July 2001 McKinsey Research Project A new regime for innovation and technology management in the E&P industry
July 2001
McKinsey Research Project
A new regime for innovation and technology management in the E&Pindustry
A new regime for innovation and technology management in the E&Pindustry
010731Technology in E&P-main pack.ppt.ppt
2
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.
010731Technology in E&P-main pack.ppt.ppt
3
OtherDrilling
Seismic
Independent studies conclude that new technologies have created significant value in the industry
Shell study: Total pre-tax benefit in 5 Shell units
X
3,8
Oper-ating cost 1991
Op. cost 1994
Total benefit from new tech-nolo-gies
Total cost of R&D and impl.
0,5X-3,3
US$ billions (1991-1993)
Facilities
Sub-surface
Well
EU study: Reserves gains 1990-1997
8.3
Reser-ves 1990 (minus prod 90-97)
Reser-ves 1997
Due to better tech-nology
Other factors
4,1
~45
Billion boe oil and gas reserves in UK, Norway and Denmark
Floaters
Source:EU Energie publication, OGJ, EIA
010731Technology in E&P-main pack.ppt.ppt
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However, too many potentially high-impact technologies have failed to materialise
Text
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
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 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
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
Now it’s the turn of the small companies e-commerce promised a level playing field.
Now it’s the turn of the small companies e-commerce promised a level playing field.
Now it’s the turn of the small 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
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-lineFinancial institutions will spend more on electronic commerce
Now it’s the turn of the small companies e-commerce promised a level playing field. Now it’s the turn of the small companies e-commerce promised a level playing field.
Now it’s the turn of the small companies e-commerce promised a level playing field.
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
February 28, 2000
Direct Hydrocarbon Indication and slimhole drilling cuts exploration cost by 70%
First platform free deep-water development in operation – cost down by 50%Downhole separation….…multiphase pumping…smart wells…
Gas-to-liquid plant to be built with total cost of USD 15/boe
010731Technology in E&P-main pack.ppt.ppt
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Leaders in the E&P industry are struggling to capture the full potential from technology
Technology related concerns
Strategy: How could we build a distinct strategy based on our technological capabilities?
Investments in new technology: Should we fund technology development, if so – how ?
Organization: How should we organize/work to maximize value creation from new technologies?
Sourcing: How could we work with our suppliers to maximize value creation from new technology?
Why of current interest:
Many companies have failed to leverage their technological strength in a holistic strategy
Investments have been very cyclical – good projects stopped despite huge long-term potential
Recent organizational trend has resulted in less willingness and capacity for new technologies
Currently there are limited incentives for suppliers to push forward new technologies
010731Technology in E&P-main pack.ppt.ppt
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McKinsey conducted a knowledge building initiative to gain understanding of the issues and to identify solutions
Technology case studies:
5 mature technologies: • 3D, MWD, Horizontal
wells and FPSOs, subsea trees
12 promising new technologies: • E.g. smart wells, 4C
sesimic, downhole separation
Develop perspective on innovation and technology in E&P
Share with E&P Co and Technology Co. and adjust
Phase 1 Phase 2
2001: January-March
Present and support teams and projects
April-June July-Dec
Phase 3
20 with E&P Companies, e.g. : • Shell, Norsk Hydro, Exxon, Statoil,
Enterprise, Unocal, ENI, Amerada Hess, Conoco, Adnoc
15 with OFSEs/ technology companies, e.g: • Halliburton, Schlumberger, Baker Hughes,
Roxar, Read Well Service, PGS, ABB, Stolt
10 with banks, governments. and R&D Institutions, e.g.: • Imperial College, First securities,
Simmons, DDB, CERA, Chr. Michelsen
Survey on E&P companies by OFSEs Interviews
• 15 questions
• Ranking of 8 E&P companies
• Participants: leading OFSEs/technology companies in Houston, London, Oslo, Stavanger
010731Technology in E&P-main pack.ppt.ppt
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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
Subsea and pipeline• Subsea trees• Multiphase metering• Risers and pipelines• Subsea separation
Topside and platform• Generators• Separators• Valves and pumps• FPSO
Processing• GTL • LNG
Yellow: Technology case studies performed
010731Technology in E&P-main pack.ppt.ppt
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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
010731Technology in E&P-main pack.ppt.ppt
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Oil and gas supply are predicted to grow faster than other energy sources
Source: International Energy Agency
World energy supply (Mtoe)
Average annual growth rate (%)
0
1000
2000
3000
4000
5000
6000
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Oil
Gas
Coal
Nuclear
Hydro
Total energy consumption
0.61980-2000
2000-2020
2.1
2.9
1980-2000
2000-2020
Oil supply
Gas supply
1.3
1.8
1980-2000
2000-2020
2.0
Other renewable
010731Technology in E&P-main pack.ppt.ppt
10
Technology challenge: +80 mmb/d
The E&P industry faces a dramatic growth challenge
* 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, World Petroleum Assessment 2000 (Reston, VA, July 2000), McKinsey
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
140
120
100
80
60
40
20
0
New fields outside M.East
Global oil* production medium scenarioMillion b/day
Increased recovery
Existing fields and Middle East fields
Region
Latin AmericaEuropeFSUM.EastAsia Pacific
Change mmb/d 2000-2020
+9-3
+10+15
+6
Region
Middle EastFSU / ChinaOther
Change (mmb/d) 1960-1980
+20+12+12
Region
North SeaSouth AmericaOther
Change (mmb/d) 1980-2000
+5+2+5
010731Technology in E&P-main pack.ppt.ppt
11Source: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).
