerce
promised a
level playing
field.
October 2, 1999
The volume
of
transactions
conducted
on-line is
growing
rapidly, but
some sectors
are likely to
outstrip
others.
The volume
of
transactions
conducted
on-line
Financial
institutions
will spend
more on
electronic
commerce
technology
than on
branch
technology
in the Year
2001.
Financial
institutions
will spend
more on
electronic
commerce
Now it’s the
turn of the
small
companies ecommerce
promised a
level playing
field.
First platform free deepwater development in
operation – cost down by 50%
Now it’s the
Downhole separation….…multiphase
turn of the
small
pumping…smart wells…
companies e-
Financial
institutions
will
Financial
institutions
will spend
more on
electronic
commerce
commerce
promised a
level playing
field.
Now it’s the
turn of the
small
Financial
institutions
will spend
more on
electronic
commerce
January 15, 2001
The volume of
transactions
conducted on-line
is growing
rapidly, but some
sectors are likely
to outstrip others.
The volume of
transactions
conducted on-line
Financial
institutions will
spend more on
electronic
commerce
technology than on
branch technology
in the Year 2001.
Financial
institutions will
spend more on
electronic
commerce
Financial
institutions will
spend more on
electronic
commerce
technology than on
branch technology
in the Year 2001.
Financial
institutions will
spend more on
electronic
commerce
Financial
institutions will
spend more on
electronic
commerce
Financial
institutions will
spend more on
electronic
commerce
Gas-to-liquid plant to
be built with total
cost of USD 15/boe
Financial
institutions will
spend more on
electronic
commerce
3
010731Technology in E&P-main pack.ppt.ppt
Leaders in the E&P industry are struggling to capture the
full potential from technology
Technology related concerns
Why of current interest:
Strategy: How could we build a distinct
strategy based on our technological
capabilities?
Many companies have failed to
leverage their technological strength
in a holistic strategy
Investments in new technology: Should
we fund technology development, if so –
how ?
Investments have been very cyclical –
good projects stopped despite huge
long-term potential
Organization: How should we
organize/work to maximize value creation
from new technologies?
Recent organizational trend has
resulted in less willingness and
capacity for new technologies
Sourcing: How could we work with our
suppliers to maximize value creation
from new technology?
Currently there are limited incentives
for suppliers to push forward new
technologies
4
010731Technology in E&P-main pack.ppt.ppt
McKinsey conducted a knowledge building initiative to gain
understanding of the issues and to identify solutions
Phase 1
Develop perspective
on innovation and
technology in E&P
2001:
January-March
Technology case
studies:
Phase 2
Share with E&P Co
and Technology
Co. and adjust
April-June
Phase 3
Present and
support teams
and projects
July-Dec
Interviews
Survey on E&P
companies by OFSEs
5 mature technologies:
• 3D, MWD, Horizontal
wells and FPSOs,
subsea trees
20 with E&P Companies, e.g. :
• Shell, Norsk Hydro, Exxon, Statoil,
Enterprise, Unocal, ENI, Amerada Hess,
Conoco, Adnoc
• 15 questions
12 promising new
technologies:
• E.g. smart wells, 4C
sesimic, downhole
separation
15 with OFSEs/ technology companies, e.g:
• Halliburton, Schlumberger, Baker Hughes,
Roxar, Read Well Service, PGS, ABB, Stolt
• Participants: leading
10 with banks, governments. and R&D
Institutions, e.g.:
• Imperial College, First securities, Simmons,
DDB, CERA, Chr. Michelsen
• Ranking of 8 E&P
companies
OFSEs/technology
companies in Houston,
London, Oslo,
Stavanger
5
010731Technology in E&P-main pack.ppt.ppt
We conducted many case studies within the main
categories of technologies
Communication and
visualisation
• Broadband and remote
operations
• Visualisation
Subsurface
• Seismic (2D, 3D, 4C,4D)
• Reservoir simulation and
management software
• Monitoring
Downhole
• Smart wells
• Downhole metering
• Downhole separation
Drilling and logging
• MWD
• Horizontal drilling
• Slag cement
• Expandable casing
• Dual gradiant drilling
• Offshore slimhole
drilling
Yellow: Technology case
studies performed
Subsea and pipeline
• Subsea trees
• Multiphase metering
• Risers and pipelines
• Subsea separation
Topside and platform
• Generators
• Separators
• Valves and pumps
• FPSO
Processing
• GTL
• LNG
6
010731Technology in E&P-main pack.ppt.ppt
A new regime for innovation and technology management
in the E&P industry
New technologies are required to meet the opportunities and challenges
in the E&P industry
Innovation and introduction of new technologies in E&P is inefficient
The conduct of E&P companies and OFSEs is the prime cause of this
inefficiency
This technology gap is an opportunity for value creation provided that a
new regime for technology management is successfully introduced
7
010731Technology in E&P-main pack.ppt.ppt
Oil and gas supply are predicted to grow faster than other
energy sources
Average
annual growth
rate (%)
World energy supply (Mtoe)
6000
Oil supply
5000
20002020
Oil
19802000
4000
Gas
3000
Coal
2.0
0.6
Gas supply
20002020
19802000
2000
2.9
2.1
Total energy
consumption
Nuclear
1000
20002020
1.8
Hydro
0
Other renewable
19802000
1.3
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: International Energy Agency
8
010731Technology in E&P-main pack.ppt.ppt
The E&P industry faces a dramatic growth challenge
Region
140
120
Latin America
Europe
FSU
M.East
Asia Pacific
Global oil* production
medium scenario
Million b/day
Region
100
60
40
20
Region
Middle East
FSU / China
Other
Change (mmb/d)
1960-1980
+9
-3
+10
+15
+6
Technology
challenge:
+80 mmb/d
Change (mmb/d)
1980-2000
North Sea
South America
Other
80
Change mmb/d
2000-2020
+5
+2
+5
New
fields
outside
M.East
Increased
recovery
+20
+12
+12
Existing fields
and Middle East
fields
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
* Including HC liquids and NGL
Source: IEA, EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey,
9
World Petroleum Assessment 2000 (Reston, VA, July 2000), McKinsey
010731Technology in E&P-main pack.ppt.ppt
The Middle East, FSU and deep water regions will be the
main growth areas
Exploration/
Deep water /
rough water
Mature area
offshore - IOR
Mature area
onshore - IOR
Middle East
Source: EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological
Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000).
10
010731Technology in E&P-main pack.ppt.ppt
Deep water exploration is high on the agenda for leading
international petroleum companies
“Our highly focused
exploration program is
concentrated in deepwater
Gulf of Mexico, Latin America
and West Africa, while our
core production areas also
include the US, UK, North Sea,
Middle East and the Pacific”
Exploration/
Deep water/
rough water
Focus areas: Deepwater
Gulf of Mexico, West Africa
(Angola, Nigeria), South
America, Caspian Region,
Eastern Canada, Middle
East
Texaco-Chevron
June 2001
ExxonMobil
Annual report 2000
Source: EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological
Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000).
11
010731Technology in E&P-main pack.ppt.ppt
But successful deep water exploration and development
requires technological breakthroughs
Exploration/
Deep water/
rough water
• Reduce exploration drilling costs
• Reduce development costs
• Resolve environmental issues regarding
gas processing
• Direct Hydro Carbon Indication (DHI)
•
•
•
•
•
(using seismic attributes)
Dual-gradient drilling
Deepwater slimhole drilling
Subsea processing
Downhole separation
…
Source: EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological
Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000).
12
010731Technology in E&P-main pack.ppt.ppt
Mature offshore areas could be further exploited through
new technologies
Mature area
offshore - IOR
• Increased oil recovery
• Improved economics of marginal fields
• Smart wells
• Downhole separation
• 4C/4D seismic
• Reservoir optimisation and management
Source: EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological
Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000).
