Technology strategy breeds value

Companies that weave the adoption of useful technology into corporate strategies can generate a competitive advantage.

The collapse of the '70s oil boom provided the impetus for large and significant changes within the oil and gas industry, beginning in early '80s. Among them were re-structuring, mergers and acquisitions, focus on quality, emphasis on health, safety and environment, re-alignment of technology expenditures, innovative contractual relationships and closer collaboration between operators and service companies, formation of functionally focused teams, etc. All of these were parts of corporate strategies enacted to enhance efficiency of operations and profitability. This article reviews the outcome of these initiatives and their impact on creation of value for the operators and service companies, with special emphasis on technology direction and efficiency of its use by the industry.

Quality

The need for quality had always been recognized by the industry. The initial vehicles for its implementation were mainly legal and contractual channels. It was finally recognized that prevention creates more value than punishment and occasional collection of damages. Quality problems are not solely caused by the contractor or supplier. They often have internal elements as well. Collaboration and cooperation are better alternatives to demand and confrontation.

The quest for quality was mainly led by majors who instituted different quality programs within their own organizations and then urged their suppliers and contractors to form theirs. The purchasing power of the majors was a big driver in this process. Today, quality processes are embedded in most of the oil and gas industry.

This initiative has created much value for all parties involved; operators and service companies. Today, the quality of job execution is superior to what it was in early '80s. Technology has also played a big role in quality improvement. Modern on-site data measurement, recording and reporting systems allow monitoring service quality and facilitate rapid wellsite decision-making.
The outcome of a service depends on two separate factors; whether the engineering design is fit for purpose and how well it is executed. The former depends on how well the applicable technologies are understood and implemented, the latter on how closely the details of job execution meet the design specifications. Most quality programs address the latter point.

Health, safety and environment (HSE)

In addition to all the direct internal financial and employee moral benefits of HSE programs, they have also helped improve the image of oil sector companies as responsible corporate citizens. Today, some operators and service companies have HSE programs that exceed even the toughest regulations of any of the local governments. These programs are embedded within the structure of the industry and a routine part of doing business. Attention to HSE has resulted in discovering new technologies for development of environmentally friendly chemicals, design of safer equipment, and safer and protected work places. Their benefits extend to the entire industry and the communities in which we work.

Teams

The old traditional relationship between the operators and service companies was at arms length and bordering on confrontational. Implementation of the quality and HSE programs highlighted the advantages of working together over doing it alone. Initial implementation of team concepts was mainly internal and in response to need for technical integration of complex operational procedures and decisions. But it was soon realized that much of the operations technology is now residing within the service companies and access to it requires their participation. Thus, technical staff members from service companies are asked to participate in these teams, sometimes as temporary external resources, but often as permanent members. The synergies thus created have helped communication, and implementation of quality and HSE programs. Today, some operators have service company technical staff permanently residing in their facilities and assisting with their operational programs. Issues regarding confidentiality of information and trade data have been addressed and resolved to the satisfaction of all parties. One interesting aspect of this endeavor has been the recognition that most of what the industry viewed as critical secrets were in fact not as critical as assumed, and that respect for confidentially is a personal and not company trait.

Use of multi-discipline teams has brought much synergy to the oil and gas industry. It has helped communication and exchange of information necessary for day-to-day operations. It has also improved the relationship between the operators and service companies by allowing each side to better understand the drivers and value systems of the other.

Contractual structures

Oil service contracts have gradually become more elaborate and the requirements for doing work more stringent. At the same time, contractual agreements have evolved to include innovations in business relationships and project awarding and rewarding systems.

One of the early explicit applications of novel transactions was the concept of "drilling in the '90s" introduced by Shell. Under this plan the contractor could offer business and operational innovations to reduce the cost of drilling in return for a bonus which was based on the amount of savings. The idea was received with skepticism by executives of the contractor community who felt that, since they were the main contributors to savings, they should get a bigger share of it than what was being offered. Their other fear was that by lowering the bar for each successive contract the operator would end up the big winner at the expense of the contractor. The concept was gradually abandoned and is not practiced in its original form anymore.

In response to Shell's initiative, service companies offered their own risk/reward (sometimes called bonus/malice) contracting structure. Under this system, the contractor's payment is linked to the outcome of the service with a bonus or penalty depending on whether the expectations were exceeded or not achieved. There are several different risk/reward systems in place, but majority of them are focused on quality of service delivery. Operators have generally resisted contracting arrangement where the service provider is rewarded based on created value. Would these strategies survive beyond the present environment of surplus service capacity?