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
010731Technology in E&P-main pack.ppt.ppt
12Source: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).
Deep water exploration is high on the agenda for leading international petroleum companies
Texaco-Chevron June 2001
“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”
Focus areas: Deepwater Gulf of Mexico, West Africa (Angola, Nigeria), South America, Caspian Region, Eastern Canada, Middle East
ExxonMobil Annual report 2000
Exploration/ Deep water/ rough water
010731Technology in E&P-main pack.ppt.ppt
13Source: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).
But successful deep water exploration and development requires technological breakthroughs
Exploration/ Deep water/ rough water
• Direct Hydro Carbon Indication (DHI) (using seismic attributes)
• Dual-gradient drilling• Deepwater slimhole drilling• Subsea processing• Downhole separation• …
• Reduce exploration drilling costs• Reduce development costs • Resolve environmental issues regarding
gas processing
010731Technology in E&P-main pack.ppt.ppt
14Source: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).
Mature offshore areas could be further exploited through new technologies
• Smart wells• Downhole separation• 4C/4D seismic• Reservoir optimisation and management
• Increased oil recovery• Improved economics of marginal fields
Mature area offshore - IOR
010731Technology in E&P-main pack.ppt.ppt
151900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
20
40
60
80
100
120
140
160
180
Source: OGJ
The “shift to gas” poses additional technological challenges
Million boe/day
“ExxonMobil is exploring the opportunity to apply its proprietary GTL technology by developing a world-scale GTL plant in Qatar”
ExxonMobil web - annual report 2001
Gas
Oil and HC liquids
010731Technology in E&P-main pack.ppt.ppt
16
Australia47
Malaysia38
Iran505
Abu Dhabi154
Qatar226
FSU1,340Norway
49
Nigeria86
Algeria67
Venezuela52
U.S.53
Indonesia47
Trillion cubic feet
*Gas reserves exceeding current or anticipated commitments in large quantity and sufficiently accessible location to support potential international gas tradesSource:Janson Association; McKinsey analysis
Stranded gas reserves* need new technology to be monetised
ESTIMATE
• LNG technologies• Gas-to-liquid technologies (GTL)• Sour gas processing
technologies
• Reduce processing costs • Reduce transportation costs and
connect gas fields to markets
010731Technology in E&P-main pack.ppt.ppt
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Growing environmental concerns add to the need for new technologies
Continuing technology advances are essential for meeting expanding energy
needs and reducing its environmental impactPhil 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
• Gas re-injection technologies• Decarbonisation technologies• GTL
• Reduce CO2 emission, including gas flaring• Reduces oil to water
010731Technology in E&P-main pack.ppt.ppt
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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
400-500
100-150
200-300
70-1001990 2000 20101980 2020
• Broadband communication and remote real-time operations
• Visualisation and “groupware”
• Higher productivity• More onshore work• Group work• Streamlined work processes
010731Technology in E&P-main pack.ppt.ppt
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New technologies are required to meet the opportunities and challenges in the E&P industry
Deepwater
Mature Area/ Brownfield
Gas e.g. in Middle East
Business challenges Possible new technologies
• Smart wells• Downhole separation• 4C/4D seismic• Reservoir optimisation and management
• Direct Hydro Carbon Indication (DHI)• Dual-gradient drilling• Deepwater slimhole drilling• Subsea processing• Downhole separation
• LNG technologies• Gas-to-liquid technologies (GTL)• Sour gas processing technologies
• Gas re-injection technologies• Decarbonization technologies• GTL
• Increase oil recovery rate• Improve economics of marginal
fields• Reduce operating costs
• Reduce exploration drilling costs
• Reduce development costs
• Reduce processing costs • Reduce transportation costs and
connect gas fields to markets
• Reduce CO2 emission, incl. gas flaring
Environmental
Productivity • Broadband communication and
remote real-time operations • Visualization and “groupware”
• Higher productivity• Demanning offshore • Streamlined work processes
010731Technology in E&P-main pack.ppt.ppt
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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
010731Technology in E&P-main pack.ppt.ppt
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Commercially available
Role* of various players through the development process(based on 15 technology case studies)[%]
Non E&P
Academic
SME
Big 3 OFSE
Other E&P
Majors
* 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
Source: Industry journals, interviews
Idea Prototype 1st field test 50% Penetration
23 29 3243
1217
22
21
2
2
9
17
40
3825
188
1 0
015 14 14
2
The role of smaller players has been crucial in the innovation and technology development process
010731Technology in E&P-main pack.ppt.ppt
221960 1965 1970 1975 1980 1985 1990 1995 2000
Visualisation
Deepw.slimhole drilling
Smart wells
Seismic while drilling
Dual gradient drilling
Expandable casing
Slag cement
4C seismic
Downhole separation
Subsea processing
Multiphase metering
FPSO
3D seismic
Horizontal drilling
MWD
GTL
Sub-sea trees
Development timelines of key E&P technologies
• Idea to prototype
• Prototype to field test
• Field test to commercial
• Commercial to 50% penetration
Successful cases
…?