13
010731Technology in E&P-main pack.ppt.ppt
The “shift to gas” poses additional technological
challenges
180
Million boe/day
160
140
120
100
“ExxonMobil is exploring the
opportunity to apply its proprietary
GTL technology by developing a
world-scale GTL plant in Qatar”
Gas
80
60
40
ExxonMobil web annual report 2001
Oil and
HC liquids
20
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Source: OGJ
14
010731Technology in E&P-main pack.ppt.ppt
Stranded gas reserves* need new technology to be
monetised
Trillion cubic feet
U.S.
53
Norway
49
Qatar
226
FSU
1,340
Malaysia
38
Algeria
67
Indonesia
47
Nigeria
86
Venezuela
52
• Reduce processing costs
• Reduce transportation costs and
connect gas fields to markets
• LNG technologies
• Gas-to-liquid technologies (GTL)
• Sour gas processing
technologies
ESTIMATE
Iran
505
Abu Dhabi
154
Australia
47
* Gas reserves exceeding current or anticipated commitments in large quantity and sufficiently accessible location to
support potential international gas trades
Source: Janson Association; McKinsey analysis
15
010731Technology in E&P-main pack.ppt.ppt
Growing environmental concerns add to the need for new
technologies
Continuing technology advances are essential
for meeting expanding energy
needs and reducing its environmental impact
Phil Watts, Managing Director of Shell
Innovation is making it possible to produce
and to use energy products in ways
which don’t damage the environment
Sir John Brown, Chief Executive BP
• Reduce CO2 emission, including gas flaring
• Reduces oil to water
• Gas re-injection technologies
• Decarbonisation technologies
• GTL
16
010731Technology in E&P-main pack.ppt.ppt
New technology is required to enable companies to
successfully achieve the forecast increases in labour
productivity
Boe/day per E&P employee for selected E&P companies
700-800
• Higher productivity
• More onshore work
• Group work
• Streamlined work processes
400-500
• Broadband communication
and remote real-time
operations
• Visualisation and
“groupware”
200-300
70-100
1980
100-150
1990
2000
2010
2020
17
010731Technology in E&P-main pack.ppt.ppt
New technologies are required to meet the opportunities
and challenges in the E&P industry
Mature Area/
Brownfield
Business challenges
Possible new technologies
• Increase oil recovery rate
• Improve economics of marginal
• Smart wells
• Downhole separation
• 4C/4D seismic
• Reservoir optimisation and management
fields
• Reduce operating costs
• Reduce exploration drilling
Deepwater
Gas e.g. in
Middle East
Environmental
Productivity
costs
• Reduce development costs
• Direct Hydro Carbon Indication (DHI)
• Dual-gradient drilling
• Deepwater slimhole drilling
• Subsea processing
• Downhole separation
• LNG technologies
• Reduce processing costs
• Reduce transportation costs and • Gas-to-liquid technologies (GTL)
• Sour gas processing technologies
connect gas fields to markets
• Reduce CO2 emission, incl. gas
flaring
• Higher productivity
• Demanning offshore
• Streamlined work processes
• Gas re-injection technologies
• Decarbonization technologies
• GTL
• Broadband communication and
remote real-time operations
• Visualization and “groupware”
18
010731Technology in E&P-main pack.ppt.ppt
A new regime for innovation and technology management
in the E&P industry
New technologies are required to meet the opportunities and challenges
in the E&P industry
Innovation and introduction of new technologies in E&P is inefficient
The conduct of E&P companies and OFSEs is the prime cause of this
inefficiency
This technology gap is an opportunity for value creation provided that a
new regime for technology management is successfully introduced
19
010731Technology in E&P-main pack.ppt.ppt
The role of smaller players has been crucial in the
innovation and technology development process
Role* of various players through the development process
(based on 15 technology case studies)
[%]
14
1
15
8
14
0
2
0
18
25
17
Academic
38
2
12
23
Idea
SME
9
40
Prototype
2
17
22
29
32
Non E&P
21
Big 3 OFSE
Other E&P
1st field test
43
Majors
Commercially
available
50% Penetration
* The role is defined as the financial value of resources devoted to the effort (i.e. direct funding, expertise, laboratory time etc.), for phase 2-4.
For the first phase “intellect contribution” is also assessed and included
20
Source: Industry journals, interviews
010731Technology in E&P-main pack.ppt.ppt
Development timelines of key E&P technologies
Sub-sea trees
…?
GTL
• Idea to
•
MWD
Horizontal drilling
•
3D seismic
•
FPSO
…?
Multiphase metering
…?
Subsea processing
Downhole separation
…?
4C seismic
…?
Slag cement
…?
Expandable casing
…?
prototype
Prototype to
field test
Field test to
commercial
Commercial to
50% penetration
Successful
cases
…?
Dual gradient drilling
…?
Seismic while drilling
…?
Smart wells
…?
Deepw.slimhole drilling
Visualisation
1960
Source: Industry journals, interviews
1965
1970
1975
1980
1985
1990
1995
2000
21
010731Technology in E&P-main pack.ppt.ppt
Visualisation technologies have been
developed efficiently
1995
2000
Pioneers Norsk Hydro,
Phillips, Statoil and
Arco and Texaco initiate
others install
visualisation development
visualisation centers
centers. Experience is
drawn from space,
BP tests
medicine and construction
successfully,
Norsk Hydro installs plans to build
virtual reality center
15 centers
More than 100 large
screen visualisation
centers are expected
by the end of 2001
worldwide
Value impact:
Drivers:
• Better detailed design of well paths in reservoir
• Pull from E&P:
has significantly improved well production - e.g .
in Hydro an online decision on well extension
improved recovery by 750’ barrels
• Better general understanding of reservoir has
improved development solutions, reduced cost
of overall well program and increased recovery
• Simulation models have improved significantly
– Low risk, limited capital involved
– Immediate value impact – fine-tune well
– Appealing technology - excitement
• Push from technology companies:
– Basic technologies from other sectors
– Non-E&P players have nothing to lose
Source: Industry journals, interviews
22
010731Technology in E&P-main pack.ppt.ppt
The success of 3D seismic required both pull from E&P
companies and push from technology companies
2 streamers
1970
Better positioning
made 3D possible –
(Norwegian
shipping tradition
met E&P)
1980
5 streamers 12 streamers
1990
2000
Delay in
development
Elephant fields
(Statfjord) fully
covered by 3D
Increased
computing
power
New entrant
(PGS) pushed
development;
multi-streamer,
onboard
processing
Value impact:
• Savings USD ~200 billion 1986-2000, or ~50 cent/b
• Enhances value through detection of small pools
• Revitalised mature basins (e.g. Gulf of Mexico)
• Doubled exploration success rate (1985–1994)
• Improved risk evaluates from volume data
• Acquisition and processing speed up from 25
sq.km/month in 1990 to 2000 sq.km/month in 1998
Source: Industry journals, interviews
Multiclient seismic
acquisition
Drivers:
• Pull from E&P:
– Huge value potential acknowledge
– Funding available from elephant fields
– Organization eager to implement
– Best people in R&D in the 80ies
• Push from technology companies:
– New entrant with nothing to loose
– Business model that allows value to
23
technology supplier
010731Technology in E&P-main pack.ppt.ppt
There have been significant delays for most
technologies
Sub-sea trees
…?
GTL
MWD
Horizontal drilling
Periods
with low
activity
…? Not yet
successful
commercialized
3D seismic
FPSO
…?
Multiphase metering
…?
Subsea processing
Downhole separation
…?
4C seismic
…?
Slag cement
…?
Expandable casing
…?
Cases
examples
…?
Dual gradient drilling
…?
Seismic while drilling
…?
Smart wells
…?
Deepwater slimhole drilling
Visualisation
1960
Source: Industry journals, interviews
1965
1970
1975
1980
1985
1990
1995 2000
24
010731Technology in E&P-main pack.ppt.ppt
Measurement While Drilling (MWD) was very slow to
develop
1970
1980
Elf and Raymond
incorporate
Teleco to push
development of MWD
Teleco
Industry outsider
demonstrates
Raymond Engineering
MWD
develops mud pulse telemetry
Elf
research
initiated
Schlumberger
research initiated
GeoLink’s
Orienteer
MWD system
1995
Price shock.