The subject of compensation on the basis of created value is one of the hotly debated topics in the industry. Aside from natural and expected differences between the buyer and seller, within the oil and gas industry the debate touches on some very fundamental issues. The quality of the reservoir plays a huge role in how much value is created. For example, a new technology that enhances well productivity by 10% will create 100 times more value in a well with 10,000 b/d production than another that produces 100 b/d of oil. But does this mean that the service itself is more valuable, or that its provider is entitled to some of the value? Is it reasonable for operator of the more prolific reservoir to expect to pay the same price for the service as the less prolific reservoir, given the huge benefits that it has brought to the reservoir? Can this system of compensation be sustained for the long haul? In today's highly interdependent industry, it is to everyone's advantage to resolve the issue to mutual satisfaction of the parties.

Technology

Together with above positive changes, several oil companies also downsized their technology organizations and expenditures and decided to relegate the development of service-related technologies to the service companies. Additional cuts resulted from mergers and in order to reduce redundancies. While some of the reductions in technology expenditure did not have a material impact on development of technology, the overall effect has been negative. A sizeable part of reduction in technology expenditures was accomplished by staff reductions. Staff departures also reduced the technical competencies that were available to the organization.

The financial ups and downs of the industry have created a generation of managers and decision-makers who have become largely accustomed to working in a cost-control environment and through experience and practice have learnt the art almost to perfection. The attractiveness of cost comes from its immediate result. A lower price means immediate savings. This gives its practitioner the illusion of value. While a higher price is not a guarantee for better product/service, a lower price also does not mean a better value. The time-proven axiom is still valid; one gets what one pays for! To some extent, the reservoir itself deserves some of the blame. Even with sub-optimal choices, the reservoir continues to generate wealth, albeit at a sub-optimal rate.

To enhance transfer of technology, many companies set-up structures and subject-matter expert networks to facilitate availability of know-how within the organization. Although knowledge transfer requires human interaction, use of computerized databases has provided a quick means of data and information exchange. In spite of many positive steps taken for better transfer of technology, it is not yet clear if this has resulted in improved drainage of the reservoirs. Recognizing that the source of all wealth in the oil and gas industry is the reservoir, it is not certain that we explore, develop and produce our reservoirs more efficiently than we were two decades ago. If not, then a great deal of value is being lost in delayed or lost production.

Issues

Two issues are important in use of technology. These are; how effectively existing technologies are being used, and what new technologies are being developed to address existing industry-wide operational problems.

Regarding use of existing technology, this is mainly a local issue and relates to technologies and competencies that are locally available to address problems. Use of these technologies varies widely across the globe, and even within different units of the same company. Part of the re-organization of technology was intended to address this issue and facilitate better deployment of existing know-how within the same company. But there is much more to be gained in this arena. Even a cursory survey of operational practices shows that the same problems that plagued the industry decades ago are still occurring globally and almost with the same frequency. The main issue with these technical problems is not the cost of their remediation, but their impact on efficiency of reservoir drainage. Broader-based prevention of these problems by better application of existing technology can create great deal more value for the industry.

Some of these issues arise from the fact that an oil well is not like a computer that one can discard every couple of years in favor of a newer and better model. We still drill basically the same size holes with the same type of equipment, use the same formation evaluation tools to learn about the reservoir, complete them with steel casing, use cement to isolate the producing zone, perforate and fracture the well, and dispose of the produced water as it flows to the surface. While this makes the technical learning process easier, it also creates a psychology of contentment with the status quo, which discourages change. If the industry is to take a big leap in improving the way it finds and produces oil and gas, then acceptance of change has to be embedded in its culture.

Change

To a large extent our reaction to production problems depends on whether they disrupt profitability of the well. As long as change is gradual and flow of oil and gas occurs at a profitable level, we accept to live with inefficiency. Considering the high profit margin of a barrel of oil or a thousand cubic feet of gas, even a minor improvement in production efficiency of our reservoirs can create values far exceeding any of the other initiatives. But we view inefficiency as a better alternative to possible risk of loosing the production. Considering that the oil that has not been produced remains in the reservoir and is still available for production, in fact the risk is mainly short-term. Since our production of the reservoir will last for decades, enhancing production efficiency is the better long-term alternative.

Oil and gas industry is well-known for its slow adoption of technology. One reason offered for this reluctance is that reservoir development and wellbore construction are very capital intensive. Therefore, loss of a well and its production capacity cost a great deal. The problem with this line of reasoning is that it looks at these numbers in terms of their absolute value and not in relation to the wealth and value that lies in the reservoir. Given that wealth, just as we view a dry hole as an element of doing business, why wouldn't taking a calculated risk for potential enhancement of reservoir performance be viewed as acceptable? The answer lies in the culture of our industry that emphasizes cost awareness and short-term financial results. All the uncertainty and up-front cost of exploration and development seem to have reduced our tolerance for risk to a bare minimum!

There are signs indicating that the present structure of the industry is partially responsible for this risk aversion. For example, small and mid-size independents with less formal internal procedures are sometimes viewed more receptive to trying a new technology than majors, even though the latter have more to gain from it. But embedment of these technologies in the routine planning and operations requires their wider-spread use, and majors are the fastest vehicle to facilitate this. Their adoption of these technologies serves as the industry endorsement and provides the overall industry the comfort of using a proven and reliable technology.