…?
…?
…?
…?
…?
…?
…?
…?
…?
…?
Source: Industry journals, interviews
010731Technology in E&P-main pack.ppt.ppt
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Visualisation technologies have been developed efficiently
Pioneers Norsk Hydro, Arco and Texaco initiate visualisation development centers. Experience is drawn from space, medicine and construction
1995 2000
Phillips, Statoil and others install visualisation centers
BP tests successfully, plans to build 15 centers worldwide
Drivers:
• Pull from E&P:– 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
Value impact:
• Better detailed design of well paths in reservoir 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
More than 100 large screen visualisation centers are expected by the end of 2001
Norsk Hydro installs virtual reality center
Source: Industry journals, interviews
010731Technology in E&P-main pack.ppt.ppt
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The success of 3D seismic required both pull from E&P companies and push from technology companies
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
technology supplier
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
Better positioning made 3D possible –(Norwegian shipping tradition met E&P) Elephant fields
(Statfjord) fully covered by 3D
1970 1980 1990 2000
2 streamers
New entrant (PGS) pushed development;
5 streamers 12 streamers
Multiclient seismicacquisition
Increased computing power
Source: Industry journals, interviews
multi-streamer, onboard processing
Delay in development
010731Technology in E&P-main pack.ppt.ppt
251960 1965 1970 1975 1980 1985 1990 1995 2000
Visualisation
Deepwater slimhole drilling
Smart wells
Seismic while drilling
Dual gradient drilling
Expandable casing
Slag cement
4C seismic
Downhole separation
Subsea processing
Multiphase metering
FPSO
3D seismic
Horizontal drilling
MWD
GTL
Sub-sea trees
There have been significant delays for most technologies
…?
…?
…?
…?
…?
…?
…?
…?
…?
…?
…?
Periods with low activity
Not yet successful commer-cialized
…?
Cases examples
Source: Industry journals, interviews
010731Technology in E&P-main pack.ppt.ppt
26
Measurement While Drilling (MWD) was very slow to develop
Teleco demonstrates MWD
Schlumberger research initiated
Schlumberger acquires Analysts to develop MWD (but do not launch MWD)
Price shock.Amoco, Exxon, Shell...begin using MWD
Elf research initiated
Industry outsiderRaymond Engineeringdevelops mud pulse telemetry
Elf and Raymond incorporateTeleco to push development of MWD
1970 1980 1990 1995
GeoLink’sOrienteerMWD system
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
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
EWR MWD developed
Revenue: US $mTeleco 132Schlumb. 70Other 70
Full penetration
Source: Industry journals, interviews
010731Technology in E&P-main pack.ppt.ppt
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Deepwater Slimhole Drilling has been slow to take off
Value Impact
• Smaller rigs and less 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
• Use of thinner pipes with stronger materials and narrower well diameters for drilling
Description
Conventional Slimhole
Hive com-pensation
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)
Source: Industry journals, interviews
010731Technology in E&P-main pack.ppt.ppt
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Drivers
• E&P players with strong strategic interest (few portfolio alternatives) in the new technology are involved
• Decision makers that will commit money are in charge
• Developments are asset-light
• Organizational culture, systems and incentives to foster and test ideas
• Technology companies exist which have strong incentives to push new technologies
• E&P companies create demand for new technology
Examples
• Need for horizontal drilling in Austin 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
The key drivers of innovation and technology
Funding
Strategy
Organisation
Sourcing
010731Technology in E&P-main pack.ppt.ppt
29
Commercially available
Idea Prototype 1st field test 50% penetration
Barriers to technology development
• Weak understanding of strategic rationale for being technology leader
• Lack of stability in funding
• Lack of Patent protection
• Organisational conservatism and risk averse approach to technology decisions
• “Not invented here” syndrome
• Insufficient cooperation with technology suppliers
Barriers
010731Technology in E&P-main pack.ppt.ppt
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With a few exceptions the main classes of new technology are still moving slowly
Classes of technologies
Communication and visualisation
Reservoir
Downhole
Drilling and logging
Subsea and pipeline
Processing
Topside and platform
Current status
Rapid introduction of broadband, remote operations and visualisation
Fast introduction of new software, but slower on next generation seismic
Many ideas introduced, but slow pilot testing phase due to high risk
Radical ideas developed, but limited push for testing
Currently some push from deep-water, but conservative attitude from E&P
Much focus around gas conversion, but few breakthrough results
Currently very little innovation around separators, generators, pumps, etc.