Full
Amoco, Exxon,
penetration
Shell...
begin using
MWD
Revenue: US $m
Teleco
132
Schlumb. 70
Other
70
Schlumberger acquires Analysts to
develop MWD (but do not launch MWD)
Value impact:
• Reduced drilling time – no
stop to log and cost reduced
by ~USD 400k per well
• EWR MWD made formation
evaluation better – discoveries
of e.g. turbidites
• MWD essential tool in
horizontal drilling
Source: Industry journals, interviews
EWR
MWD
devel
oped
1990
Drivers:
• Pull from E&P:
– When cost became an issue in 1986
• Push from technology companies:
– Primarily from industry outsiders
Barriers:
• Major OFSEs held back the technology for a long
period to protect existing service lines
– Industry leaders slow to adapt
• Focus on log quality and not cost / value benefit
25
010731Technology in E&P-main pack.ppt.ppt
Deepwater Slimhole Drilling has been slow to take off
Value Impact
• Smaller rigs and less
Description
• Use of thinner pipes with stronger materials and
narrower well diameters for drilling
Hive compensation
equipment needed
• Reduced investment by ~50%+
• Reducing expl. drilling cost
– Casing: 65%
– Mud Cost: 70%
– Cement: 80%
– Personnel: 25- 30%
• Reduced cost:
– 40-45% in shallow water,
– 50% deep water
Barriers :
• Development stopped
– No support from major
OFSEs or existing rig
owners (to protect
existing service lines?)
– No E&P company wants
to be first mover (risk
aversion)
Conventional
Source: Industry journals, interviews
Slimhole
26
010731Technology in E&P-main pack.ppt.ppt
The key drivers of innovation and technology
Strategy
Drivers
Examples
• E&P players with strong strategic
• Need for horizontal drilling in Austin
interest (few portfolio alternatives)
in the new technology are involved
Funding
• Decision makers that will commit
money are in charge
• Developments are asset-light
Organisation
• Organizational culture, systems
and incentives to foster and test
ideas
Sourcing
• Technology companies exist which
have strong incentives to push new
technologies
• E&P companies create demand for
new technology
chalk + Troll field (Hydro)
• Statfjord “funded” 3D in 1980
• Visualisation is asset-light
• Shell deepwater-team
• Norsk Hydro culture open to try “wild
idea” of horizontal drilling (Troll)
• Separate JV with open culture
• PGS pushed 3D seismic
• Teleco pushed MWD
• Demand in E&P companies induced
OFSEs to provide MWD
27
010731Technology in E&P-main pack.ppt.ppt
Barriers to technology development
Idea
Prototype
1st field test
Commercially
available
50%
penetration
Barriers
• Weak understanding
of strategic rationale
for being technology
leader
• Lack of stability
in funding
• Lack of Patent
protection
• Organisational
• Insufficient
conservatism and
cooperation with
risk averse approach technology
to technology
suppliers
decisions
• “Not invented here”
syndrome
28
010731Technology in E&P-main pack.ppt.ppt
With a few exceptions the main classes of new technology
are still moving slowly
Classes of technologies
Current
status
Comment
Communication and
visualisation
Rapid introduction of broadband,
remote operations and visualisation
Reservoir
Fast introduction of new software, but
slower on next generation seismic
Downhole
Many ideas introduced, but slow pilot
testing phase due to high risk
Drilling and logging
Radical ideas developed, but limited
push for testing
Subsea and pipeline
Currently some push from deep-water,
but conservative attitude from E&P
Processing
Much focus around gas conversion,
but few breakthrough results
Topside and platform
Currently very little innovation around
separators, generators, pumps, etc. 29
010731Technology in E&P-main pack.ppt.ppt
The pace of innovation in E&P has been slow relative to that
in other industries
Average duration of the four phases in different industries
• Idea to
Consumer
products
(US average)
•
•
Medicine
(Merckaverage)
•
prototype
Prototype to
field test
Field test to
commercial
Commercial to
50% penetration
ADSL
(broadband
telecom)
E&P industry
(15 tech. Cases)
0
5
10
15
20
25
30
35
Time (years)
Source: Industry journals, interviews
30
010731Technology in E&P-main pack.ppt.ppt
A new regime for innovation and technology management
in the E&P industry
New technologies are required to meet the opportunities and challenges
in the E&P industry
Innovation and introduction of new technologies in E&P is inefficient
The conduct of E&P companies and OFSEs is the prime cause of this
inefficiency
This technology gap is an opportunity for value creation provided that a
new regime for technology management is successfully introduced
31
010731Technology in E&P-main pack.ppt.ppt
The conduct of E&P companies and OFSEs directly
influences innovation and technology development
Level of
influence
Factors influencing innovation and technology
Oil price
Geological
realities
Patenting
Government
policies
Field
investments
Cyclical
mindset
Techn. R&D
investments
None
Talent
attention
Low
E&P Co.
Organization
Innovation and
technology
development
E&P Co.
strategy
Macro
economy
High
Sourcing
32
010731Technology in E&P-main pack.ppt.ppt
Player conduct has varied significantly and today leads
to a poor environment for technology and innovation
Oil Price
Environment for
technology and
innovation
Macro
trend
++ Very positive
Actual price
+
Positive
o
Neutral
-
Negative
-- Very negative
1980
1985
1990
1995
2000
++
-
++
0
+
-
0
++
-
+
-
+
--
0
++
+
+
0
0
--
--
+
0
+
0
+
0
0
Influenced
by
macro
trend
33
010731Technology in E&P-main pack.ppt.ppt
Macro trend downward is partly a result of the
cyclical behaviour following the industry cycles
Oil Price
Environment for
technology and
innovation
++ Very positive
Industry cycles
Actual price
+
Positive
o
Neutral
-
Negative
-- Very negative
1980
1985
1990
1995
2000
++
-
++
0
+
-
0
++
-
+
-
+
--
0
++
+
+
0
0
--
--
+
0
+
0
+
0
0
Follow
industry
cycle
34
010731Technology in E&P-main pack.ppt.ppt
Few companies have been able to identify
and execute on a technology based strategy
Companies:
ExxonMobil
Shell/ Royal Dutch
BP Amoco
TotalFina Elf
ChevronTexaco
Conoco
Phillips
Unocal
Norsk Hydro
Statoil
Petrobras
ENI
Saudi Aramco
Adnoc
Anadarko
BHP
Enterprise
Amerada Hess
Distinct
technology
based strategy
(V)
(V)
(V)
(V)
(V)
(V)
(V)
-
- No apparent technology-based strategy
(V) Elements of a technology based strategy
V Fully implemented technology based strategy
Our growth strategy is
based on privileged
relations within specific
countries. Technology
plays a minor role
E&P
company
E&P
company
We have been in the
technology forefront
many times, but it
has been “bits and
pieces”. We never
developed any
distinct strategy
35
010731Technology in E&P-main pack.ppt.ppt
Some companies cite the lack of correlation
between performance and innovation as a
reason for not taking a stronger role in
technology and innovation
Total return to shareholders 1994-2001
25%
ENI
BP
20%
TotalFinaElf
Shell
ExxonMobil
15%
“Free rider”
mentaity
ChevronTexaco
Norsk
Hydro
10%
Unocal
5%
0%
1.5
2.0
2.5
3.0
3.5
4.0
4.5
36
010731Technology in E&P-main pack.ppt.ppt
The “free rider” mentality is a significant
strategic weakness in the industry
What is apparently a rational decision for an
individual company….
