The Selfish Technology Gene. Robert K. Perrons, SPE, Smart Fields consultant, Shell, and. Lew Watts, President and Chief Executive Officer, PFC Energy.
Guest Editorial
The Selfish Technology Gene Robert K. Perrons, SPE, Smart Fields consultant, Shell, and Lew Watts, President and Chief Executive Officer, PFC Energy Perrons
Mother Nature may be beautiful, but she is also unapologetically harsh. Changes in an environment—such as an increase in temperature or a shift in precipitation patterns—can act as triggers that ruthlessly reshuffle the fortunes of living things within an ecosystem. Organisms that are best suited to the new conditions will prosper; the rest are swiftly killed off without an ounce of remorse. Similarly, changes in one’s business environment should act as a trigger to pause and reflect on the future. Seemingly innocent changes in the prevailing winds of an industry can reshape the competitive landscape of the market with brutal efficiency. The upstream oil and gas sector is beginning to feel the effects of just such a change, and there is every reason to believe that this shift will have a dramatic impact on the industry’s “ecosystem.” The sector has historically been very slow to develop and adopt new technologies, and relative investment in R&D by Big Oil has traditionally been only a fraction of that spent in other industries. Much of the oil and gas sector’s R&D activities have shifted throughout the past decade toward service companies and, in some areas, to national oil companies (NOCs). But the industry is undergoing a significant transformation. With future hydrocarbon resources being in more technologically challenging environments, future winners in the industry are likely to be firms that have the ability to innovate and develop unique breakthrough technologies, and international oil companies (IOCs) are now working hard to strengthen their in-house R&D capabilities. Just as important as the technologies themselves, however, is how companies try to deploy them. Several of the accepted norms of the oil and gas sector are also barriers that impede the introduction of innovations in the industry. First, companies in the oil and gas market have used shared asset-ownership structures as a way to manage risk, but firms quite reasonably refrain from laying their cards on the table—that is, from revealing their cutting-edge innovations—if they believe that these tools and techniques will be immediately absorbed and replicated by the other partners. Second, partner firms often quash new-technology proposals because they are not convinced of the value of the innovation and/or they are uneasy about the additional layers of perceived risk that new technologies tend to carry with them. There always seems to be a reason not to use a new technology, and having many partners in an asset frequently begets frustratingly long lists of excuses. The growing importance and profile of technology in the industry may therefore bring about a pronounced shift in the fundamentals of how oil and gas firms collaborate and compete. Where once these companies were more strongly influenced by capital-management strategies and were attracted to ownership structures designed to hedge against the risk of a project’s failure, it is now highly conceivable that these same firms will be much less inclined to share. Selfishness will quite possibly become more in vogue. Upstream oil and gas companies—particularly the large, integrated ones with deep pockets that can support aggressive R&D portfolios—may be drawn toward more concentrated or even single-firm asset ownership structures that readily lend themselves to technology deployment and the protection of proprietary innovations. This is not to say that this force will become the single defining issue whenever asset ownership structures are being decided in the future. Countries with hydrocarbon resources will have to consider the benefits of each approach carefully. On one hand, host governments might not object to this strategic shift when 22
Watts
Robert K. Perrons, SPE, is a Smart Fields consultant in Shell International’s Exploration & Production division, and an affiliated researcher at Cambridge University’s Centre for Strategy and Performance. He earned a B.Eng. degree in mechanical engineering from McMaster University in Canada, an SM degree in technology and policy from the Massachusetts Institute of Technology, and a PhD degree in engineering from Cambridge University, where he was a Gates Cambridge Scholar. He is chartered as both a C. Eng. (IMechE) and Eur Ing professional engineer. Lew Watts is President and Chief Executive Officer of PFC Energy, a global energy consultancy based in Washington, DC. He has nearly 30 years’ experience within the oil and gas industry, including upstream, gas and power, and the service industry. He is a past executive director of Shell’s Gas and Power business and spent more than 20 years in Shell’s upstream business in a variety of global operational and commercial roles, culminating in his role as vice president for Global Strategy and Economics. Immediately before joining PFC Energy, he was a senior vice president with Halliburton Energy Services. Watts graduated with first-class honors in geology from the University of Bristol and earned a PhD degree from Reading University, both in the UK. He is a past board member of Petroleum Development Oman.
JPT • APRIL 2008
Guest Editorial presented with the improvements to the bottom line that the resulting innovations will bring in the long term. But on the other hand, it might be difficult to convince governments that securing multiple partners is not the better strategy for maximizing technology input and maintaining the checks and balances that keep operators in line. And countries with NOCs may insist on nonexclusive ownership to ensure that their national champion is kept abreast of the latest technologies. Nonetheless, as the strategic importance of proprietary technologies grows within the industry, IOCs will feel an increasingly strong urge to share ownership much more selectively and with as few partners as possible. As noted earlier, however, these kinds of upheavals in an ecosystem often inflict collateral damage. Service companies and top-tier suppliers have thrived within the sector’s traditional technology deployment model because asset ownership structures involving multiple partners have essentially provided
a vast interconnected network within which news about novel technologies dispersed rapidly through a form of “virulent marketing.” Large-scale movement toward 100% ownership of assets would create hurdles within these existing conduits of technology dissemination. And the ramping up of R&D budgets by IOCs is also creating a strategic trap for service providers insofar as service companies could be forced to revert to a combination of being providers of commodity products and contractors that implement the high-value technologies developed by the IOCs. Hoping to avoid these low-margin scenarios, several leading service companies are responding in kind with pronounced increases in their own R&D budgets. Naysayers may object to the suggestion of a future focused on proprietary technology on the grounds that our industry’s emphasis on capital management will be no less appropriate in the future. Projects requiring several billions of dollars, they say, should clearly be financed jointly by a group of
companies rather than by a single firm. But this same balancing act has been managed successfully in other industries. Semiconductor companies have contended for years with eye-watering capital costs while aggressively protecting their technology portfolios. A single chip-fabrication facility costs on the order of USD 3 billion, but it would almost never occur to Intel to share these investment costs with AMD or Motorola. That industry has always put a comparatively high premium on the value of proprietary technologies, and the sector’s sensitivity to intellectual property (IP) seepage has accordingly tended to be much greater than ours. But things are changing quickly. As some host governments begin to select energy companies on the basis of their ability to offer differentiating innovation and unique know-how, IOCs are beginning to feel the bitterly cold winds of evolutionary change. The model of multifirm asset ownership that has loyally served the upstream oil and gas industry for so long may be entering some interesting times. Capital risk management will clearly never cease to be an important consideration in the development of new oil and gas fields, but this force may eventually be less powerful and less compelling than each firm’s growing instinct to deploy their own technologies quickly and secretly. At the same time, however, this may not suit everyone. Host governments—especially ones tethered to NOCs—may prefer to stick to models of multifirm asset ownership. But as Big Oil works ever harder to protect its proprietary IP, a new and somewhat nimbler species of oil and gas company may emerge that exhibits more selfish portfolio management strategies than its predecessors. How far and how deep this model spreads will depend on several factors, but one thing is certain: Only the technologically fittest companies will survive. This shock to the upstream oil and gas ecosystem will probably be painful and breathtakingly brutal for some firms. But then again, that just seems to be how Mother JPT Nature works. This article reflects the personal views of the authors and should not be interpreted as a reflection of Shell’s or PFC Energy’s official position or policies.
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