Comment
010731Technology in E&P-main pack.ppt.ppt
31
The pace of innovation in E&P has been slow relative to that in other industries
0 5 10 15 20 25 30 35
E&P industry(15 tech. Cases)
ADSL (broadbandtelecom)
Medicine (Merck-average)
Consumer products (US average)
Time (years)
Average duration of the four phases in different industries
• Idea to prototype
• Prototype to field test
• Field test to commercial
• Commercial to 50% penetration
Source: Industry journals, interviews
010731Technology in E&P-main pack.ppt.ppt
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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
010731Technology in E&P-main pack.ppt.ppt
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The conduct of E&P companies and OFSEs directly influences innovation and technology development
Innovation and technology
development
Oil price
Cyclical mindset
Macro economy
Field investments
E&P Co. Organization
E&P Co. strategy
Techn. R&D investments
Sourcing
Talent attention
Government policies
Geological realities
Level ofinfluence
None
Low
High
Factors influencing innovation and technology
Patenting
010731Technology in E&P-main pack.ppt.ppt
34
1980 1985 1990 1995 2000
Player conduct has varied significantly and today leads to a poor environment for technology and innovation
Actual price
++
++
++
+
-
-
+
0
++
+
+
+
0
-
0
0
+
+
0
+
-
--
--
0
0
0
--
0
Oil Price
Very positive
Positive
Neutral
Negative
Very negative
++
+
o
-
--
Environment for technology and innovation
Influ-enced by macro trend
Macro trend
010731Technology in E&P-main pack.ppt.ppt
35
1980 1985 1990 1995 2000
Macro trend downward is partly a result of the cyclical behaviour following the industry cycles
Industry cycles Actual price
++
++
++
+
-
-
+
0
++
+
+
+
0
-
0
0
+
+
0
+
-
--
--
0
0
0
--
0
Oil Price
Follow industry cycle
Very positive
Positive
Neutral
Negative
Very negative
++
+
o
-
--
Environment for technology and innovation
010731Technology in E&P-main pack.ppt.ppt
36
Our growth strategy is based on privileged
relations within specific countries. Technology
plays a minor role
Companies:
ExxonMobilShell/ Royal Dutch BP AmocoTotalFina ElfChevronTexacoConocoPhillipsUnocalNorsk HydroStatoilPetrobrasENISaudi AramcoAdnocAnadarkoBHPEnterpriseAmerada Hess
We have been in the technology forefront many times, but it has been “bits and pieces”. We never
developed any distinct strategy
E&P company
Distinct technology
based strategy
-(V)(V)----
(V)(V)-
(V)---
(V)-
(V)-
- (V)V
No apparent technology-based strategy Elements of a technology based strategy Fully implemented technology based strategy
E&P company
Few companies have been able to identify and execute on a technology based strategy
010731Technology in E&P-main pack.ppt.ppt
37
0%
5%
10%
15%
20%
25%
1.5 2.0 2.5 3.0 3.5 4.0 4.5
ExxonMobil
ENI
Shell
ChevronTexaco
BPTotalFinaElf
Innovation index
Tot
al r
etur
n to
sha
reho
lder
s 19
94-2
001
Unocal
Norsk Hydro
Some companies cite the lack of correlation between performance and innovation as a reason for not taking a stronger role in technology and innovation
“Free rider” mentaity
010731Technology in E&P-main pack.ppt.ppt
38
If someone launches a new, good technology, our suppliers will give us access to it within less than 6 months
E&P company
Why invest, it is safer to “wait
and see”
E&P company
Our investments has not paid off, now it is
our turn to wait for others to carry the
R&D burden
Technology company
What is apparently a rational decision for an individual 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
The “free rider” mentality is a significant strategic weakness in the industry
010731Technology in E&P-main pack.ppt.ppt
39
Source: US Patent and Trademark Office
0
1
2
3
4
5
6
7
8
1976-80 1981-85 1986-91 1991-95 1996-01
E&P
Construction
Automobile
Industrialautomation
Pharmaceutical
Number of patents as a fraction of number in 1976-80
We have many patents, but we
nevertheless see similar products
showing up rather fast.
Technology company
Slow growth in E&P patents is symptomatic of poor patent protection for the industry
010731Technology in E&P-main pack.ppt.ppt
40
R&D funding in the E&P industryYear 2000 US$ (billions)
3,0
1,1
1,9
1,7
OFSEs R&D
Business units/ Licenses
Central
1990 2000 E
4,1
3,6
Oil and gas com-panies
R&D is increasingly “outsourced”, and central funding has been reduced drastically
010731Technology in E&P-main pack.ppt.ppt
41
13.6
13.5
11.0
6.1
5.3
4.4
4.3
4.3
2.4
1.8
1.5
0.9
0.9
0.8
R&D in E&P is also low compared to other industries
Software & IT
Pharma
Health
Chemicals
Electronics
Aerospace/Defence
Media
Automobiles
Telecoms
Construction
Metals
Oil & Gas
Beverage
Tobacco
R&D Investment (%)
010731Technology in E&P-main pack.ppt.ppt
42
BP Chevron Conoco Shell
Phillips
1999 US$/boe (adjusted by E&P share of total revenues)
1991 20001995
R&D expenditure has dropped by 50% in the last decade with sharpest decline in the US
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 afterSource: Herold’s; PetroCompanies; BP;10Ks, annual reports
ExxonTexaco
35
28
9,3
8,5
7,6
6,5
5,8
Norsk Hydro
Statoil
Shell
Chevron
BP
Texaco
Exxon
Philips
Conoco
5,7
5,1
Average R&D spend1995-2000 cent/boe
9,0ENI-Agip
010731Technology in E&P-main pack.ppt.ppt
43
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
There is no master plan behind academic and government driven R&D
010731Technology in E&P-main pack.ppt.ppt
44
The consequence is that nobody takes responsibility for long-term R&D
Long term R&D
E&P companies
• Technology is not core
• Technology will become available – we will then be fast followers
Service companies
• We are not paid for that
• It could even hurt our business
• And do we know what they need?