If someone launches a
new, good technology,
our suppliers will give
us access to it within
less than 6 months
Our investments has
not paid off, now it is
our turn to wait for
others to carry the
R&D burden
E&P
comp
any
Why invest,
it is safer to
“wait and
see”
E&P
company
…has negative consequences for all
when aggregated up to the industry level
Hey, why do we
need to wait so
long for new
technologies
Industry
spokesman
Technology
company
37
010731Technology in E&P-main pack.ppt.ppt
Slow growth in E&P patents is symptomatic of
poor patent protection for the industry
Number of patents as a fraction of number in 1976-80
8
Pharmaceutical
7
Industrial
automation
6
5
4
Automobile
We have many
patents, but we
nevertheless see
similar products
showing up rather
fast.
3
Construction
2
E&P
1
0
1976-80 1981-85 1986-91 1991-95 1996-01
Technology
company
Source: US Patent and Trademark Office
38
010731Technology in E&P-main pack.ppt.ppt
R&D is increasingly “outsourced”, and
central funding has been reduced drastically
R&D funding in the E&P industry
Year 2000 US$ (billions)
4,1
3,6
OFSEs
R&D
1,1
1,7
Oil and
gas companies
3,0
1,9
Business
units/
Licenses
Central
1990
2000 E
39
010731Technology in E&P-main pack.ppt.ppt
R&D in E&P is also low compared to other
industries
R&D Investment (%)
13.6
13.5
Software & IT
Pharma
11.0
Health
6.1
Chemicals
5.3
Electronics
Aerospace/Defence
4.4
Media
4.3
4.3
Automobiles
2.4
Telecoms
Construction
1.8
Oil & Gas
1.5
0.9
Beverage
0.9
Tobacco
0.8
Metals
40
010731Technology in E&P-main pack.ppt.ppt
R&D expenditure has dropped by 50% in the last
decade with sharpest decline in the US
1999 US$/boe (adjusted by E&P share of total revenues)
0.20
0.18
Average R&D spend
1995-2000
cent/boe
Norsk Hydro
0.16
35
Statoil
0.14
Shell
0.12
0.10
BP
Chevron
Conoco
Shell
0.08
0.06
28
9,3
ENI-Agip
9,0
Chevron
8,5
BP
7,6
Texaco
6,5
Exxon
5,8
Philips
5,7
Conoco
5,1
0.04
Exxon Phillips
Texaco
0.02
0.00
1991
1995
2000
Note: All R&D figures are adjusted according to average E&P share of total revenue, BP figures include
Amoco in 1997 and after; Exxon figures include Mobil in 1997 and after
Source: Herold’s; PetroCompanies; BP;10Ks, annual reports
41
010731Technology in E&P-main pack.ppt.ppt
There is no master plan behind academic
and government driven R&D
There is a hopeless
duplication of Academic
R&D efforts and no
master plan
Director,
E&P
company
Neither governments
nor companies have
focused on R&D, and
the result is fragmented
activity in many different
academic institutions
R&D manager,
E&P company
42
010731Technology in E&P-main pack.ppt.ppt
The consequence is that nobody takes
responsibility for long-term R&D
Long
term
R&D
E&P companies
Service companies
• Technology is not
• We are not paid for
core
• Technology will
become available – we
will then be fast
followers
Institutes / academia
• Duplication
• Lack resources
• Lack of practical
exposure and
business judgment
that
• It could even hurt
our business
• And do we know
what they need?
43
010731Technology in E&P-main pack.ppt.ppt
Different opinions persist regarding the shift
in approach to R&D
OFSEs can do long term R&D
We used to have an R&D
department but shut it
down – we trust in the
service sector (or other
E&P companies) to do
the breakthrough R&D
OFSEs cannot do long term R&D
Small
technology
company
We tried to get an OFSE
engaged in our long
term project, but they
thought it was too far a
way to go -- we had to
do it ourselves
US E&P
company
First and
recordsetting
performance…
Don’t expect anything
real new from the big
OFSEs
E&P
company
We are more “hungry” and
efficient than E&P companies’
internal departments, and thus
create higher impact R&D.
But E&P must finance it,
OFSEs do not want to finance
long term R&D
Schlumberger
web-site
Independent R&D institution
44
010731Technology in E&P-main pack.ppt.ppt
Investments have been very cyclic in the
E&P industry
Investments
US$ (billions)
Oil price
US$/bbl
30
35
25
30
25
20
20
15
15
10
10
Nominal oil
price
99
Exploration
cost
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
19
19
19
19
83
0
81
0
79
5
77
5
Development
cost
• Correlation between exploration cost and oil price = 0,89
• Correlation between development cost and oil price = 0,53
Note: Domestic and foreign investments by US oil companies registered in EIA database
Oil price is US average domestic first purchase price
45
010731Technology in E&P-main pack.ppt.ppt
Capital intensive technologies are often stranded
in a funding “Death Valley” for years
E&P industry
Field test to
commercial
4C seismic
+
Offshore
slimhole
drilling
Downhole
separation
Subsea
separation
Cash
flow
Slag
cement
Multiphase
metering
Time
-
• No more R&D funding available
• Small companies do not have
R&D funds
available
The Death
Valley
balance sheet to carry risk
• Big 3 do not push due to existing
cash cows
• E&P companies wait for others to
test, or expect free test equipment
• Limited VC available, regarded as
too risky “digital risk”
46
010731Technology in E&P-main pack.ppt.ppt
The average field size has decreased, and fields
are no longer “sponsors” of new technologies
Average field size at the UK sector
Million toe after year of discovery
Average field size at Norwegian sector
Million toe after year of discovery
137
118
105
96
78
49
25
11
16
12
7
17
3
68-75 76-80 81-85 86-90 91-95 96-00
Without
Ormen
Lange
gas field
68-75 76-80 81-85 86-90 91-95 96-00
47
010731Technology in E&P-main pack.ppt.ppt
There is a shortage of funding available for the
remaining smaller players
Absolute size
USD millions in equity
funds in Europe 1999
Communication
2,915
IT
1.45
1,342
Pharma
1,006
Transport
0.95
0.69
639
518
Financial
services
453
202
VC in Oil and gas is too
risky – too dependent on
a very few customers
and it is difficult to really
understand the very
complicated technology
0.23
842
Electronics
Energy
0.16
2,718
Chemicals/
material
Construction
Relative size
Equity funds/market
cap
0.43
0.28
0.02
0.02
A Venture Capital partner
48
010731Technology in E&P-main pack.ppt.ppt
The move from functional to asset-based
organisations has weakened the ability of some
companies to innovate and develop new
technology
E&P
E&P
Expl
orati
on
Field
deve
lopm
ent
Oper
ation
Cons
tructi
on
Functional
organisation
Strengths:
• High attention on R&D and strategic
technology development
• Easy to enforce consistent technology and
methodology approaches across fields
Issues:
• Weak business coordination within asset
(e.g. how to proactively optimise
infrastructure through satellite tie-ins)
• Focus towards disciplines generates
“academic interests” that might not pay off
• Too complex when many fields
Sup
port
Asset
1
Asset
2
Asset
3
All vital functions within
assets
Asset-based
organisation
Strengths:
• Strong business focus, good coordination across phases at asset level
• Non-bureaucratic and empowered
organisation
• Lean and mean
Issues:
• Weaker processes for optimising and
sharing of technology-related results
• Incentives might be too short-sighted
• Less capacity for strategic
technology development
49
010731Technology in E&P-main pack.ppt.ppt
Safety concerns also limit the willingness of E&P
organisations to test new technologies
We are dealing with
people in high risk
environments, we
cannot risk life and
property by playing
around with fancy new
technologies
With the government’s
current focus on safety,
it is very difficult to get
support for using any
technology that does
not have a proven track
record
Technology
company
E&P manager
50
010731Technology in E&P-main pack.ppt.ppt
Survey results from suppliers indicate that E&P companies
need to improve in most areas
Survey question
Key Success Factors
Range of survey results
Generate ideas internally
In relation to
technology to
Understand the value
what degree does
Use external ideas / products
the E&P
Share ideas / products externally
company...