Adoption

When it comes to development and application of innovative technologies, the industry record is mixed. Even after horizontal holes were demonstrated to offer a better alternative for certain applications, it took the industry many years before the technology was accepted across the board. Slimholes have been offered as a better alternative for certain operations, but even the companies who championed the technology development have used it only a handful of times. Underbalanced drilling has demonstrated to offer a better alternative to conventional drilling, but its use is still very limited and occasional. 3-D seismic has been successfully used by operators to create value through better reservoir production, but it is debatable if the technology has been profitable for its developers and suppliers. Coiled tubing drilling was hailed as a break-through technology, but after several years of development and after losses suffered by most of its providers, the service now supports a small niche market.

While one may argue that the technology was not suitable for broader application, the other argument is that a profitable business would have given its suppliers the financial means for its larger development. Slag cement was developed and hailed by a major operator as the break-through in well completion, but today it is hardly used anywhere, not even by its own developer. Would the technology have benefited from a joint venture between the operator and a major service company? Dual gradient drilling is viewed to hold great potential for the tough deep-sea drilling problems, but it is still in the development stage. Can its development be accelerated through a development/deployment joint venture between an operator and a service company so that the service company does not have to absorb all the associated risks? Another example is downhole oil/water separation and re-injection, which had received high priority from offshore operators. However, not a single offshore installation has used the system and the service is not even available to the market anymore. Here, one main culprit was lack of knowledge about whether the wellbore had intersected a high permeability zone for water injection, and where. Intelligent wells have been hailed as a major tool for downhole regulation of flow through multiple producing/injection zones. However, the technology has produced only financial losses for its suppliers because of insufficient use. One reason for this is that the industry uses the technology mainly as an intervention tool. The required technical systems for reservoir management have not yet been developed by the users! Perhaps these examples explain why most of the technology focus and expenditure of the last two decades has been mainly directed towards tweaking of the existing products and services for incremental enhancements. We are more comfortable with incremental change and ready to accept and adapt to it.
One encouraging exception to the above list is the expandables technologies. The original technology was developed by a major operator and then offered to the industry through a joint venture with a major service company. Today, expandables are used in drilling and sand control applications and are creating great value for the entire industry. In fact, even for its developer, the benefits of the availability of the technology to its own operations far outweigh the profits from the business joint venture.

Strategies

Given the present realities of the industry and its technology needs are there strategies that can accelerate acceptance of technology. The few that have been used have had mixed results. One option used by at least one major was offering a bonus for use of selected technologies. Others have included use of new technology as part of the operations score card. One possibility is a process in use by a national oil company. The plan is simple. After evaluating and screening the potential of various technologies, technicans drill a well for the specific purpose of installing, testing, evaluating and learning the selected technology. At first this may appear to be extravagant, but a deeper analysis indicates otherwise. Using this careful process they minimize their total risk of technology introduction, learn enough about it to show their operations how and where to use it, and are able to assist them with its implementation. It allows them to influence the direction of technology development and make sure its features match their specific needs. Even more important, this process allows them to determine the value of the technology for their reservoirs and where it can create best results. By early validation of the usefulness of high potential technologies for their operations, they expedite its early use and value.

This program is funded and led by the corporation, rather than a specific asset, although assets have a great deal of input in it. There is no reason why a similar program cannot be initiated within the large-size oil and gas companies. If the industry is to grow into its next phase of operational efficiency, then a different set of parameters and priorities need to be established. There is no doubt that technology can bring values far greater than any of the other initiatives taken by the industry. The main issue is how to get there. In my view, this should be treated just like all the other initiatives of the industry, driven from the top.

The industry can afford to take measured and prudent risks for implementation of new and existing technologies. To make the process match industry organizational structure, these actions can be funded by a central corporate budget and not counted against the asset financial sheet. Each company can identify technologies of special interest to its operations and locations where these can best be tested and proven. In collaboration with a selected Service company, the technology is implemented under controlled conditions, with emphasis on making it field worthy. Operators bring many competencies that can accelerate development and introduction of technology. Among these are issues related to reliability, operational requirements, and product specifications. Operator's commitment to certain number of installations after a successful field trial will motivate the development of technology. The main benefit of such commitment is not its financial implication, rather the commitment from the end user to a successful deployment of technology. In this approach, the operator is an interested participant, and its greatest beneficiary.

Technology impact on financial and operational results can be as large and long lasting as any of the other initiatives discussed earlier. Leaving the process of technology implementation to small operational units has obviously not worked. There is need for a change in the way we introduce technology into the field operations. Recognizing that technology implementation is a process very similar to quality and HSE, it requires attention and systematic planning from very high levels within the organization.