A.D. Koen
Senior Editor-News
Upstream oil and gas research and development (R&D) is in the midst of big changes in the U.S. It is caught in a tug of war between dwindling funding and growing com-petition.
With neither trend expected to abate soon, fundamental changes in the ways research is organized and conducted are assured.
Languishing oil and gas prices are forcing companies to curtail spending and squeeze better results from activities still in the budget.
To compete with producers in more prolific oil and gas provinces, U.S. producers have had little choice but to focus on reining upstream costs. When faced with choices between funding near term and long term projects, expenditures on the latter are more easily deferred, including outlays for R&D.
Continuous improvement is the guiding concept underlying mounting competitive pressures as companies constantly look for ways to streamline exploration, drilling, development, and production. Key to those efforts, producers more and more are realizing the economic benefits possible from applying new scientific knowledge and technological advances at the well site.
With new technology generating economic benefits upstream, many in the U.S. oil and gas industry say it is certain that capabilities yet undeveloped will become even more important to maintaining competitive and profitable production operations.
Expectations that nonexistent technologies will play more critical roles in future oil and gas production operations are bringing new urgency to debates over issues raised in the U.S. as researchers reorganize upstream R&D efforts to fit available funds.
DEBATE OVER FUNDING
Industry sources agree that upstream R&D funding in the U.S. has ebbed in recent years. The extent of the decline is open to debate.
Publicly reported figures are hard to compile or analyze because spending patterns vary at different companies. R&D spending at major integrated U.S. companies isn't often broken out into upstream and downstream work, and even upstream lines sometimes tend to blur between operations and research.
In a speech at a regional meeting in Bakersfield, Calif., of the Society of Petroleum Engineers, Texaco Inc. Senior Vice Pres. C. Robert Black reported that R&D spending in 1993 by 12 major integrated oil and gas companies was 13% less than in 1991 and will decline another 5% by this year, according to a 1994 survey by Arthur Andersen & Co.
That survey and a University of Tulsa study of 11 majors concluded R&D spending by both groups will bottom out this year, a contention that Black challenged.
Data on oil and gas R&D spending compiled by Research & Organization Management Inc. (ROM), Bethesda, Md., reveal that less research spending by major producing companies disproportionately reduces industry-wide R&D funding.
ROM founder Mark R. Haas said two thirds of oil and gas R&D is conducted by companies with 25,000 employees or more. By contrast, companies with 5,000 employees or fewer account for less than 5% of oil and gas research.
Although oil and gas industry yearly net sales have about doubled since 1982, data compiled by ROM show industry-wide R&D spending year to year has equaled only about 1% of those sales.
Meantime, oil and gas industry R&D employment since 1981 has declined by about one third.
In an age of cost shared research, Haas said, topics and issues deemed worthy of study will depend on which entities are sponsoring specific programs. In turn, the ebb and flow of wellhead prices will influence industry thinking about where opportunities arise to apply new technologies.
Because major companies in the past focused on their own technological needs, independents might be able to expect better results from cooperative R&D programs tailored more closely to their needs.
R&D TRENDS
Expectations that oil and gas company budgets will continue to be constricted indicate that many of the ways in which upstream R&D is evolving in the U.S. will continue well into the future. That means repercussions are likely for oil and gas research around the world.
For producers forced to make every dollar count, developing cutting edge technology on a proprietary basis has become too costly, while competitive advantages gained by applying superior technology are short lived.
At the same time, as the nature of R&D evolves toward more information products, vs. development of specific pieces of hardware, it becomes harder to keep research under wraps.
"The flood of information on electronic sources such as Internet is changing hour to hour, and there's no way to define it so it can be protected," Haas said. "Some people believe intellectual property rights could become obsolete within 10-15 years because there's simply no way to keep data secret."
In the case of seismic processing, for example, once industry knows a company is using a specific algorithm to achieve better results, others can begin experimenting with variations of that algorithm to achieve similar results without violating a protected process.
Victoria Guennewig, director of public affairs at Union Pacific Resources Co., Fort Worth, says, "Any company can buy the same technology nowadays. 3D capabilities and new drill bits and mud motors essentially are available off the shelf. But the thing that sets one company apart from the next is how that technology is applied and the people who use it."
Because of that attitude, emphasis likely will continue to grow on cofunded, joint research projects directed at achieving results that can be applied near term.