Best in class
Worst in class
Companies in survey
Communicate new tech. internally
BP
ChevronTexaco
ENI
Exxon
Norsk Hydro
Shell
Statoil
TotalFinaElf
Unocal
Fund during early phase development
Provide field testing opportunities
Effectively manage JIPs
Collaborate with small tech. companies
Implement new technology effectively
Companies surveyed
To what degree
does the E&P
company have
appropriate...
Commercial skills
Brit Bit
FMC
Halliburton
Inside Reality
PGS
Read
Schlumberger
SPS-AFOS
Stolt
Internal processes / procedures
Company structure
Internal incentives
External contractor incentives
Poor
Source: McKinsey surveys
Moderate
Excellent
51
010731Technology in E&P-main pack.ppt.ppt
OFSEs and technology companies do not rate oil companies
highly in technology development and innovation
• There is a tendency to stick to tried and tested technologies
• Joint Industry Projects are not well managed
• Not enough funding or testing opportunities are provided
• Ideas from technology companies are not well adopted
• The problem lies with the oil companies’ internal structure,
processes and procedures
• Incentives to promote new technology are poor
52
010731Technology in E&P-main pack.ppt.ppt
Suppliers rank Norsk Hydro and BP as technology leaders
Average of all questions
Norsk Hydro
BP
Shell
Statoil
TotalFinaElf
ChevronTexaco
Unocal
ENI
Exxon
Poor
Moderate
Excellent
Source: McKinsey surveys of 9 technology suppliers: Brit Bit, FMC, Halliburton, Inside Reality, PGS, Read, Schlumberger, SPS-AFOS, Stolt
53
010731Technology in E&P-main pack.ppt.ppt
E&P companies can be classified in four distinct groups
when evaluated for their technology leadership and external
cooperation
R&D
investments
Shell
Norsk
Hydro
BP
“External
oriented
Leaders”
ENI
Technology and
innovation orientation
(Average R&D spend
level* (1996-2000) +
total survey score)
TotalFina
Elf
ChevronTexaco
ExxonMobil
Enterprise
Conoco
Amerada Hess
Low
“Internal
oriented
followers”
Statoil
High
“Internal
oriented
leaders”
“External
oriented
followers”
Low
High
External cooperation orientation
(Score on survey - external orientation + qualitative assessment )
Source: 10 Ks/annual reports, Survey, Interviews; Team analysis,
54
010731Technology in E&P-main pack.ppt.ppt
Each group has some typical ways to approach technology
and innovation
• Leading in some technologies
• Large central technology
• Leading in many technologies
• Asset based organizations, but
departments
• Often want to own
technologies themselves
strong competence networks
• Use of incentives in contracts
• Open to let technology
companies own the technology
Shell
Statoil
Norsk
Hydro
BP
Leader
ENI
TotalFina
Elf
ChevronTexaco
Follower
ExxonMobil
Conoco
• Focus to standardize and
reuse technology internally
• Central departments approve
all important technology
decisions
• Wait for others to pioneer new
technology – prefer field
tested technologies
Enterprise
Amerada Hess
Internal External
Source: 10 Ks/annual reports, Survey, Interviews; Team analysis,
• Low budgets, and explicit policy
of being fast followers
• Asset based - no own R&D
department
• Open to use turnkey solutions
from suppliers
55
010731Technology in E&P-main pack.ppt.ppt
A talent shortage in the E&P industry is cited as a
key barrier to technological innovation
Number of E&P professional job
applications to a major oil company
(% of 1990 applications)
100
6
98
59
1990
1992
1995
4
40
2000
Recruitment of staff with potential to
become senior management, in a
major oil company (% of 1980 intake)
1
1992
1995
2000
Headcount in 25 largest E&P companies
(millions)
1,6
100
1,4
1,12
8
0
6
0
4
0
2
0
0
1980
Disguised Client Example
Top tier recruits in a
major oil company
(% of total recruitment)
0,8
Required level
1980
1985
1990
1995
1985
1990
1995
0,6
0,5
2000
2005
56
010731Technology in E&P-main pack.ppt.ppt
The best talent was attracted to petroleum studies
in the 1980’s, but this is no longer the case
Entrance score of Norwegian Institute of Technology
(no. 1 Engineering School)
70
(Changed formula)
30
65
28
26
Petroleum
Top 2% of cohort
24
Product Design
60
Industrial Economics
55
Physics and Math.
Architecture
Electrical Engineering
22
Top 10% of cohort
Marine Engineering
Mech. Engineering
20
18
50
45
Civil Engineering
Petroleum
Top 30% of cohort
Chemistry
Engineering
40
16
35
14
12
30
10
25
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993
1995
1997
1999
57
010731Technology in E&P-main pack.ppt.ppt
The OFSE industry is highly concentrated
Market share - selected segments
Company
Revenue 1999
$Million
Halliburton
15,664
Schlumberger
9,568
Baker Hughes
5,080
BJ Services
1,087
PGS
775
CGG
475
Wireline
logging
Cement
3D seismic
14%
38%
5%
57%
29%
50%*
20%
5%
20%
10%
12%
6%
Veritas
265
* 50/50 joint venture of Western GECO
Source: Spears and Associates, Inc.
58
010731Technology in E&P-main pack.ppt.ppt
And the “Big 3” OFSEs have primarily entered
new technology markets through acquisitions
In-house innovation*
Acquired**
Adaptor
No role played
No. of new
technologies
Halliburton
Schlumberger
Baker Hughes
* ”In-house innovation” is any innovation by OFSE before 1990 or an innovation by a division
after 1990 that was part of the OFSE before 1990
** ”Acquired” innovation is any innovation that was acquired through an acquisition after 1990
or was developed by a division acquired after 1990
59
010731Technology in E&P-main pack.ppt.ppt
With a mindset of selling “products” rather than
“value” some companies hold technologies back
We were not engaged in
wireline logging, and
therefore pushed MWD
aggressively at an early
stage
We would rather sell a
large number of
commodity wells than a
few advanced ones
Baker
Hughes
An
OFSE
We contacted one of the big
service companies to get their
support in developing our new
technology. They were positive,
but nothing materialised. They
had all kinds of excuses, but
after a while we realised that they
were not really interested in
success due to their existing
service line
An E&P
company
60
010731Technology in E&P-main pack.ppt.ppt
Some companies have focused on “selling value”
and have been innovative
• PGS has been a pioneer in developing a business model focused on
selling value rather than just “sell products”
• They have (as a result?) been pioneers and technology pushers
within the both the seismic business (3D acquisitions and
processing, vertical cable acquisitions, 4C-seismic) and small field
production (FPSOs).
• However, they have not (yet?) capitalised on many of their
inventions, e.g 4C seismic
• Unlike other OFSEs, they have taken significant geological and
reservoir risks
61
010731Technology in E&P-main pack.ppt.ppt
Smaller companies have major difficulty in
accessing E&P companies
E&P companies are listening
only to the three big OFSEs.
Therefore we do not get
access to E&P companies with
our slimhole technology that
will reduce drilling cost by
An
50%
OFSE
Our company is “built to
flip” [sell company], we
don’t get anywhere
alone – marketing etc.
