On The Radar: Oil & Gas Technology Report

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We sat down with Lloyd’s Register Energy to discuss its most recent Oil and Gas Technology Radar report, tackling how the energy industry is “Innovating in a New Environment”

One of the greatest challenges for firms this year has been supporting new innovation with investment. As has been seen across the board, low prices have meant slashing the latter, with spending on new technology or long-horizon research and development often one of the first targets.
The industry’s shift in priorities since September 2014 means that the tone of Lloyd’s Register Energy’s (LRE) 2015 Oil and Gas Technology Radar report has taken a markedly different tone to its predecessor. Working with Longitude Research, Lloyd’s Register surveyed and interviewed over 450 industry professionals for their take on the market.

Where last year’s report took a wide-ranging view on short- and long-term technology trends, this year’s is on the specific and timely subject of “Innovating in a New Environment.” Indeed, even in the high times of last summer, the authors conceded that investment in future technologies “will be unpredictable and complex, and will always be, to a degree, conditional on expected future oil prices,” – a message which now seems eerily prescient.
The resulting 2015 data offer some sound insight into the challenges the sector is facing, the attitudes of those involved and – more promisingly – where the industry may look to source solutions for its most pressing concerns.

Less money, more problems

Tellingly, 76% of survey respondents believe that unstable oil prices have led their firms to slow or halt new innovation projects. This has been seen in the delay of deepwater projects, the cancellation of some work in frontier areas – the Arctic is no longer the new prize it was a year ago – and staff cuts within almost every business department. Last year, 68% of the survey’s respondents intended to increase their R&D budgets in the next 2 years. Such optimism seems unlikely to be matched in 2015 and 2016.

Accordingly, innovation is still needed, but to tackle an enormously different outlook. This “refocusing of the lens,” as Lloyd’s puts it, actually means that some work may be accelerated. Projects which were close to completion may be allocated extra resources in order to speed up deployment or guarantee their ROI. Society of Petroleum Engineers president Nathan Meehan commented that these fast-tracked priorities “may be in material science or efficiency improvements, or displacement of other technologies. However, long-term, disruptive innovation projects are going to take a back seat for now.”

Financial incentive, as always, is the primary driver. For BP’s group head of technology, David Eyton, that means a priority on better water-flood enhanced oil recovery (EOR), a technique which is not as adversely affected by lower prices as some of its rivals (e.g. thermal EOR or polymer injection). Given it is also the most widely used form of EOR, the scalability of this in a global organisation like BP makes similar sense.

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Standardisation, a topic which has floated around the subsea industry in particular for years, is also on the innovation agenda. Lloyd’s cites an anonymous respondent who believes that subsea trees are moving closer towards full electrification (rather than the current electro-hydraulic models), and is developing a model which allows these parts to be swapped in as replacements at a later date. Expanding this concept across the whole sector will require a great deal more innovation in standardised design.

Collaboration consternation

Standards also highlight the double-edged sword of collaboration: equipment can often be more cost-effective if a template or design can serve multiple purposes, or if design and assembly can be streamlined. Yet few firms are particularly willing to give up business they could otherwise compete for on their own, nor give up IP where it can be helped.

One major finding of the 2014 report was that firms which collaborate are more likely to be successful. This year, data suggest that more specific conclusions could be put forward: “Companies that collaborate more actively in technology innovation perform considerably better than their peers in all the different facets of innovation. Those respondents who describe their firms as ‘enthusiastic’ collaborators in technology innovation are considerably more successful in meeting their innovation goals than ‘selective’, ‘cautious’ or ‘reluctant’ collaborators,” the report notes.

The majority (43%) of respondents described their firms as “selective” collaborators, while only 16% were “enthusiastic.” While majors and supermajors appear happy to work with service and technology providers to form various joint industry projects (JIPs) and tie-ups – Lloyd’s cites Statoil as a stand-out example – few upstream explorers seem willing to collaborate with those in the same sector.

But respondents seem to think that this wariness may finally change. As investors exert pressure on operational costs, financial results and increasingly environmental impacts, many may be forced to become more innovative about how they work – despite the perceived issues. Technip’s subsea regional technology officer for Asia-Pacific, Robby O’Sullivan, argues: “IP and competition issues have obviously been addressed and resolved by other industries through open discussion, planning and appropriate structuring, so there should be no reason the oil and gas industry cannot resolve them.”

