We spoke with Honorary Professor Max Rowe, University of Aberdeen, about the challenges for industry innovators when it comes to funding, developing and deploying technologies in the field.
Q: Early-stage technology companies need funding to develop their concepts, and in the oil & gas industry that’s an additional challenge due to the complex nature of the systems and equipment involved. Is adequate funding available for oil & gas industry innovation in the UK?
A: The oil price crash certainly made it more challenging to secure funding. Not only did operators look to cut back on areas that wouldn’t immediately hurt the bottom line, such as R&D investment, but they also scaled-back things like industry memberships, such as in the Industry Technology Facilitator (ITF).
But at the same time, in the UK the price crash meant there was a recognition that the future of the Scottish economy and the local Aberdeen economy were both at stake. This led to the creation of a number of bodies which are slowly changing the innovation funding landscape: now there’s not just the ITF but also organisations like the Oil & Gas Technology Centre (OGTC) and the Oil & Gas Innovation Centre (OGIC), who help fund R&D within the UK.
Other sources, however, have dried up. The venture-capital sector, who did invest in early-stage companies in years past, now tends to make funds available only when a company is making at least £1,000,000 EBITDA. The oil companies have their venture-capital arms, and these are still active in earlier stage companies, but they don’t have any more money available today than they used to.
Q: Do you feel that bodies like OGTC and OGIC are doing enough to help fund innovation projects? There was the news just recently that the OGTC has put £1.6 million into several projects.
A: For technology developers the availability of such funding can be vital. The £1.6 million invested so far by OGTC has been for three projects so this represents a significant level of funding for each. More significant though may be OGTC’s recent announcement that two major operators (Chevron and Total) have made their facilities available for eight field trials to be completed during 2017. Access to field facilities can be a major obstacle to qualifying any new technology. Operators typically want to know where a technology has already been deployed before agreeing to try it themselves (sometimes referred to as the race to be second).
Since its foundation in 2014, OGIC has funded over 30 projects. Whilst the typical level of financial support per project may be less than that from OGTC, what OGIC brings is access to the wealth of expertise and facilities (both often hidden) within Scottish Universities. Working in industry / academic partnerships can enable hard-pressed companies develop ideas that otherwise might not be progressed.
ITF, which was founded in 1999, has to date enabled well over 200 projects to be undertaken in partnerships between developers and oil and gas operators or service companies. These partnerships often continue long after the initial project and can sometimes lead to opportunities to undertake field trials.
Although the funding landscape seems complicated, it is good to see these organisations working together on some initiatives and also in collaboration with other sources of funding such as Innovate UK and some venture capital funds.
So, to answer your question – “are they doing enough?”! It would be easy to say that there is never enough money available, but though true, this would over-simplify the situation. Funding is only part of the problem. What technology developers have struggled to secure has been involvement from operators including field trials, test facilities, access to expertise and early adoption. These are essential for a company selling innovative techniques in the oil and gas sector. There are some encouraging signs that the Oil & Gas Authority (OGA) and OGTC are now encouraging such behaviours.
Q: So how can we foster innovation and make technology development a reality?
A: Well, it’s a positive development that the UK now has an independent regulator that has more teeth: OGA. It’s still early days, but it has bold ideas. The regulator is seeking to encourage deployment and offering carrots, trying to get companies to provide their offshore facilities where ideas can be tried out and trials undertaken.
There’s no doubt that the low prices over the last few years have put the global industry under huge strain, and those strains are greater in the UK: The North Sea and continental shelf are very expensive areas from which to get oil & gas because of several factors, including labour costs, the difficult environmental conditions and a strict safety / environmental regulatory regime. What’s going for us is our stable political regime. In other parts of the world, an oil company might be in favour with the government one minute, and the next minute they’re out of favour and the government’s appropriating their assets.
I am seeing investment again in oil & gas innovation, and there are new projects happening. My general feel, however, is that many companies developing oil & gas innovations try to jump forward to establishing a company too early. My general advice is to stay in the incubation period for longer and get your technology really robust. A lab-based proof of concept is not the same as a field trial. As you move through the prototype and trials, you will uncover lots of problems, so why not do all that while you’re benefiting from support? For example, when working on a project with a university it’s possible to draw industry funding into university, but once you’ve commercialised, you lose the academic funding support.