will be far too expensive
Smaller
technology
company
Offshore &
Marine
62
010731Technology in E&P-main pack.ppt.ppt
In summary, several barriers impede the four key drivers
of technology
Strategy
Weak understanding of strategic rational for being a technology leader
• Lack of ability to identify and execute on a technology based strategy
• Ambiguity about whether technology is core business
• Notion that being a technology “free-rider” makes sense
– Easy to be fast follower - no efficient patent protection
• Lack of companies taking the “shaper” role
Funding
Lack of stability in funding
• Lack of “elephants” to sponsor new technologies
• Each downturn has resulted in unreasonable cut in good projects
• Especially difficult to fund “field test phase” – none take the responsibility
• Lack of tools to do valuation of new technologies – insufficient funding
• Limit Venture Capital available
Organisation
Organisational conservatism and risk aversion in technology decisions
• Power moved from center to assets – less strategic/holistic perspective
• Increased focus on short term performance targets – uptime focus
• Safety, health and environmental issues driver for using “known technology”
• Homogenous demographics and strong professions – “wild ideas” stopped
• Lack of talents with time and incentives to engage in new technology
• Lack of openness for external ideas (the not-invented-here syndrome)
Sourcing
Insufficient cooperation with technology suppliers
• Significant cannibalization issues stops suppliers from pushing technologies
– Contracts has wrong incentives - sell “products/hours” rather than “value”
• Independent players with great ideas/products have limited access
• Poor set-up of many joint industry projects – lack of”win-win” incentives 63
010731Technology in E&P-main pack.ppt.ppt
With the result that the industry dynamics for
technology have become dysfunctional
E&P companies
• Increasingly expecting others to do
R&D
• Not changing contractual models
accordingly
Big 3 OFSEs
• Important cash-flow from existing
products - no incentives for proactively
introducing new technologies under
current contractual regime
• Limited tradition for in-house
breakthrough innovation
• Controlling distribution channels
Other technology
companies
• Often innovative, but
– difficult to get
funding
– difficult to get
access to E&P
companies
64
010731Technology in E&P-main pack.ppt.ppt
A new regime for innovation and technology management
in the E&P industry
New technologies are required to meet the opportunities and challenges
in the E&P industry
Innovation and introduction of new technologies in E&P is inefficient
The conduct of E&P companies and OFSEs is the prime cause of this
inefficiency
This technology gap is an opportunity for value creation provided that a
new regime for technology management is successfully introduced
65
010731Technology in E&P-main pack.ppt.ppt
The conduct of E&P companies and OFSEs directly
influences innovation and technology development
Level of
influence
Factors influencing innovation and technology
Oil price
Geological
realities
Patenting
Government
policies
Field
investments
Cyclical
mindset
Techn. R&D
investments
None
Talent
attention
Low
E&P Co.
Organization
Innovation and
technology
development
E&P Co.
strategy
Macro
economy
High
Sourcing
66
010731Technology in E&P-main pack.ppt.ppt
Core elements in the new regime for innovation and
technology management
• Strategic role
• Valuation methodology
• Funding
• Processes
• Technology as a business project
• Organisational structure
• Culture
• Supplier incentives
• Links with smaller players
• Successful alliances
67
010731Technology in E&P-main pack.ppt.ppt
Determining your role
Observations that say “Lead”
Observations that say “Follow”
• The demand for new oil will be huge
• The macro trend in most industries is that
– Lack of appropriate technology is still a show
stopper for many fields
• New geographies are opening up
– Technology could be the ticket to entry
• Technology companies have not had the
strengths or interests to be shapers of
breakthrough technologies
• The capacity for innovation and technology
value chains are split up into global
niches dominated by technology
specialists, i.e. it is difficult for “users”
like E&P companies to keep ahead as
leaders
• Intellectual property rights are not easily
obtained/enforced
• Also in Oil and Gas we see that
technology companies are taking over
R&D and a larger part of the value chain
development is currently low
It is not obvious that a single approach (leader or follower) to all
E&P technologies is the best strategy
68
010731Technology in E&P-main pack.ppt.ppt
Some companies have taken the role of
technology leaders
Examples
• BHP Petroleum was a pioneer in FPSO developments in
The FPSO expert
Australia, and has leveraged this in Vietnam
• Shell recognised the potential early, tied up more than
The deepwater expert
The sub-salt exploration
expert
600 deepwater blocks in GoM with a dedicated
organisation
• Petrobras became a leading deepwater player in South
America
• Anadarko has developed superior skills within sub-salt
imaging, deepwater exploration and option based risking
• Statoil has aggressively invested in IOR-technology for
Mature giant field expert
extending life of own giant fields in the North Sea
The arctic expert
• Yet to be seen…?
The environmental expert
• Yet to be seen…?
69
010731Technology in E&P-main pack.ppt.ppt
Shell recognised the potential of deepwater exploration in
GOM before most other players
Shell was in the 80s and
early 90s an early mover
in deepwater exploration
and production
SHELL IN DEEPWATER EXPLORATION
Success rates in deepwater exploration Gulf of Mexico*
Percentage of wells with finds >100 MMBOE**
27
24
21
• Tied up deepwater
blocks
• Invested heavily in
skilled personnel
• Led the development in
technology to exploit
deepwater fields
13
Shell
Water depths >1,500 feet
** to 1991
Exxon
Conoco Onyx
Land position
Blocks
633
135
115
3
Average field size
MMBOE
200
128
128
90
Number of finds
8
5
3
901
70
010731Technology in E&P-main pack.ppt.ppt
Unocal had a “Follower” role that has also been
successful in drilling
Well time, days
153
-55%
68
Unocal approach to achieving drilling cost reductions
• Maintain a supportive culture
– Encourage and reward innovation, open
communication, effective teamwork and fast
decision making
• Instil the right philosophy
– Geoscientists, engineers, drillers, financial staff
and contractors work as a team and share
commitment to succeed
• Provide the right incentives
– Compensation of deepwater teams directly linked
to 50% cost goal
• Employed innovative, state-of-the-art technology
Industry
average
comparable
Garden
Banks wells
Spirit Energy
Garden
Banks 74
Source: Unocal PIRA conference presentation
–
–
–
–
–
–
Advanced interpretation
Improved well design (slim holes, fewer sections)
Premoored anchors
BOPs on the rig floor
Synthetic muds
LWD evaluation
71
010731Technology in E&P-main pack.ppt.ppt
Key success factors in a “Follower” role
Speed
• Develop a flexible organisation to respond to opportunities
Networks
• Develop internal and external global networks with other companies
• Keep visible possible new technology clusters on the horizon
Deal Making
• Gain access to new opportunities and add value by applying technology
Contractor relationships
• Leverage relationship with contractors to track knowledge on new technology clusters and
potential opportunities for application
Superior operating and development performance
• Application of new technologies under a performance culture to extract the best in class
performance
Willingness to accept new technologies from outside as well as inside the company
• Cultivate a culture that willingly accepts and understands the introduction of new technologies
72
010731Technology in E&P-main pack.ppt.ppt
Select what role you want to play for each
technology cluster
• Look at clusters of technologies
Examples
• For each cluster, take deliberate decisions on
where to be leader and where to be follower
based on:
– Value potential of the technology
– Overall and business area strategy
– Current and future assets
– Technological capabilities
– Organisational capacity
– Technology status by suppliers
– Competitors ambitions and actions
– Governments expectations etc.