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Search and deploy

67% of respondents also said that the challenge of deploying new technologies in the real world is a major barrier to innovation, and 70% believe that the process of doing so is taking too long. This is a problem which affects the newest innovations in particular, and despite the work of bridging bodies such as the UK’s Oil and Gas Innovation Centre (OGIC), is certainly made worse by low margins in an already conservative industry.

Some in the survey suggested that this was the result of a shift in scope for new technologies. During the boom years, companies looked to grow reserves by exploring new (expensive) horizons, and developing technologies which would be used in 5-10 years. Now with a more urgent focus on efficiency and cost-effectiveness, many have not yet adjusted. Even those who have prioritised the development of cost-reducing equipment may struggle to deploy it fast enough to produce the desired result.

Risk aversion remains a major issue. The UK Institution of Mechanical Engineers’ director of engineering, Colin Brown, responded: “This is due to the increasing complexity involved and the implications of mistakes. Previously, the high oil price and resulting profitability shielded companies somewhat from the risks. Now there’s less motivation to drive change because of the high financial risk of something going wrong.”

Against that backdrop, the old adage of “the race to be second” appears as relevant as ever. The head of the E.ON E&P UK Innovation Centre, Jonathan Carter, made similar comments, stating: “A lot of companies look to deploy new technologies only when they are proven. They don’t want to be the first, and that’s a barrier.”

Yet many other industries with similar risk profiles – aerospace being perhaps the most useful analogue for oil and gas – have successfully incorporated new technologies such as real-time monitoring and sensing equipment through the development phase, often far faster and with better results. The energy industry must follow that lead if it is to improve how it operates.

Initiatives to explore the crossover potential of technologies from other industries have been talked about for years – but actual results still seem to be lagging, largely because there is a sense that technology invented elsewhere is unlikely to be fit for purpose in the oil and gas sector. This is a problem affecting those both inside and outside the industry, as Nathan Meehan explains: “The people who developed it were thinking outer space and it never occurred to them about high pressures or high temperatures, or needing to make it much, much bigger or in certain kinds of shapes.”

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Without doubt, this is an area that is characterised by technical complexity, but one where new types of collaboration can bring about dramatic change. BP offers one example of upstream leadership in the form of its Digital Innovation Organisation (DIO), a group tasked with investigating and incorporating technology-based innovations into BP’s business units. However, DIO looks for solutions which can have a meaningful effect within 12-18 months, meaning it is less likely to support the more speculative, long-horizon technologies.

For now at least, given the current pressures, the industry looks more likely to maintain this trend rather than adjust its horizons.

The more things change

These report’s findings broadly suggest that a gloomy outlook will prevail into 2016. But it is also worth stating the more encouraging findings. In comparing the 2014 and 2015 reports, despite the market turmoil, many firms are still facing the same challenges as they were a year ago. Last year, 44% believed that improving operational efficiency was the primary driver behind innovation, compared with a slight rise to 46% this year.

Technologies such as industrial automation and EOR led the pack last year, but remained well in the sights of those surveyed this year, given their potential to improve recovery and efficiency in the near term. Big data too remains in focus, with companies beginning to see the added benefits of harnessing such information, but as before, the uptake is not as wide-ranging as it could be.

Respondents have shown that the industry is, in fact, affected by the same problems as it always has been: difficulties in co-operation and collaboration, and a conservative attitude towards the adoption of new technologies. While low prices may alter R&D budgets and short-term priorities, innovators still face the same hurdles of deployment and adoption.

The bright side to this – if there is one – is that there may finally be the impetus for more companies to change these attitudes and adapt to new ways of working. The Lloyd’s authors conclude: “A sustained period of low oil prices can help to erode the conservative attitudes toward innovation that have long been evident in the upstream oil and gas industry.” Doing so is surely the only viable option in the short and long term.
With low prices forcing firms to work cheaper, 2016 must be the year industry and innovators finally collaborate effectively, in order to work smarter.

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