OTC: Technologies require new business models

May 10, 2005
The energy industry, suffering a "crisis in technology," must find a way to compress technology development time from first-generation innovation to product commercialization, said members of a May 4 panel at the Offshore Technology Conference.

Judy Clark
Senior Associate Editor

HOUSTON, May 10 -- The energy industry, suffering a "crisis in technology," must find a way to compress technology development time from first-generation innovation to product commercialization, said members of a May 4 panel at the Offshore Technology Conference..

The industry also must develop new business models for technology growth, panelists said.

The industry's technology crisis developed because exploration and production company cost cuts in the 1990s curtailed research and development, leaving service companies to shoulder most of that responsibility.

"Vendors are burdened with a disproportionate share of the risk and an inadequate share of the margin," in developing new technologies, noted Ricardo Rodriguez, manager of investments for Shell Technology Ventures. Entrepreneurs, service companies, and operators need to work together, he said, to shorten the 15-30 year life cycles required in the past to develop a new technology to the point of full deployment.

Ron Mobed, president and chief executive of IHS Energy, said the crisis is more likely in investment, competition, and value than in technology. There actually has been a shift in spending rather than a reduction, he said. "Far more rigor is being placed in investment." In addition, disruptive technology requires changing behaviors, and if the change is large, there is resistance and a closer examination as to whether the benefit is worth the change.

Mark Hoel, vice-president of technology and logistics with BJ Services, said risk aversion is the largest obstacle to the implementation of emerging technologies. "Operators must be willing to take the risk and pay for the risk," he said.

Venture capital
At the same time funding must be available.

"Operator company demand for services has not kept pace with their revenues," leaving the service companies with little funding for technology growth, said moderator Art Schroeder, chief executive of Energy Valley Inc. "The main drivers of innovation are financially starved entrepreneurs."

Venture capital (VC) funding in the energy business represents less than 2% of total VC funding, Schroeder said, because energy has "demonstrated the longest product lead times of any industry tracked."

VC providers say entrepreneurs also must have customers first before funding will be provided. Yet without sufficient start-up cash or operating capital they cannot attract customers, Schroeder added.

George Coyle, a venture executive with ChevronTexaco Technology Ventures, who manages investment in innovative companies and technologies, said projects also must be realistic and have companies willing to deploy them.

He said venture capital is an efficient tool for developing and commercializing new technology, but he warned that there must be suitable opportunity to test and improve the product because "bad news travels fast if the first deployment fails."

Dirk McDermott, managing partner, Altira Group LLC, does not think there is a crisis in technology, only in risk- taking.

"Venture capital is a high risk-high return asset class" with a goal of tripling to quintupling the investment in 3-5 years when the risk is greatest, he said. "But it is patient capital�in there for the long term."

Engineering, experience
"What we tend to call 'R&D' is really investment in engineering, as with tension leg platforms and floating production, storage, and offloading vessels," Rodriquez said. "We need to do a better job of distinguishing between the two."

George King, formerly with Amoco R&D for 28 years and now serving as a special advisor to BP, said he has found the most innovative people to be those who were examining a problem under pressure.

"Desperation is the mother of invention," he said. "The best developments have come out when competitors are breathing down necks."

He said that, in addition to its engineers and R&D personnel, BP looks to experienced people in the field working directly with the problem and seeks their input as well.

"Applications-based technology really makes a difference in our business," said King. He said BP places 5-year engineers with service companies in high-activity areas to give them field experience so they can better know the problems faced.

"Right now we're ahead of the game both in new hires and in getting them experienced fast," King said.

Coyle, who invests in such emerging energy technologies as hydrogen and nanotechnology, said some barriers and challenges to technology will always exist. Companies must face getting the technology deployed and adopted, dealing with operations metrics not set up for pilots or testing, project-manager metrics not set up to aid necessary technology, global procurement difficulties, and change management.

Hoel said dissemination of information training is another must. "Technology transfer is very much a contact sport," he said.

Matt Simmons, chairman of Simmons & Co. International, said energy prices "need to rise to a level that triggers an explosion in R&D," just as the launching of Sputnik in late 1957 triggered exploration in space technology. "We need breakthrough R&D that leapfrogs current programs," he said.

Simmons noted that the industry should be thinking about such things as developing ways to change unconventional oil and gas to conventional "without the energy intensity required," figuring out an inexpensive way to drill more appraisal wells and core and plug them, and inventing new forms of energy.