To achieve returns more quickly from R&D investments, Black said, companies will continue reorganizing research along business lines or to solve specific upstream technical problems.
More work will be done by integrated teams composed of technicians trained in a variety of scientific disciplines. In addition, collaborative R&D involving production and service companies, contract research organizations, universities, and government will continue to increase.
SERVICE COMPANY R&D
U.S. petroleum service companies are being swept along by the oil and gas industry trend toward more joint research.
B.N. Morali, vice-president of technology for Halliburton Energy Services, Houston, said his company uses all available research vehicles in a diverse R&D program that includes cost shared projects with industry research groups and joint projects with customers.
Depending on factors such as levels of expertise or specific research topics, Halliburton is careful to choose which types of research it is willing to conduct as a member of a group, with customers, with industry partners, with universities, or alone.
Halliburton cofunds joint research in several ways, with money, shared research resources, or facilities.
In cases in which the company believes the technology under development has broad geographic applications with several customers, Halliburton is content to work with one or two group members closely enough to decide whether capabilities being developed will meet the requirements of a few, most, or all members of the research group.
In cases calling for a unique solution focused on a limited problem, operating companies often are willing to pay Halliburton to develop the product for them.
In another example, Halliburton is conducting a joint research project with Gas Research Institute (GRI), Chicago, in which Halliburton personnel are working at the company's Houston R&D facilities to develop cement imaging technology The project is funded by GRI.
"The whole issue of cofunding research and sharing other research resources is creating a new dimension in R&D. All kinds of new combinations are occurring," Morali said. "That was not even a driver earlier because everybody funded his own research."
Arrangements take an extra twist in projects receiving cofunding from the federal government through the Department of Energy.
"Whether research occurs at a commercial lab, through a consortium, or at service and supply companies, cofunding of joint projects is going to be a three way deal whenever DOE is involved," Morali said.
"In the DOE model, the government provides the technology, the service companies develop and use the tools, and applications are at the oil and gas companies."
NEW TECHNOLOGY
GRI in its 1995 assessment of U.S. energy supply and demand concluded that future technological advances will affect heavily the gas industry's ability to capture a bigger share of U.S. energy markets.
Based on the premise that oil prices in real terms will remain essentially flat during the next 15 years, with similar effects on gas wellhead prices, GRI found that U.S. gas supplies likely can not be sustained at current levels through the end of the century unless new gas supply technology continues to be developed at a pace consistent with the past few years.
After 2000, GRI's analysis found, the decline of supplies will gain speed, so that by 2010 the supply of gas on U.S. markets will be about 25% less than in 1993.
By comparison, GRI said, contributions of new gas technology assumed in a 1992 National Petroleum Council study will allow U.S. producers to increase gas supplies by about 1 quadrillion BTU during the 1990s. But even at that rate of technological advance, U.S. gas supplies will fall short of demand growth projected in GRI's 1995 baseline assessment, effectively capping U.S. gas supply growth after the 20th century.
Only incremental technological advances projected in GRI's 1995 base-line will allow U.S. producers a fair chance to capture fully available new gas marketing opportunities.
"The actual contribution of new technology to gas production will depend on the pace at which the predictability and reliability of new tools, practices, and information can be developed, demonstrated as useful, and transferred to service companies and producers," GRI said.
"The low price outlook of the 1995 projection provides added urgency for the gas industry to make the investment necessary to develop the incremental supply technology and vigorously apply it in the field."
A DECIDED EDGE
In an article last year in SPE's journal of Petroleum Technology, Myron Gottlieb, vice-president of gas supply technology development for GRI, weighed advantages and disadvantages of joint research projects conducted through industry groups.
Gottlieb warned that a member of a cooperative research group does not retain ownership of research results, cannot dictate project selection or direction, and can become dissatisfied with his share of equity in a project vs. his support of the work and perceived benefits accrued. What's more, because group research projects tend to function through committees or teams, they often progress slower than a member might expect.
On the plus side, he pointed out that participating in a cooperative research project is a good way to leverage R&D spending and spread risks.
It allows R&D objectives to be adapted quickly to fit changing circumstances and promotes technology transfer by assuring the right problems are addressed and research results are available sooner to more potential users.
And while group projects admittedly progress slowly, Gottlieb said, "careful deliberation allows the consortium to process the varied input and expertise of participating members, thereby giving it a decided edge in making well informed and effective decisions."