Q: Is the switch from larger independent oil companies to the smaller operators in the North Sea affecting the UK funding landscape?
A: I see no evidence that the smaller players are generally spending more or less. On the one hand they are often more open to the innovations proposed by the service industry, but on the other hand they often don’t have the capital to fund R&D projects.
During the oil price crash, the service sector’s business reduced dramatically with some companies reporting a 50% drop in sales. One approach some of them used was to explore using more innovation, and potentially stray into the operators’ previous territory of owning fields, or taking the risk in sub-surface operations. Previously they would’ve just provided services for a fee and the operator would carry the risk. Now we see a situation that they are sharing the risk.
Incidentally, this is one of the ironies: we are an industry who knows how to manage risk and lives with it – there’s that basic risk of drilling a well and not knowing how much resource is there – yet the industry is often reluctant to take a risk on innovation.
The thing to remember is that game-changing technology is also known as disruptive technology: and established players, service companies included, may hesitate to deploy those technologies because what if they alleviate the need for what they do, or do it for less?
For example, there’s a small company in Aberdeen who has a very simple method to install and remove subsea equipment without the need for a crane or even a barge, just a couple of anchor handling vessels. But if you look at how the industry works, the service companies are currently providing it all — the barge, the anchor handling, the crane — and charging for it all. They’re not really interested in a solution that’d cost the operator a lot less, because they can’t make as much money out of it.
Q: Are organisations like OGTC and OGIC doing enough to foster innovation? Should they do more, take more of a leadership role?
The raison d’être of OGIC is to ensure that Scottish universities are relevant to the key industries that have been identified as critical to the economy. If industry identifies areas that should be worked on, and if university funding and expertise are deployed to address those needs, with the intent that solutions will emerge, that’s positive. OGIC has been working and it has a place, but it is effectively a channel for Scottish Government University funding.
OGTC is working on some technology areas that are desperately needed: decommissioning, asset integrity, ways of developing small pools, well construction and digital transformation.
I’m not sure any of these organisations can really make the industry enthusiastic about deploying innovation, or about disruptive technologies.
Q: Joint Industry Projects are, on the one hand, very practical – projects are undertaken specifically because operators say they have such-and-such a problem. But it’s a limited kind of innovation: not the kind of blue-sky thinking that we associate with real breakthroughs or game-changers.
A: But those breakthrough developments are being explored right now by UK companies. For example: it would be amazing if we knew before we drilled whether there was oil & gas in the ground, and where it was. I’m working with a group who have a technology that could be used to remotely distinguish between rocks in the ground that contain oil, rocks that contain gas and rocks that contain water. Think of the game-changer that would be, in an industry that’s been reliant for so long on the limited capabilities of seismic. It would be absolutely incredible. Other companies, often independent SMEs, know the value of innovation and have made some real, game-changing breakthroughs.
Q: So what’s the next step? Do you see signs that the UK oil & gas industry will become one where innovation is energetically funded, fostered and deployed?
A: The biggest challenge is always going to be deployment, getting your customers to try out your technology. Another challenge is this pattern that the industry has got into: when oil is at a high price, they are in a hurry to produce and don’t want technology to get in the way; when the price is low, they’re too worried about saving money to invest in innovation. The same is true for service companies when prices are high they don’t need to innovate; but in a low-price regime, service companies’ survival really requires them to come up with something new.
I think we are seeing some of that, where service companies are beginning to embrace innovation. One major service company I know said they realise they can’t rely on finding the best ideas in-house and need to partner with someone from the outside. I’m seeing some of that partnering going on, but not as much as I’d like.
And we still see examples of companies who develop an innovation only to have it acquired by an established player who put it on the shelf so as not to disrupt their current service offerings. It can be depressing, actually: I know of several examples of good innovations that were never put into play.
The thing that will really make a difference to the way the industry sees innovation is if a really revolutionary technology is developed and deployed bringing its users significant competitive advantage. Some of those ideas are right here, being developed by local SMEs & start ups: all that’s needed is for the industry to give them a chance.
Max Rowe is Honorary Professor at the School of Engineering, University of Aberdeen and a non-executive director of LUX Assure. Contact Max Rowe on LinkedIn [https://www.linkedin.com/in/max-rowe-17076024] or at firstname.lastname@example.org