Leader
• After the leader/follower decision, decide on
“cooperation strategy” – “internal” versus
“external/collaborative”
Follower
Source: BBC; press clippings
73
010731Technology in E&P-main pack.ppt.ppt
Be sophisticated when choosing approach for each
technology cluster
ILLUSTRATIVE
Overall approach
of E&P
companies
E&P companies’ approach to Leader
each specific cluster of
technologies
Follower
Internal
Leader
Shell
Statoil
External
Norsk
Hydro
BP
Leader
ENI
TotalFina
Elf
Follower
ChevronTexaco
Follower
Exxon
Mobil
Internal
Internal
Enterprise
Conoco
Amerada Hess
External
External
Leader
Follower
Internal
External
74
010731Technology in E&P-main pack.ppt.ppt
There are four main technology strategies for each
technology cluster
Description
• Be an innovator but •
keep cards close
• Actively use patents as
protection
• Establish internal R&D
projects
– Corporate initiatives
– BU or cross-BU
When to use
When technology is of
key strategic importance
and could give unique
competitive differentiation
(none/little to gain from
others), and risk is
acceptable
Description
• Be architect/facilitator • When technology is of
• Lead and drive through key financial and strategic
collaborative efforts
– JV / JIP
– Alliances/partnerships
– Corporate venture
capital
Leader
Innovate
Lead and
and protect collaborate
Follower
Prepare
and adapt
Internal
Description
When to use
• Let others drive
• When technology is of
development but actively moderate importance
monitor and test
and could give
• Experiment/prepare
competitive advantage
internal systems to allow
if rolled out rapidly, but
fast roll-out
others lead
When to use
importance, but company
believes that joint R&D is
most efficient, lacks some
skills and/or wants to
share the risk
Pick and
play
External
Description
• Keep watch over
development
• Adopt fast when
commercially available
When to use
• When technology is of
moderate importance,
but others are better
positioned to drive it,
and it is easily available
in the market
75
010731Technology in E&P-main pack.ppt.ppt
Core elements in the new regime for innovation and
technology management
• Strategic role
• Valuation methodology
• Funding
• Processes
• Technology as a business project
• Organisational structure
• Culture
• Supplier incentives
• Links with smaller players
• Successful alliances
76
010731Technology in E&P-main pack.ppt.ppt
Systematic valuation of your technology portfolio
is vital for investment decisions
Identify
technologies
What
Calculate value
Categorise and
prioritise
• Map technologies to
• Identify value creation
• Evaluate value creation
develop a gross list of
promising technologies
in each cluster
• Assess overall
attractiveness of the
mapped technologies
• Select key technologies
to be further evaluated
opportunities of the
selected technologies
• Identify and understand
key uncertainties
• Identify options
• Calculate the value
potential vs. ease of
capture for individual
technologies
• Evaluate connectivity
between technologies
• Identify and prioritise
groups/clusters of
technologies
• Estimate value for
• Prioritisation of
End
• List of key technologies
products to be evaluated
individual technologies
technology clusters and
individual technologies
77
010731Technology in E&P-main pack.ppt.ppt
Use an appropriate valuation methodology
according to the development stage
Life cycle
stages
Idea
Development and
early implementation
Commercialisation
Mature
products
Level of
uncertainty
• True ambiguity
• High uncertainty
• Continuous or
discrete uncertainty
• Useful
prediction
• Stable situation
• Low uncertainty
Level of
flexibility
• Very high
• High
• Medium
• Low
Appropriate
metrics
• Preliminary
• Detailed real option
analysis of option
valuation (ROV*)
value
• Discounted
cash flow
(DCF)
• Economic Profit
(IRR)
* ROV methodology is discussed further in the Appendix
78
010731Technology in E&P-main pack.ppt.ppt
Secure stability, scale and value chain mindset
(idea to full use) in funding of technology projects
Life cycle
stages
Funding
need in each
phase
Total
funding –
see life
cycle need
Idea
• Moderate
Development and
early implementation
• High
Commercialisation
• Very high
Mature
products
• Low
R&D cost in E&P is currently
typically 5-10 cents per barrel, while
cost improvement attributed to new
technology was probably 20-40 cents
per year in the first half of 1990’s and
10-15 cents in the last part – stability
of funding is the key to keep
momentum
79
010731Technology in E&P-main pack.ppt.ppt
Core elements in the new regime for innovation and
technology management
• Strategic role
• Valuation methodology
• Funding
• Processes
• Technology as a business project
• Organisational structure
• Culture
• Supplier incentives
• Links with smaller players
• Successful alliances
80
010731Technology in E&P-main pack.ppt.ppt
The new regime means stronger technology
processes internally and externally
E&P
E&P
Expl
orati
on
Field
deve
lopm
ent
Oper
ation
Con
stru
ctio
n
Su Asset Asset Asset
1
2
3
ppo
rt
Most vital functions
within assets
E&P
Tech Asset Asset Asset
1
2
3
nolo
gy
units Technology architects
Functional
organisation
Asset-based
organisation
New regime: Asset based
with technology architects –
“The best of both worlds”
• High attention on R&D
• Strong business focus
• Empowered organisation
• Lean and mean
• Keeps strong business
and functional
excellence
• Consistent technology
approaches across
fields
But…
But…
coordination
• Risk of becoming too
academic
• Too complex when
there are many fields
optimisation across
assets
• Short-sighted incentives
• Less capacity for
strategic technology
• Weak business
• Risk of weak technology
focus within assets
• Achieves focus and
scale in R&D and
technology development
• Ensures coordination
and proficiency towards
suppliers
• Internal VC ensures
secure, professional
allocation of funds for
technology projects
81
010731Technology in E&P-main pack.ppt.ppt
Key building blocks are a “VC unit” and technology
architects that act as “businesses”
Central units allocate funds
and make policies
E&P
CTO/VC
Technology units control and
execute technology standards,
supplier relation and some
operational tasks
Techn
ology
units
Asset
1
Asset
2
Asset
3
Technology architects
Technology architects lead
technology development and
implementation projects as
“businesses” to maximise
value from new clusters of
technologies
Supplier
1
Supplier
2
Assets
follow
policies and
interact on
commercial
basis with
technology
architects
Other E&P
companies
82
010731Technology in E&P-main pack.ppt.ppt
The internal VC unit has some similarities, but
also differences from external VC companies
Tasks for the Venture Capital Unit:
• Value new technology and allocate funds to
projects accordingly – Hold expertise in
valuation of technology
• Yearly valuation and reassessment of all
technology projects
• Member of “boards” for technology projects
– Selection of management
– Advisor and door-openers on alliance
partners, commercial deals etc.
• Window towards the external would - Initiate
projects and get partners in, or propose
participation in external projects
E&P
Contract
support
“Venture
capital unit”
Central R&D
Similarities to “real” Venture
Capital companies:
Difference from “real” Venture
Capital companies”:
• Allocate funding
• Select and coach
• “Synthetic” NPV of venture based
management
• Support commercial
processes
• Mindset and people skills
on calculated improvement in cash
flow from new technology
• Accept higher risks (if upside is
significant for company’s own
assets)
83
010731Technology in E&P-main pack.ppt.ppt
Set up technology projects as “businesses”
E&P
Use a business plan approach and create a (synthetic) cash-flow
model to calculate option value / NPV, IRR, value of early testing etc.
Create the “technology
architect” as a real
champion”. Ensure sufficient
budget. Key task is to
maximise life-cycle NPV of
technology for the company
Search for
partners with
competence and
incentives to
speed up
“Buy” testing
development
time from
phase
assets/ licenses
on a purely
economical basis
Get partners to
share investments
and ensure
sufficient scale in
testing phase
Su Asset Asset Asset
1
2
3
ppo
rt
Technology architects
Increase the future value
through proactively
positioning in strategic
assets
Apply “best practice”
development projects, inspired
by
• E&P field development
projects
• Venture Capital
methodologies
• Best practice from product
development in other
industries
84
010731Technology in E&P-main pack.ppt.ppt
The use of mini business plans creates discipline
and eases the management task
Organisation and
resources required
to carry out the
project
Impact of the
technology on the
industry
Description of
technology platform
Objectives of project
(+goals metrics for
measuring
performance)
Business plan
for a technology
development
project
Value to the Oil Co.
and other partner
companies
Market for the
technology
Funding requirement
for the projects
Roles of other
players and
competitors
85
010731Technology in E&P-main pack.ppt.ppt
Choose organisational solution based on synergy
potential across assets vs. within assets
Assessment for each technology type:
Need to keep resources and
operational control in assets.
Align work processes, tools and
decide R&D centrally, i.e. balanced
Contract
support
“Venture
capital unit”
Need negotiation power towards
suppliers, and directive approach
towards assets to develop & test
new technology, i.e. strong center
Need optimisation within assets
on often unique installations, but
big synergy potential in buying
power, standards and R&D if
coordinated, i.e. balanced
If optimisation is important across
assets is strong center natural
Need to push concept thinking
and challenge suppliers. Cyclical
need, i.e. central unit is natural
Degree of
operational and
technology control
High
Moderate
Low
E&P
Central R&D
Subsurface
(G&G+reservoir)
Asset 1
Asset 2
Asset 3
Drilling
Maintenance/
topside support
Logistics and
supply
Engineering/
Construction
Technology
units
Technology architects
86
010731Technology in E&P-main pack.ppt.ppt
Strong technology networks are crucial when key
technology personnel are in assets
Examples of technology/ competence
networks (3 types) :
• Discipline focused:
–
–
–
–
• Technology focused
Geology
Geophysics
Reservoir engineering
Etc.