HELP FOR INDEPENDENTS
Recognition of Gottlieb's points is reflected in many venues for upstream oil and gas R&D recently created in the U.S.
George Alcorn, Alcorn Exploration Inc., Houston, said GRI has become more helpful to independent producers since it changed the way it is funded and began reserving a substantial part of its money for supply side research, including many field projects useful now to independents, as opposed to long term projects.
"That's important to independents," Alcorn said. "Whoever is doing the research-whether it is GRI, DOE, or major producers-the most important research for us often is that which can be focused on an issue that can be of use in the relatively near term, not 20 years from now."
A director of the recently organized Petroleum Technology Transfer Council (PTTC) and chairman of the Independent Petroleum Association of America, Alcorn said it is imperative for independents to become more involved in joint oil and gas R&D if they are to compete in an era of low wellhead prices.
Deborah Rowell, PTTC executive director, said one of PTTC's goals is to provide U.S. independent oil and gas producers a systematic way of communicating their technological needs to the R&D community.
"But our bigger mission is to disseminate new and improved technologies to producers and help them get comfortable with it," she said.
PTTC considers itself a conduit for information from any source pertaining to upstream oil and gas technology. Any member of the oil and gas R&D community-national labs, service companies, universities, DOE labs, private research organizations, or professional associations-with technology to offer independent producers can approach PTTC during its workshops or seminars, at PTTC resource centers being set up around the country, or through the electronic information system the organization is creating, Rowell said.
OIL AND GAS BACKGROUND
Rowell said members of the oil and gas industry must provide the leadership for cofunded R&D projects because they know best what the problems are and what new technical capabilities are needed Similarly, officials at Westport Technology Center International (WTC), Houston, expect its oil and gas background to make it more suitable than many contract research facilities to host joint industry projects.
A full service research site operated as a division of IIT Research Institute, Chicago, WTC until May 1993 was a part of British Petroleum plc and developed upstream technology for BP Exploration Inc. Facility assets remained intact when it was acquired by IIT.
Michael R. McElwrath, director and vice-president of WTC, said participants in a major company group recently approached WTC as a result of difficulty agreeing among themselves on which company should host the research "because of natural competitive instincts."
"Westport and other labs that come from major oil and gas company backgrounds can provide the staffing and technical capabilities to create an independent, neutral research platform with major company capabilities that doesn't require technology to be developed in one company or another," McElwrath said.
"We also are looking for opportunities to serve as a platform that would provide a meeting place for government and industry."
At the same time, divestitures of assets in major company downsizings allow WTC to provide high accuracy measurement services for companies that have not retained the capability to handle all their higher measurement needs.
"In a few instances, entire areas of measurement are being eliminated by majors," said Tom Williams, director of WTC business development. "In those instances, the companies have to find other places that can do those measurements with equal accuracy."
REFLECTING INDUSTRY VIEWS
Guidance by members of the oil an gas community is cited as a strength of Energy Research Clearing House (ERCH), residing since its formation in 1992 at the Houston Advance Research Center, The Woodlands, Tex.
Organized as an industry group promoting cooperative research, ERCH in a 1993 survey learned its member were most interested in funding join R&D projects that promised quick returns on investments.
Today, an organization with about 20 oil and gas majors, independents, and service companies on its membership roster, ERCH undertakes research project members agree to fund jointly.
ERCH's focus on its members will begin to sharpen even more May 1 when Gene W. Sparkman succeeds Cloy Causey as ERCH director.
Because ERCH research activities reflect the needs of its members, Sparkman in his tenure as ERCH director intends to spend more time helping member companies communicate their R&D needs as a way of focusing the organization's work.
ERCH members at yearend 1994 had pooled about $2 million to fund 14 research projects from among 100 proposals. Another 38 projects have been proposed this year and in mid-April were in various stages of review, pending formal technical presentations Apr. 18-19 at HARC.
U.S. R&D Spending by Company Size, 1992 (49164 bytes)
BALANCED COFUNDING
One of the most visible recent efforts to boost upstream oil and gas R&D in the U.S. is based in DOE, which earlier this year chose 31 projects to work on oil and gas exploration and production limitations with assistance from eight DOE national labs (OGJ, Feb. 20, p. 34).
The projects are being cofunded under DOE's Advanced Computational Technology Initiative (ACTI), the agency's latest effort to create a balanced, cofunded oil and gas R&D program that holds benefits for companies of all sizes and interests, upstream and downstream.
