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A few thousand years ago tribes of hunter-fishers and farmer-gatherers recognized improved tools could enhance their ability to feed their families. They also recognized that, to develop this technology, an effort had to be made to assure availability of sufficient food to feed their immediate families and feed those assigned to develop new technology. The result of these efforts was better fish hooks, plows, spears, etc. In turn, these improvements continued into development of the mechanically driven spear (bow and arrow) and so forth.
These advancements allowed the tribes to have excess food in their focused categories and begin to trade with other tribes for a variety of food types. Unfortunately, these early technological developments continued rapidly and expanded into the area of tribal protection and territorial growth (warfare).
The simple lesson here; if we are to improve technology required to find, develop and process oil and gas, we (producers and service companies) must make commitments to pay for development from existing income streams. For the most part, this step has been taken, as producers and service companies, often working together, “gamble” on finding new technology and “win” long-term competitive advantage and increase growth.
Since the industry has limited research and development (R&D) assets (people, for the most part), only a few games can be played at a time and, as such, the selected games will always be the ones with the highest odds of winning. The small independent service company may then be left to work on other games with lower wager limits and often a lesser chance of winning.
One viable solution to development of small and often specific application-type R&D projects is for the producers to fund the project cost with a defined mechanism for repayment of their investment if the gamble pays off. Producers already work this way in some foreign countries. They take the exploration risk, and the state oil company has a right to back in for a share of a project when commerciality is declared.
Certainly, the major oil companies have sizeable R&D commitments with their technology focus on big games and often never commercialize the results. That may be due in part to restrictions on sharing intellectual property. A great example was a 1960 patent by Unocal, George Maly, et al for a well packer using a swellable elastomer compound. Only after introduction of the concept into horizontal well zone isolation in 2001 by a then-small, independent, Norwegian services company was there a developed market for the 40-year-old “award winning-new technology.”
This old technology used in new applications may have a market value in excess of US $100 million per year within a short period of time. More importantly, the implications for simple, effective and reliable zone isolation in horizontal and long-reach wells may contribute profits to the oil companies several times the estimated income value to the service sector. A true win-win case with the casino still being the big winner!
Independent producers rely almost totally on the service companies to develop new technology or license it from the majors and bring it to them. They are often more willing to try new tools and techniques than the majors, especially where the risk-reward ratio is economically attractive.
In many cases, independent service companies have no R&D expenditures and thus transfer the savings into reduced price of goods and services. As one of the major factors in most operational and engineering decision-making processes is “low bid,” this selection process seems to be in direct conflict with their corporate R&D expenditures. Such low-bid decisions are often good short-term solutions but place no emphasis on the long-term benefits of supporting technology development.
Regardless of the level of testing and lab verification, the proof (both functionally and financially) in any new technology is actual real-life field applications. Since service companies do not have wells, facilities or refineries, they must rely on oil companies to loan them these test beds and accept risks associated with the gamble. In attempting to present new technology with development and lab testing history, risk analysis, and potential value to the customer, an often-asked question is “Where are your case histories?” If there were case histories, the technology would not be new, just recently developed!
Field operations are often at conflict with the gamble since profit centers may be greatly affected if the gamble doesn’t pay off. That obstacle is easily overcome by a few oil companies in which corporate decision-makers are able to weigh potential gains to the company against the costs and are willing to fund the gamble. That would eliminate or at least minimize the potential negative impact to the field profit center.
The oil company and service company must each feel that there is a chance to win and, in reality, the best deals are those in which both are able to win at an acceptable level with new technology development. The casino must be open for the gambler to be able to play a game. Without an open, friendly casino, no game justifies the gamble to develop new technology