Institutes / academia
• Duplication• Lack resources• Lack of practical
exposure and business judgment
010731Technology in E&P-main pack.ppt.ppt
45
Different opinions persist regarding the shift in approach to R&D
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 ourselvesE&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
Independent R&D institution
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
US E&P company
First and record-setting perfor-
mance…
Schlumberger web-site
Don’t expect anything real new from the big
OFSEsSmall technology company
OFSEs cannot do long term R&DOFSEs can do long term R&D
010731Technology in E&P-main pack.ppt.ppt
46
Investments have been very cyclic in the E&P industry
0
5
10
15
20
25
30
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
0
5
10
15
20
25
30
35
Development cost
Nominal oil price
Exploration cost
InvestmentsUS$ (billions)
Oil priceUS$/bbl
• 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
010731Technology in E&P-main pack.ppt.ppt
47
Capital intensive technologies are often stranded in a funding “Death Valley” for years
The Death Valley
• No more R&D funding available • Small companies do not have
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”
R&D funds available
Downhole separation
Subsea separation
4C seismic
Multiphase metering
Offshore slimhole drilling
Slag cement
Cash flow
+
-
E&P industry
Time
Field test to commercial
010731Technology in E&P-main pack.ppt.ppt
48
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
The average field size has decreased, and fields are no longer “sponsors” of new technologies
68-75 76-80 81-85 86-90 91-95 96-00 68-75 76-80 81-85 86-90 91-95 96-00
17Without Ormen Lange gas field
010731Technology in E&P-main pack.ppt.ppt
49
2,915
2,718
1,342
1,006
842
639
518
453
202
Absolute sizeUSD millions in equity funds in Europe 1999
There is a shortage of funding available for the remaining smaller players
Communication
IT
Chemicals/material
Pharma
Transport
Construction
Electronics
Financial services
Energy
0.16
0.95
0.23
0.69
0.43
0.28
0.02
0.02
1.45
Relative sizeEquity funds/market cap
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
A Venture Capital partner
010731Technology in E&P-main pack.ppt.ppt
50
Functional organisation
Asset-based 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
Strengths:• Strong business focus, good coor-
dination 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
E&P
Exploration
Field development
Operation
Construction
E&P
Support
Asset 1
Asset 2
Asset 3
All vital functions within assets
The move from functional to asset-based organisations has weakened the ability of some companies to innovate and develop new technology
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We are dealing with people in high risk environments, we
cannot risk life and property by playing
around with fancy new technologies
E&P manager
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
Safety concerns also limit the willingness of E&P organisations to test new technologies
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Survey results from suppliers indicate that E&P companies need to improve in most areas
Survey question
In relation to technology to what degree does the E&P company...
To what degree does the E&P company have appropriate...
Range of survey resultsKey Success Factors
Source: McKinsey surveys
Generate ideas internally
Understand the value
Use external ideas / products
Share ideas / products externally
Communicate new tech. internally
Fund during early phase development
Provide field testing opportunities
Effectively manage JIPs
Collaborate with small tech. companies
Commercial skills
Internal processes / procedures
Company structure
Internal incentives
External contractor incentives
Implement new technology effectively
Companies in survey
BPChevronTexacoENIExxonNorsk HydroShellStatoilTotalFinaElfUnocal
Companies surveyed
Brit BitFMCHalliburtonInside RealityPGSReadSchlumbergerSPS-AFOSStolt
Best in class
Worst in class
Poor ExcellentModerate
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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
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Suppliers rank Norsk Hydro and BP as technology leaders
Source: McKinsey surveys of 9 technology suppliers: Brit Bit, FMC, Halliburton, Inside Reality, PGS, Read, Schlumberger, SPS-AFOS, Stolt
Norsk Hydro
BP
Shell
Statoil
ChevronTexaco
TotalFinaElf
Unocal
ENI
Exxon
Poor Moderate Excellent
Average of all questions
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E&P companies can be classified in four distinct groups when evaluated for their technology leadership and external cooperation
Low
Technology and innovation orientation (Average R&D spend level* (1996-2000) + total survey score)
External cooperation orientation (Score on survey - external orientation + qualitative assessment )
Norsk Hydro
High
Source: 10 Ks/annual reports, Survey, Interviews; Team analysis,
Lo
wH
igh BP
Conoco
ExxonMobil
Shell
TotalFinaElf
ChevronTexaco
ENI
Statoil “External oriented Leaders”
“External oriented
followers”
“Internal oriented leaders”
“Internaloriented
followers”
Amerada Hess
Enterprise
R&D investments
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Each group has some typical ways to approach technology and innovation
Source: 10 Ks/annual reports, Survey, Interviews; Team analysis,
Norsk Hydro
Conoco
ExxonMobil
TotalFinaElf
ChevronTexaco
ENI
Statoil
Amerada Hess
Enterprise
BP
• Leading in many technologies• Asset based organizations, but
strong competence networks • Use of incentives in contracts • Open to let technology
companies own the technology
• Leading in some technologies • Large central technology
departments • Often want to own
technologies themselves
• 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
• Low budgets, and explicit policy of being fast followers
• Asset based - no own R&D department
• Open to use turnkey solutions from suppliers
Leader
Follower
Internal External
Shell
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Number of E&P professional job applications to a major oil company (% of 1990 applications)
100 98
5940
1990 1992 1995 2000
64
11992 1995 2000
Top tier recruits in a major oil company(% of total recruitment)
Recruitment of staff with potential to become senior management, in a major oil company (% of 1980 intake)
0
20
40
60
80
100
1980 1985 1990 1995
Required level
1,61,4
1,120,8
0,6 0,5
1980 1985 1990 1995 2000 2005
Headcount in 25 largest E&P companies (millions)
Disguised Client Example
A talent shortage in the E&P industry is cited as a key barrier to technological innovation
010731Technology in E&P-main pack.ppt.ppt
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10
12
14
16
18
20
22
24
26
28
30
1975 1977 1979 1981 1983 1985 1987 1989 1991
Petroleum
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)
Top 2% of cohort
Top 10% of cohort
Top 30% of cohort
25
30
35
40
45
50
55
60
65
70
1993 1995 1997 1999
Product Design
Electrical Engineering
ArchitecturePhysics and Math.