Best practice technology networks
– 4C Seismic
– Downhole separation
– Etc.
Technology
units
• Business concept focused
– Tail-end production
– Sub-salt exploration
– Etc.
Asset
1
Asset
2
Asset
3
• Clear membership of each network
• Dedicated (full time) owners/leaders
• Committed (part time) leadership group
• Frequent local and global meetings/ seminars
• Personal incentives linked to success of network
• Fully harmonised processes and procedures across assets
• High quality common databases and systems to support work processes
• Strong informal networks and a culture to share experience and ask for advice
• Ad hoc and permanent project groups to follow up/ conduct research on specific tasks
• Flexible and non-bureaucratic approach to start and stop networks according to changing needs
87
010731Technology in E&P-main pack.ppt.ppt
Create a new culture through best practice
support processes and systems
E&P
• Knowledge
management
Su Asset Asset Asset
1
2
3
ppo
rt
Technology architects
• Performance
management
Technology projects “give and take”
Technology market
organisation
• Work processes and information
• KPIs in use focusing both on
flow are mapped, and systems are
short and long term objectives.
designed to support processes
• KPIs developed that allow
• Common platform across
• Talent
valuation of technologies under
geographies and field
development – these KPIs
management
development phases are
should be used to make it
implemented that allow efficient
possible to value and trade off
cooperation between different
• Continuous recruiting – avoid long term development versus
competence groups and assets
cyclical mindset and on-off
shorter term objectives
• Information and experience
recruiting
sharing intra-net and extra-net
• Explicit career path descriptions
systems are fully in use to support with big upside for high performers
the different knowledge-,
• Explicit programs for long term
technology- and business focused development of professionals,
groups
including training and rotation
88
010731Technology in E&P-main pack.ppt.ppt
Core elements in the new regime for innovation and
technology management
• Strategic role
• Valuation methodology
• Funding
• Processes
• Technology as a business project
• Organisational structure
• Culture
• Supplier incentives
• Links with smaller players
• Successful alliances
89
010731Technology in E&P-main pack.ppt.ppt
Use incentives to stimulate suppliers to deliver
value, not products – align interests, and open the
way for SMEs
E&P
• Use KPIs/incentives in a creative way to
give suppliers incentives to create value
for you as an E&P company, e.g.
– Pay per (marginal) barrel produced
– Pay linked to field value enhancement
(reserve increase, revenue increase
and/or cost improvement – use
valuation methodology)
– Pay linked to HSE indicators
• Let technology companies own the
technology – use contractual means (not
ownership of technology) to regulate
privileged access to technology
• Keep channels open for SMEs and
industry outsiders with innovative
technologies – experience shows the
importance of those companies in
innovation
Techn
ology
units
Asset
1
Asset
2
Asset
3
Technology architects
Supplier
1
Supplier
2
Industry
outsider
Small
Small
Supplier 1 Supplier N
90
010731Technology in E&P-main pack.ppt.ppt
Set up cooperation agreements to match the
specific project needs
Category of
relationship
Industry
expertise
Rationale
Form of cooperation
Type of cooperation partner
• Gain access to skills
• Non-exclusive
• Suppliers/customers
• Downstream industrial players
• Players with complementary
the company can not
provide
relationships with large
number of individual
companies and institutions
• Exclusive relationship with
few strategic partners
• Large and non-exclusive
network with industry and
academy
Ideas/
technology
• Boost idea flow
• Pre-empt competition
Smart capital
• Gain smart capital
• Facilitate exit
• Close relationship with few
• Boost business
• Exclusive relationships
Business
building
Reputation
building skills further
• Signal strength and
growth horizons to
external stakeholders
• Capture ideas, talent
and capital
selected partners
with few strategic partners
• Non-exclusive, loose
relationship with regional
and international players
• Loose relationships with
top players nationally and
globally
business areas
• Industrial Partners
• Cooperation agreement with
Universities/research centers
• Venture Capital companies within
industry
• Venture Capital companies
outside industry
• Industrial Partners
• Local incubators for non-core
business
• Local research institutions
• International research institutions
91
010731Technology in E&P-main pack.ppt.ppt
Experience shows that JV and JIPs require careful
consideration to achieve success
Example
Pros
Cons
Joint Venture
Partnerships
JV
• Well Dynamics
• Clear objectives
• Low commercial
for JV
• Separate
organisation and
culture to parent
companies
viability of venture
due to high upfront
funding
• Misalignment of
shareholder
objectives
• Lack of knowledge
resources within
venture
Joint Industry
Project
HIP (US CAR)
• Deep star JIP
• Broad assessment
• Misalignment of
JV merger of
smart well and iwell groups
(Shell and
Halliburton)
– Development
of deepwater
technology
– 24 members
(both oil
companies and
OFSE)
of technology gaps
• Helps companies
to climb the
learning curve
•
•
•
•
objectives between
participants
Slow implementation
speed
Lack of direct funding
Value impact not
understood
Lack of knowledge
capability within JIP
92
010731Technology in E&P-main pack.ppt.ppt
‘To-do’s for E&P companies
• Use modern valuation methods as the basis
for investment decisions
• Secure long term stability and scale in
funding of technology innovation and
development – avoid cyclical behavior
• Ensure that new, promising technologies
are given testing opportunities, e.g. through
explicit funds to technology manager to buy
testing opportunities
• Ensure that technology and competence
processes across assets are efficient – secure
a “global” approach when appropriate. Use
technology architects and internal VC to run
technology projects as a business
• Be open to share and receive ideas with
others, avoid “not invented here” syndrome
• Stimulate people to drive innovation and
technology development
Techn. R&D
investments
E&P Co.
Organization
Innovation and
technology
development
E&P Co.
strategy
• Develop a technology based strategy
• Make deliberate decisions on where to be
the technology leader and follower and
when to collaborate for each cluster of
technologies
• Protect your intellectual property
Sourcing
• Understand your suppliers’
economics, and give them
incentives to work jointly with you to
to maximise value from new
technologies
• Actively explore alliances with small
93
010731Technology in E&P-main pack.ppt.ppt
‘To-do’s for E&P companies at the industry level
Level
Level
of of
influence
influence
Factors influencing innovation and technology
Oil price
Geological
realities
Patenting
Government
policies
Field
investments
Cyclical
mindset
Macro
economy
None
Talent
attention
Low
E&P companies and technology companies should work at the industry
level to…
• Make patent protection more efficient – give more to the inventors!
• Make license decision structures more efficient, especially when there are
“multiple owners” (large partnerships)
• Stimulate Venture Capital into the industry - create independent VC bodies
• Make a better national and international master plan for academic E&P
research
• Improve recruiting quality and quantity - promote petroleum education for
youngsters and the petroleum sector for graduates
94
010731Technology in E&P-main pack.ppt.ppt
‘To-do’s for OFSEs
• Secure long term stability and scale
in funding of technology innovation
and development - get partners (and
governments) to commit to fund you
throughout the testing phase (to
overcome “child diseases”)
• Build networks or “communities of practice” for business
issues across org. units – dedicate sponsors to network
• Be open to share and receive ideas with external parties avoid “not invented here” syndrome
• Make sure that employees understand value drivers in E&P
and stimulate them to innovate and sell integrated concepts
at high levels in E&P companies
Techn. R&D
investments
OFSE
Organisation
Innovation and
technology
development
OFSE
strategy
OFSE
Sourcing
• Fundamentally rise ambitions towards
delivering more value to E&P companies
through offering integrated solutions,
and capture more of the value through
take some of the performance upside
and geological/reservoir risk
• Be the architect of integrated solutions
in areas where you can differentiate, and
use sub-suppliers when appropriate
• Be creative and proactive in developing
E&P companies
R&D drive
and using contractual models where
you get a (larger) proportion of the
upside
• Use JV etc. to secure commitment and
long term relation with subsuppliers
and customers – but focus on finding
business model where value is captured
95