Royal Dutch Shell Group .com Rotating Header Image

Financial Times: Frontier challenges in the race for oil

By Sheila McNulty
Published: August 21 2007 03:00 | Last updated: August 21 2007 03:00

In a suburb of Fort Worth, down a dirt road, past a field with some horses and asmall house, a single rig is drilling. The well below it goes 8,000 feet under the ground and then 2,000 feet across without disturbing more than an acre ofthe rolling grass of this part of north Texas.

Into this well workers pump water under intense pressure to fracture the Barnett Shale rock in which massive amounts of natural gas are trapped. The process creates millions of escape routes through which the gas flows intoa network of pipes.

Until 2002, gas in the Barnett Shale was barely accessible. But when Devon Energy, a US oil and gas company, combined horizontal drilling with water fracturing, it bypassed a series of geologic challenges. Now, hundreds of wells are drilled there each day.

Over the past few decades international oil companies have used such advances in technology to open new areas to exploration and raise production.

Yet compared with other industrial sectors, oil companies spend little on research and development. In 2006, R&D spending at Exxon-Mobil was $733m, while Shell spent $885m and BP $395m. Microsoft and General Motors, by contrast, spent $6,580m and $6,600m respectively. It is an omission that threatens damaging long-term consequences to their ability to compete.

Oil companies argue that their business is more capital intensive and has longer lead times than any other industry and, therefore, the amounts devoted to technology cannot be fairly compared. But there is a growing recognition among them that they must boost R&D to stay ahead of state-owned rivals and service companies that are encroaching on their market.

Lew Watts, president and chief executive of the PFC Energy consultancy, estimates that Schlumberger, the global service provider, will spend $720m on R&D funding this year. That level of funding would, for the first time, eclipse that of Exxon, the world’s biggest international oil company, which he estimates will spend $650m.

Since the early 1990s, Mr Watts says, a big proportion of R&D funding has shifted to service companies, which do everything from geophysical analysis to reservoir development, and now control large portfolios of patents. And national oil companies such as Petrobras, Petronas and Saudi Aramco have increased their R&D budgets and are aiming to cut out the middleman.

In the past, oil and gas-rich countries had neither the money nor the expertise to exploit their reserves and invited international companies to help. Now, with oil prices high, they can afford to hire service companies to do the work for them or, if they have the expertise, do it themselves. The inter-national oil companies are at risk of being marginalised.

“Why would reserve holders need the international oil companies if they don’t bring critical, advanced management skills and ground-breaking technology?” asks Robin West, chairman of PFC Energy. “It is essential that the international oil companies effectively position themselves as leaders in the world of technology.”

To increase reserves, oil companies are working on technology in three main areas: going deeper under the ocean or into the Arctic; tapping unconventional sources such as tar sands and shale economically; and creating alternative sources of energy.

“Technology is crucial,” says Don Paul, Chevron’s chief technology officer, “and we are entering a phase here in which it is more important than over the past few decades because the industry is changing. Now we’re shifting into a world of frontier challenges.”

The international oil companies believe their years of experience managing massive projects and bringing energy to market at scale give them an advantage. On the technological front they are ramping up investment.

Yet some energy experts say the companies are still not spending as much as they should. Amy Myers Jaffe, an energy expert at the James A Baker III Institute for Public Policy, says the inter-national companies could face unexpected competitors, such as General Electric. GE invests about $5bn a year in technology across all industries, of which $150m is aimed at the oil and gas industry.

Steve Cassiani, president ofExxon’s upstream research arm, says the company’s technology expenditure has grown in recent years but emphasises that research has always been important. Exxon, which employs more than 14,000 scientists and engineers, has never outsourced technological development. “We have never lost our commitment and focus to proprietary technology,” Mr Cassiani says.

Exxon’s 1963 invention of 3-D seismic technology has improved the industry’s exploration and production processes. It enables Gigi Ellis, a Chevron earth scientist, to look deep into the earth below the seabed on a screen in Houston. Engineers bounce sound waves thousands of feet below the Gulf of Mexico and use the information to position wells. Before this invention, engineers could barely see through salt formations.

In the hope of finding more such technologies, Shell and Chevron are not just doing in-house research but also funding the development of ideas through investments in venture capital companies. The arrangement gives the two producers early access to emerging technologies outside their traditional university or proprietary research networks. “This gave us [at Chevron] another window,” Mr Paul says.

Shell invented a way to stop water breaking through wells. Its venture capital company then commercialised the technology.

High oil prices are essential to increasing R&D investment (see box below). Testing a technology on a multimillion or multibillion-dollar investment is hard tojustify unless companies are flush with cash.

“Oil companies want somebody else to be the first mover,” says Brad Burke, managing director of the Rice Alliance for Technology and Entrepreneurship, which supports entrepreneurs and early-stage technology.

“They want to see proven field results before risking tens or hundreds of millions of dollars of investment.”

This risk-averse culture, combined with the cyclical nature of oil prices, is why incremental improvements are the norm. Just about everyone boasts of having developed “serial No 1” technology to take a process further.

Seven years ago, the industry could not drill in 10,000 feet of water, says Jim Hackett, Anadarko Petroleum’s chief executive. Now, thanks to technological improvements, it can.

But he hopes for more revolutionary changes. And it is becoming clear that the future of the international oil companies depends on their inventing them.

Crude economics: how the price of oil drives technology

Richard Ranger, upstream manager for the American Petroleum Institute, says one of the biggest challenges facing the international oil companies he represents is that the median age of their workforce is in the mid-50s.

In the 1980s low energy prices led to job cuts and the hiring of new minds became less of a priority. But now the need to invent technology is greater than ever and recruitment efforts have increased.

High oil prices are encouraging companies to try out new ideas. “One of the key things we’re going to need is the pool of people to generate those ideas,” Mr Ranger says.

Jim Hackett, chief executive of Anadarko Petroleum, agrees. “The absolute price level of a resource like oil is as much of a driver to the technology being employed as the technology itself.”

Because of the expense, 3-D seismic technology was not used widely until the 1980s, although it had been invented in 1963. But once prices forced companies to use it, the processing of sound-wave data by computer dramatically improved their ability to locate reserves.

Copyright The Financial Times Limited 2007

This website and sisters royaldutchshellplc.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

Comments are closed.