Industrial Economics
Marine Engineering
Civil Engineering
Chemistry Engineering
Mech. Engineering
(Changed formula)
Petroleum
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The OFSE industry is highly concentrated
Company
Market share - selected segments
Wireline logging
14%
57%
20%
Cement
38%
29%
5%
20%
Revenue 1999 $Million 3D seismic
5%
10%
12%
6%
15,664
9,568
5,080
1,087
775
475
265
Halliburton
Schlumberger
Baker Hughes
BJ Services
PGS
CGG
Veritas
* 50/50 joint venture of Western GECO Source: Spears and Associates, Inc.
50%*
010731Technology in E&P-main pack.ppt.ppt
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Halliburton
Schlumberger
Baker Hughes
And the “Big 3” OFSEs have primarily enterednew technology markets through acquisitions
No. of new technologies
In-house innovation*
Acquired**
Adaptor
No role played
*”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
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With a mindset of selling “products” rather than“value” some companies hold technologies back
We would rather sell a large number of
commodity wells than a few advanced ones
An OFSE
We were not engaged in wireline logging, and
therefore pushed MWD aggressively at an early
stage
Baker Hughes
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
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• 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
Some companies have focused on “selling value” and have been innovative
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Smaller companies have major difficulty in accessing E&P companies
An 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
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
50%
Offshore & Marine
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64
In summary, several barriers impede the four key drivers of technology
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
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
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)
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
Funding
Strategy
Organisation
Sourcing
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E&P companies
• Increasingly expecting others to do R&D
• Not changing contractual models accordingly
With the result that the industry dynamics for technology have become dysfunctional
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
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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
A new regime for innovation and technology management in the E&P industry
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The conduct of E&P companies and OFSEs directly influences innovation and technology development
Innovation and technology
development
Oil price
Cyclical mindset
Macro economy
Field investments
E&P Co. Organization
E&P Co. strategy
Techn. R&D investments
Sourcing
Talent attention
Government policies
Geological realities
Level ofinfluence
None
Low
High
Factors influencing innovation and technology
Patenting
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Core elements in the new regime for innovation and technology management
• Strategic role
• Valuation methodology• Funding
• Supplier incentives • Links with smaller players• Successful alliances
• Processes• Technology as a business project• Organisational structure• Culture
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Determining your role
Observations that say “Lead”
• The demand for new oil will be huge – 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 development is currently low
It is not obvious that a single approach (leader or follower) to all E&P technologies is the best strategy
• The macro trend in most industries is that 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
Observations that say “Follow”
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Some companies have taken the role of technology leaders
The FPSO expert
The sub-salt exploration expert
Mature giant field expert
The arctic expert
Examples
• BHP Petroleum was a pioneer in FPSO developments in Australia, and has leveraged this in Vietnam
• Anadarko has developed superior skills within sub-salt imaging, deepwater exploration and option based risking
• Yet to be seen…?
• Yet to be seen…?
The deepwater expert• Shell recognised the potential early, tied up more than
600 deepwater blocks in GoM with a dedicated organisation
• Petrobras became a leading deepwater player in South America
The environmental expert
• Statoil has aggressively invested in IOR-technology for extending life of own giant fields in the North Sea
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Shell recognised the potential of deepwater exploration in GOM before most other players
SHELL IN DEEPWATER EXPLORATIONSuccess rates in deepwater exploration Gulf of Mexico*Percentage of wells with finds >100 MMBOE**
27
24
21
13
Shell Exxon Conoco Onyx
Land positionBlocks
Average field sizeMMBOE
Number of finds
633 135 115 3
200 128 128 90
8 5 3 901
Shell was in the 80s and early 90s an early mover in deepwater exploration and production
• Tied up deepwater blocks
• Invested heavily in skilled personnel
• Led the development in technology to exploit deepwater fields
Water depths >1,500 feet** to 1991
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-55%
Unocal had a “Follower” role that has also been successful in drilling
153
68
Industry average comparable Garden Banks wells
Spirit Energy Garden Banks 74
Well time, daysUnocal 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– Advanced interpretation– Improved well design (slim holes, fewer sections)– Premoored anchors– BOPs on the rig floor– Synthetic muds– LWD evaluation
Source: Unocal PIRA conference presentation
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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
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
Deal Making
• Gain access to new opportunities and add value by applying technology
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Select what role you want to play for each technology cluster
• Look at clusters of technologies
Source: BBC; press clippings
Leader
Follower
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.
