Why companies avoid new oil and gas technology

Oil and Gas Technology: A huge impact historically, but little current appetite

Throughout its history the oil and gas industry has been propelled forward by innovation and technology.  Technology has dramatically altered the way in which oil and gas resources are discovered, developed, and produced.

North sea oil rig - Warren business Consulting

Oil rig in the North Sea

Technology has improved the performance of oil products, reduced environmental impact and advanced safety performance.  It has also helped us to consume precious natural resources much more efficiently.

Over the years there have been many technological breakthroughs and thousands of incremental advances.  For example, oil recovery has increased from less than 10 per cent of oil in place in the early history of the industry, to in excess of 70 per cent in some fields today.

And yet the R&D spend of oil and gas operating companies is small relative other sectors and there is some evidence that it is decreasing.  In the global top 1000 companies by R&D spend, the top 25 contains no oil and gas companies, according to research by the U.K. government:

R&D spend by top 1000 global companies

When R&D is expressed as a percentage of sales or operating profits, the picture looks even worse for oil and gas operating companies:

U.K. Government 2010 R&D Score Board

U.K. Government 2010 R&D Score Board

U.K. Government 2010 R&D Score Board

U.K. Government 2010 R&D Score Board

Not only are oil and gas spending less on R&D, they are also less inclined to adopt technologies developed by others.  There is little rigorous data and analysis to back this assertion up.  But there is plenty of anecdotal evidence.  Just ask any budding entrepreneur with a new widget that promises increased productivity in the oil field.  Even seasoned business developers in the large oil services companies will acknowledge that sales of new technology to operating companies are quite a challenge.

How technology fell out of favour

Oil rigR&D spend by oil and gas operators appears to have fallen victim to the general outsourcing initiative which started in the 1980s.  At this time companies began to scrutinise activities carried out within the firm and decided that in the “buy versus build” decision, it was mostly better to buy new technology from the market place.

This meant that service companies were called upon to fill the gap by increasing their R&D activities.  Today, much technological innovation in the industry is generated by service companies and technology start-ups.  National oil companies and governments have also played a role.  Service companies file many more patents annually than the operators.

Service companies will often acquire start-up technology companies early in the deployment phase of a new product or service.  These start-up companies drive much of the innovation in the industry.

What’s driving oil company attitiudes to technology?

So, why do oil and gas operators shy away from new technology so much more than other players in the industry and companies in other sectors?  The answer is likely to come in several forms:

Driven by investors:  There is much greater transparency when investing in new technology in the retail, entertainment, telecoms and healthcare sectors.  The new technology is all around us and clear to see.  However, there is little mainstream media attention given to the impact of technology on natural resource companies.  This may colour investors’ perceptions.

Slow Adopters:  In oil and gas we are notoriously slow adopters of new technology.  Operating companies may therefore take the view that commercialising technology in the oil and gas is too costly and time consuming.

They may be right.  Consider these 2 examples:

  • The world’s first 3D seismic survey was undertaken by ExxonMobil in 1967, but it was not until the mid-1980s that the technology became truly mainstream.
  • Horizontal drilling began in the USA in the mid-1970s, but it wasn’t until the 1980s that steerable motors that could be controlled from the surface were introduced – that allowed the real growth in horizontal drilling to take place between 1990 and 2000.

Risk Aversion:  In recent years’ oil and gas companies have been driven to technically and politically more challenging parts of the world in the quest for new resources.  At the same time there has been significant industry inflation and government take has been on the rise.  Operators have become increasingly risk averse as they take on new projects that are more expensive and offer lower returns.  In many ways, new technology is “a risk too far”.

Lacking Capabilities:  The oil company strategy to outsource technology development to the services sector has resulted in a significant reduction in the number of people they have that understand technology and the R&D process.  This has proven to be a barrier to the rapid introduction of new technologies to these companies.

First Mover Disadvantage:  Operating companies are generally reluctant to be the first to apply an unfamiliar technology, preferring others to take the initial risk.  This can lead to a lengthy commercialisation process and delays in achieving economic gains for successful new technologies.  However, commercialisation works much better if the operator has been involved in the development process.  When operators are intimately familiar with the technology under development they are much better at estimating its risk reward characteristics.

Short Termism:  Operating companies are generally more willing to take geological or political risk than technical risk and this seems to be strongly influenced by investor expectations.  Many new technologies will offer significant benefits over the long term.  However, most new technologies also introduce short term downside risk, such as disruptions to drilling or production.  In this scenario, short term corporate targets will almost always win the day.  Similarly, which executive will take the short term risk to the performance of his unit, for the long term benefit of the whole company?

Cost and Integration:  The capital cost of introducing even the simplest new technology can be prohibitive, once all design, manufacturing, installation, operation and maintenance activities are accounted for.  Even a small, new widget will be a part of a much bigger system, and often system integration issues make the oil and gas operator reluctant to adopt it.

The “Believers”:  some still investing in oil and gas technology

All this said, there are a number of companies taking a strategic view of technology and investing in select new technologies.  Strategic investors in oil and gas technology include Chevron, Shell, Energy Technology Ventures, a joint venture between GE, NRG, and ConocoPhillips, Statoil Ventures, and KPC Ventures.  The last too are especially noteworthy, because they are divisions of national oil companies.