An oil and gas industry veteran of 16 years, Reggie Spiller, DOE deputy assistant secretary for gas and petroleum technology, said industry clearly knows more about the technical areas where research is needed, but only government can provide the overview needed to effectively organize DOE's R&D into an effective, integrated program.
"If we just put our money in one area - advanced computing or marginal wells - we would be missing the boat," Spiller said. "But since the agency has oil and gas industry people on staff, we can help the industry develop a balanced energy research program."
Spiller said DOE is sensitive to industry complaints that applying for government cofunding requires so much paperwork that many companies decide not to try. But he defended the requirement as necessary to assure public money is being spent for its intended purpose and said the agency is trying to streamline the application process.
In response to criticism of DOE for tying ACTI grants to national labs, Spiller said it is a case of the agency trying to balance its R&D spending to reflect long and short term goals. But proposing to use national labs for oil and gas research doesn't necessarily assure a better chance of getting funding for oil and gas research projects at a time when Congress is trying to cut federal spending.
"Some members of Congress try to cut our budget because the work we're doing is not applied enough," Spiller said. "They want to see more demonstration programs in which industry proves up ideas and national labs are kept out.
"On the other hand, other members of Congress believe the role of the federal government in R&D should be to enhance long term, basic research, and if the oil and gas industry wants to do applied research, let it do it itself," he said. "We tell people all the time we have to do a little bit of both, because it's the best way of servicing the diversity of the industry."
Spiller said DOE through its R&D spending is trying to create programs that collectively will create an effective national energy research policy. Unfortunately for the industry, with Congress trying to cut taxes by $189 billion over 5 years, there are no guarantees that DOE will survive, let alone the agency's R&D budget.
In late March, a supervisor instructed Spiller to work up a fiscal 1997 budget with a 25% reduction for fossil energy R&D, a cut of about $112 million when oil, gas, and coal programs are included. One week later, he was asked to work up a budget reflecting a 75% reduction.
With passage in the U.S. House of Representatives in early April of a $189 billion tax cut, Spiller said big reductions are certain at DOE. How much is likely to be trimmed is another question.
"If R&D were eliminated from the DOE budget, it would eliminate the pieces that underpin everything else we typically do," he said.
U.S. R&D Employment (51073 bytes)
ENTHUSIASTIC SUPPORT
Persons questioning the value of government cofunded joint oil and gas research in the U.S. could review the stack of letters received by DOE since an alert was issued in February that Congress was culling through DOE's budget looking for places where spending could be cut.
Another example of the value of government encouraged R&D could be noted in effects of the Section 29 federal tax credit for gas produced from nonconventional reservoirs thought nonproductive only a few years ago.
One of the most enthusiastic statements of support for joint research comes from Curtis D. Burton in Texaco's central offshore engineering group. Burton serves as project manager for the DeepStar joint industry research project focused on the deepwater Gulf of Mexico.
He said some DeepStar participants already have realized returns as great as 50:1 from selected components of the project. In addition, the quality of data generated by the group has been high because companies involved have been assigning their top technical people to the project.
The scope of DeepStar has encouraged contributions from some companies that don't usually get involved in group R&D. The project recently added a manufacturing and service company advisory panel from the vendor community. In some cases, contract R&D at DeepStar has come full circle, with some research services for broad industry problems being provided by employees of producing companies deemed best in specific research areas.
While recognizing the simmering debate about how much industry should get involved with government, Burton advocates that U.S. producers form a research triad with service companies and government as one of the best ways of funding future oil and gas R&D. He said a refocusing would have to occur for national labs to work with oil and gas producers in constructive ways, but there appears to be a willingness to do that within government offices.
"With government funds that are going to be pumped into those labs anyway directed toward oil and gas industry problems and applied in a complementary fashion with service companies to work that needs to be addressed, we could see some real progress in some of those areas," Burton said.
"I'm not a proponent of government being involved in our industry, but I am a proponent of our industry working smart. We have to lose the paradigm that says there's no place for it."
Burton agreed that government funded research projects can become drawn out affairs because of the paperwork required.
"But by working cooperatively with the government for less than two man-weeks, we at DeepStar just got $6.5 million of government funding," he said. "It won't always be that easy, but things are changing, and we won't solve tomorrow's problems with yesterday's thinking."
Copyright 1995 Oil & Gas Journal. All Rights Reserved.