• After the leader/follower decision, decide on “cooperation strategy” – “internal” versus “external/collaborative”
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Be sophisticated when choosing approach for each technology cluster
Norsk Hydro
Conoco
TotalFinaElf
ChevronTexaco
ENI
Statoil
Amerada Hess
Enterprise
Leader
Follower
Internal External
Overall approach of E&P companies
E&P companies’ approach to each specific cluster of technologies
ExxonMobil
ShellBP Leader
Follower
Internal External
Leader
Follower
Internal External
Leader
Follower
Internal External
ILLUSTRATIVE
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There are four main technology strategies for each technology cluster
Lead and colla-borate
Innovate and protect
Prepare and adapt
Pick and play
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• Let others drive
development but actively monitor and test
• Experiment/prepare internal systems to allow fast roll-out
When to use• When technology is of
moderate importance and could give competitive advantage if rolled out rapidly, but others lead
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
Description
• Be architect/facilitator• Lead and drive through
collaborative efforts– JV / JIP– Alliances/partnerships– Corporate venture
capital
When to use
• When technology is of key financial and strategic importance, but company believes that joint R&D is most efficient, lacks some skills and/or wants to share the risk
Leader
Follower
Internal External
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Core elements in the new regime for innovation and technology management
• Strategic role
• Valuation methodology• Funding
• Supplier incentives • Links with smaller players• Successful alliances
• Processes• Technology as a business project• Organisational structure• Culture
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Categorise and prioritise
Calculate value Identify technologies
• Map technologies to develop a gross list of promising technologies in each cluster
• Assess overall attractiveness of the mapped technologies
• Select key technologies to be further evaluated
• List of key technologies to be evaluated
• Identify value creation opportunities of the selected technologies
• Identify and understand key uncertainties
• Identify options • Calculate the value
• Estimate value for individual technologies
• Evaluate value creation potential vs. ease of capture for individual technologies
• Evaluate connectivity between technologies
• Identify and prioritise groups/clusters of technologies
• Prioritisation of technology clusters and individual technologies
What
End products
Systematic valuation of your technology portfolio is vital for investment decisions
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Level of uncertainty
• True ambiguity• High uncertainty
• Continuous or discrete uncertainty
• Useful prediction
• Stable situation• Low uncertainty
Appropriate metrics
• Preliminary analysis of option value
• Detailed real option valuation (ROV*)
• Discounted cash flow (DCF)
• Economic Profit (IRR)
Development and early implementation
Commer-cialisation
Mature products
Level of flexibility
• Very high • High • Medium • Low
IdeaLife cycle stages
* ROV methodology is discussed further in the Appendix
Use an appropriate valuation methodology according to the development stage
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Funding need in each phase
Development and early implementation
Commer-cialisation
Mature products
• Moderate • High • Very high • Low
IdeaLife cycle stages
Secure stability, scale and value chain mindset (idea to full use) in funding of technology projects
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
Total funding – see life cycle need
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Core elements in the new regime for innovation and technology management
• Strategic role
• Valuation methodology• Funding
• Supplier incentives • Links with smaller players• Successful alliances
• Processes• Technology as a business project• Organisational structure• Culture
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• High attention on R&D and functional excellence
• Consistent technology approaches across fields
But…• Weak business
coordination • Risk of becoming too
academic • Too complex when
there are many fields
• Strong business focus• Empowered
organisation• Lean and mean
But…• Risk of weak technology
optimisation across assets
• Short-sighted incentives• Less capacity for
strategic technology
Functional organisation
Asset-based organisation
E&P
Exploration
Field development
Operation
Construction
E&P
Support
Asset 1
Asset 2
Asset 3
Most vital functions within assets
The new regime means stronger technology processes internally and externally
New regime: Asset based with technology architects – “The best of both worlds”
E&P
Technology
units
Asset 1
Asset 2
Asset 3
Technology architects
• Keeps strong business 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
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Key building blocks are a “VC unit” and technology architects that act as “businesses”
E&P
Technology units
Asset 1
Asset 2
Asset 3
Technology architects
Central units allocate funds and make policies
Supplier 1
Supplier 2
Other E&P companies
CTO/VC Technology units control and execute technology standards, supplier relation and some operational tasks
Technology architects lead technology development and implementation projects as “businesses” to maximise value from new clusters of technologies
Assets follow policies and interact on commercial basis with technology architects
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The internal VC unit has some similarities, but also differences from external VC companies
“Venture capital unit”
Central R&D
E&P
Contract support
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
Similarities to “real” Venture Capital companies:
• Allocate funding• Select and coach
management • Support commercial
processes• Mindset and people skills
Difference from “real” Venture Capital companies”:
• “Synthetic” NPV of venture based on calculated improvement in cash flow from new technology
• Accept higher risks (if upside is significant for company’s own assets)
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Set up technology projects as “businesses”
Search for partners with competence and incentives to speed up development phase
Create the “technology architect” as a real champion”. Ensure sufficient budget. Key task is to maximise life-cycle NPV of technology for the company
Get partners to share investments and ensure sufficient scale in testing phase
Apply “best practice” development projects, inspired by • E&P field development
projects• Venture Capital
methodologies • Best practice from product
development in other industries
“Buy” testing time from assets/ licenses on a purely economical basis
Use a business plan approach and create a (synthetic) cash-flow model to calculate option value / NPV, IRR, value of early testing etc.
