Because global energy demand is expected to increase 50% by 2030, oil and gas companies must adapt rapidly in an exceedingly dynamic energy landscape and grow in a sustainable fashion. A common expansion strategy adopted by major corporations is mergers and acquisitions; however, a better growth strategy for a mature sector, such as oil and gas, is organic growth — growth that results from improvements to a company’s existing businesses. Organic growth is an excellent measure of a company’s sustainability.

One of the keys to growth for a corporation is to nurture innovation. In fact, in order to gain a competitive edge, organizations are looking for more than incremental innovations; they are looking for disruptive innovations — changes in social practices, the way we live, work and learn.

Many innovative ideas are generated by entrepreneurial startups or independent individuals. Energy companies looking to increase innovation in mainstream business processes should be able utilize the intellectual capital from such external sources.

Understanding the problem

The oil and gas industry commonly depends upon in-house research and development (R&D) and technology licensing. Both approaches have inherent limitations.

• In-house R&D scientists generate many new ideas. However, the total number of ideas originating in such an environment can be limited.

• Contractual technology licensing (CTL) involves technology acquisition for a fee. CTL limits the quantity of knowledge transferred to the minimum required. Often industries and academia have collaborative technology development programs; however, such programs fail to take advantage of the intellectual capital outside the discipline.

Opening organizational boundaries

Under current closed innovation protocol a number of improvement ideas are selected in line with the business goals, and a selected group of people works on a portion of these ideas and develops them further. As expected, a certain fraction of these ideas are successful.

On the other hand, open innovation refers to the concept of leveraging external resources to drive internal growth of an organization in a holistic fashion. Open innovation also refers to diffusion of ideas outside the organization, thus finding newer applications for existing technology. It is a dynamic approach for managing and developing ideas. Such an approach augments the organizational capability for future technology development.

In today’s age of knowledge economy supported by superior communication, an organization should be able to tap into the universe of information to aid internal efforts. Open innovation represents a mechanism to survey and access useful knowledge and is currently being practiced by industries such as consumer products and pharmaceuticals (Eli Lilly).

Organizations implementing open innovation utilize the external pool of experts either through existing open networks (e.g. Nine Sigma, Innocentive) or by developing their own networks.

Open innovation oil and gas case study

Problem statement: A major exploration and drilling equipment supplier is looking for technologies for real-time downhole visual inspection.

Closed innovation approach: Under the existing protocol, the organization would form a team of individuals who would define the problem, budget, schedule, execute, test and implement. Although this is the standard modus operandi for tackling problems in process industry, it may not be the most effective since an organization may not have access to the right resources.

Open innovation approach: The organization should poll professionals in several fields and geographic locations in addition to the conventional resources.

A project description was published widely, and the seeking organization received 10 proposals. A medical device startup responded with a proposal that would modify its existing body scan technology for real-time downhole imaging. A consumer products company responded with its rotating surfactant disposal assembly technology.

A university professor responded with a novel scratchproof material coating for the camera lens. The seeking organization evaluated various proposals and awarded the contract to a high-speed camera manufacturer and the university. It was decided that stage 2 would include the rotating surfactant assembly. The medical imaging technique did not fit the camera proposal but found application in fractal observation in oil sands mines. Thus, the open innovation approach helped to infuse newer ideas from several disciplines as well as opened up the organizational boundaries to find new opportunities for growth.

Words of caution

There are certain challenges to implement open innovation in an oil and gas organization:

• When and how to engage in open innovation depends on the organization’s strategic objectives, and needs;

• To effectively utilize the external pool of experts requires an understanding of business and technology and may require full-time commitment of a few internal employees;

• Establishing trust between an organization and outside experts can be challenging;

• Structuring intellectual property rights and fair compensation may be a challenge.

Sanjeev R. Saraf, Ph.D., saraf@exponent.com, is senior engineer with Exponent Inc. (Failure Analysis Associates) in Houston.

Mukund R. Karanjikar, Ph.D., mukund@chevron.com, is a venture development associate with Chevron Technology Ventures LLC in Houston.

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