And a recent report by Bain, the management consulting firm, noted that many NOCs seek to nurture entrepreneurship and foster globally competitive businesses in energy-related sectors in their home country.  Many times this will involve start-ups which are developing new technologies.

Chevron has invested in firms such as Ampersand Ventures, Element Partners, EnerTech Capital, Nth Power, and RockPort Capital Partners.  KPC Ventures backs Braemar Energy Ventures, Chrysalix, Emerald Technology Ventures, Conduit Ventures, Nth Power, and EnerTech Capital.  Baker Hughes, Nalco, and Weatherford sponsor the Oil & Gas Innovation Center, and the Surge Accelerator serves as a Houston-based incubator for energy start-ups.

Despite the general lack of industry appetite for new technology, there are believers who see the potential for breakthrough and are backing this belief with resources.

Oil and Gas Operators Still have a Major Role to Play

New technology development requires firstly an understanding of the problem to be solved and the benefits of resolution; secondly, knowledge of the underlying science and engineering of the proposed solution; and lastly, the capability to commercialise new products through development, finance and marketing.  Therefore, the oil and gas operating companies have the leading role to play, and in many ways are the natural custodians of new technology.


  1. Anonymous says:

    1. The ‘low R&D spend’ is an old challenge, and comes from a fundamental misunderstanding of the oil business. If you compare the ‘value chain’ of oil and gas (exploration, appraisal, development, production) to a Pharma company or a FMCG company (R&D, pilot, develop production capacity, production sales & marketing) it is clear that it is the exploration phase in upstream that equates to ‘R&D’ in most other business, and what Upstream tags as R&D is actually a peripheral value add rather than core business. You need to compare exploration spend in upstream to R&D spend in ’sales based’ industries BECAUSE it is exploration that develops new assets (i.e. products) and not ‘R&D’ per se.

    2. For many years the industry has relied on service companies to develop new technology and gain profit through selling it back to them in the belief that oil and gas technology is hard to keep proprietary anyway, and that service companies have a much greater ‘scale leverage’ e.g. even a large oil co might only have one heavy oil field, making R&D less attractive, but a service company can apply new tech to hundreds of fields. If you look at service companies, R&D ratios are much higher than oil cos. [NB some of the big NOCs, such as Aramco, do have high R&D budgets but they also have a much more homogenous asset set and a desire for ‘recognition’ as leaders]

    3. Asymmetric risk/return. The cost of testing new technology is often high (rig time, production deferred, significant additional exploration costs) with unknown results – it is not like being able to do low cost piloting. This acts as a barrier, especially as people are judged on today’s numbers, not future benefits. Also risks are high – no-one want to stop a working well for a test that might potentially damage production.

    4. The unique experiment issue and proof of concept. Every field is different and you only conduct the ‘experiment’ once – if production improves can you show it was the new technology or would it have happened anyway? It is not uncommon when developing new technology to show a trial to to an asset team who will say ‘ah yes, but my field is different…’.

    5. Aversion to change – agree. Also this is driven by most projects being run by an interlocking set of partners, all of whom have different views and risk resilience. Getting an agreement on spending money on a new technology from the owner group is like getting the UN to agree on… anything of substance!

    • THANK YOU! I really appreciate you taking time to share your thoughts.

      1. Yes, agreed. It is well recognised that the hopper model for pharma has many similarities to that for E&P, and it is also well recognised that “R&D” for “exploration” is almost a straight swap between the two. On the other hand, Big Oil doesn’t spend that much on exploration.

      2. This is the classic “make versus buy” decision, and it seems that R&D was thrown out of oil companies along with everything else in the great outsourcing rush of the late 1980s/early 1990s. Service companies R&D ratios are much higher than for oil cos, but then again their revenues are much lower. I believe the natural home for technology development and deployment is the oil co.s, for the reasons I mentioned in the article – what do you think?

      3. Yes, agreed. This is the point I made in the article.

      4. Good point, I hadn’t thought of that.

      5. Good point, I hadn’t thought of the JV angle.

  2. It appears that the article and comments may miss the point of where Oil & Gas Exploration & Development break-through technologies occur. O&G E&P technologies never have been primarily in R&D division or in R&D CapEx. These break-through discoveries and technologies occur in the operational Exploration offices and in the office and/or field for Development. These operational / applied technology break-through(s) are driven by economics and made by individuals most familiar with the practical / economic applications. R&D scientists are not great explorationist. That is in part why R&D division in O&G companies have disappeared. New field discoveries are made by applied scientists working in operational offices and division; not in R&D. The same holds true for reservoir and operations engineers. If you look at those technology break-through(s), they occur on a daily basis in every play, productive trend, basin, nation in the world.
    Another example is CPU usage in O&G companies. Accounting departments and administrative groups were primarily responsible for bring computers into the O&G industry. My experience at a major multi-national and several small to large private, independent operating E&P companies is that within a short period of time, E&P, usually more specifically geophysical application, accounted for over 90+% of CPU usage. Again, in an economically driven operationally driven application; not an R&D CapEx or division.

    • Bill,

      Thank you for sharing your perspective, we appreciate it.

      In your experience is the technology development done in the foeld pushed by the operators or the service companies? Service companies have upped R&D capex spend so perhaps this is where itis appearing.


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