E&P
Support
Asset 1
Asset 2
Asset 3
Technology architects
Increase the future value through proactively positioning in strategic assets
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The use of mini business plans creates discipline and eases the management task
Business plan for a technology
development project
Description of technology platform
Organisation and resources required
to carry out the project
Funding requirement for the
projects
Value to the Oil Co. and other partner
companies
Objectives of project (+goals metrics for
measuring performance)
Impact of the technology on the
industry
Roles of other players and competitors
Market for the technology
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Choose organisational solution based on synergy potential across assets vs. within assets
Asset 1 Asset 2 Asset 3
Drilling
Maintenance/ topside support
Subsurface (G&G+reservoir)
Engineering/ Construction
Logistics and supply
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
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
Central R&D
E&P
Technology architects
High Moderate Low
Degree of operational and technology control
Technology units
Contract support
“Venture capital unit”
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Asset 1
Asset 2
Asset 3Best practice technology networks
• 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
Strong technology networks are crucial when key technology personnel are in assets
Technology units
Examples of technology/ competence networks (3 types) :
• Technology focused– 4C Seismic – Downhole separation – Etc.
• Business concept focused– Tail-end production – Sub-salt exploration– Etc.
• Discipline focused: – Geology– Geophysics– Reservoir engineering– Etc.
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Create a new culture through best practice support processes and systems
• Talent management
• Performance management
• Knowledge management
Technology market organisation
E&P
Support
Asset 1
Asset 2
Asset 3
Technology projects “give and take”
Technology architects
• Work processes and information flow are mapped, and systems are designed to support processes
• Common platform across geographies and field development phases are implemented that allow efficient cooperation between different competence groups and assets
• Information and experience sharing intra-net and extra-net systems are fully in use to support the different knowledge-, technology- and business focused groups
• KPIs in use focusing both on short and long term objectives.
• KPIs developed that allow valuation of technologies under development – these KPIs should be used to make it possible to value and trade off long term development versus shorter term objectives
• Continuous recruiting – avoid cyclical mindset and on-off recruiting
• Explicit career path descriptions with big upside for high performers
• Explicit programs for long term development of professionals, including training and rotation
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Core elements in the new regime for innovation and technology management
• Strategic role
• Valuation methodology• Funding
• Supplier incentives • Links with smaller players• Successful alliances
• Processes• Technology as a business project• Organisational structure• Culture
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Use incentives to stimulate suppliers to deliver value, not products – align interests, and open the way for SMEs
E&P
Asset 1
Asset 2
Asset 3
Technology architects
• 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
Supplier 1
Supplier 2 Industry
outsider
Technology units
Small Supplier 1
Small Supplier N
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Set up cooperation agreements to match the specific project needs
Type of cooperation partnerForm of cooperationRationale
• Suppliers/customers • Downstream industrial players• Players with complementary
business areas
• Non-exclusive relationships with large number of individual companies and institutions
• Gain access to skills the company can not provide
Industry expertise
Category of relationship
• Industrial Partners • Cooperation agreement with
Universities/research centers
• Exclusive relationship with few strategic partners
• Large and non-exclusive network with industry and academy
• Boost idea flow• Pre-empt competition
Ideas/technology
• Venture Capital companies within industry
• Venture Capital companies outside industry
• Close relationship with few selected partners
• Gain smart capital• Facilitate exit
Smart capital
• Industrial Partners • Local incubators for non-core
business
• Exclusive relationships with few strategic partners
• Non-exclusive, loose relationship with regional and international players
• Boost business building skills further
Business building
• Local research institutions • International research institutions
• Loose relationships with top players nationally and globally
• Signal strength and growth horizons to external stakeholders
• Capture ideas, talent and capital
Reputation
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Experience shows that JV and JIPs require carefulconsideration to achieve success
Example Pros Cons
Joint Venture Partnerships JV
• Well Dynamics JV merger of smart well and i-well groups (Shell and Halliburton)
• Clear objectives for JV
• Separate organisation and culture to parent companies
• Low commercial viability of venture due to high upfront funding
• Misalignment of shareholder objectives
• Lack of knowledge resources within venture
Joint Industry ProjectHIP (US CAR)
• Deep star JIP– Development
of deepwater technology
– 24 members (both oil companies and OFSE)
• Broad assessment of technology gaps
• Helps companies to climb the learning curve
• Misalignment of objectives between participants
• Slow implementation speed
• Lack of direct funding• Value impact not
understood• Lack of knowledge
capability within JIP
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‘To-do’s for E&P companies
Innovation and technology development
E&P Co. Organization
E&P Co. strategy
Techn. R&D investments
Sourcing
• 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
• 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
• 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 players
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‘To-do’s for E&P companies at the industry level
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
Level ofinfluence
None
Low
Oil price
Cyclical mindset
Macro economy
Field investments
Talent attention
Government policies
Geological realities
Level ofinfluenceFactors influencing innovation and technology
Patenting
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‘To-do’s for OFSEs
E&P companies R&D drive
• 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
• 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 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
Innovation and technology development
OFSE Organisation
OFSE strategy
Techn. R&D investments
OFSESourcing