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July 2001 McKinsey Research Project A new regime for innovation and technology management in the E&P industry.

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Presentation on theme: "July 2001 McKinsey Research Project A new regime for innovation and technology management in the E&P industry."— Presentation transcript:

1 July 2001 McKinsey Research Project A new regime for innovation and technology management in the E&P industry

2 010731Technology in E&P-main pack.ppt.ppt 1 The E&P industry is technologically one of the most advanced The E&P industry has been, and still is at the leading edge of many technologies. It was the key driver behind the explosive growth in computing power during the 70s and 80s… … and many high-impact new technologies (e.g. 3D seismic, horizontal wells, FPSOs) fully penetrated the market in the 90s. Today it continues to integrate advanced software, material science and robotics.

3 010731Technology in E&P-main pack.ppt.ppt 2 Other Drilling Seismic Independent studies conclude that new technologies have created significant value in the industry Shell study: Total pre-tax benefit in 5 Shell units X 3,8 Oper- ating cost 1991 Op. cost 1994 Total benefit from new tech- nolo- gies Total cost of R&D and impl. 0,5 X- 3,3 US$ billions (1991-1993) Facilities Sub- surface Well EU study: Reserves gains 1990-1997 8.3 Reser- ves 1990 (minus prod 90-97) Reser- ves 1997 Due to better tech- nology Other factors 4,1 ~45 Billion boe oil and gas reserves in UK, Norway and Denmark Floaters Source:EU Energie publication, OGJ, EIA

4 010731Technology in E&P-main pack.ppt.ppt 3 However, too many potentially high-impact technologies have failed to materialise Text January 15, 2001 The volume of transactions conducted on-line is growing rapidly, but some sectors are likely to outstrip others. The volume of transactions conducted on-line Financial institutions will spend more on electronic commerce Financial institutions will spend more on electronic commerce technology than on branch technology in the Year 2001. Financial institutions will spend more on electronic commerce Financial institutions will spend more on electronic commerce technology than on branch technology in the Year 2001. Financial institutions will spend more on electronic commerce The volume of transactions conducted on-line is growing rapidly, but some sectors are likely to outstrip others. The volume of transactions conducted on-line Financial institutions will Now its the turn of the small companies e- commerce promised a level playing field. Now its the turn of the small Financial institutions will spend more on electronic commerce Financial institutions will spend more on electronic commerce technology than on branch technology in the Year 2001. Financial institutions will spend more on electronic commerce October 2, 1999 The volume of transactions conducted on-line is growing rapidly, but some sectors are likely to outstrip others. The volume of transactions conducted on-line Financial institutions will spend more on electronic commerce Now its the turn of the small companies e- commerce promised a level playing field. Financial institutions will spend more on electronic commerce technology than on branch technology in the Year 2001. Financial institutions will spend more on electronic commerce February 28, 2000 Direct Hydrocarbon Indication and slimhole drilling cuts exploration cost by 70% First platform free deep- water development in operation – cost down by 50% Downhole separation….…multiphase pumping…smart wells… Gas-to-liquid plant to be built with total cost of USD 15/boe

5 010731Technology in E&P-main pack.ppt.ppt 4 Leaders in the E&P industry are struggling to capture the full potential from technology Technology related concerns Strategy: How could we build a distinct strategy based on our technological capabilities? Investments in new technology: Should we fund technology development, if so – how ? Organization: How should we organize/work to maximize value creation from new technologies? Sourcing: How could we work with our suppliers to maximize value creation from new technology? Why of current interest: Many companies have failed to leverage their technological strength in a holistic strategy Investments have been very cyclical – good projects stopped despite huge long-term potential Recent organizational trend has resulted in less willingness and capacity for new technologies Currently there are limited incentives for suppliers to push forward new technologies

6 010731Technology in E&P-main pack.ppt.ppt 5 McKinsey conducted a knowledge building initiative to gain understanding of the issues and to identify solutions Technology case studies: 5 mature technologies: 3D, MWD, Horizontal wells and FPSOs, subsea trees 12 promising new technologies: E.g. smart wells, 4C sesimic, downhole separation Develop perspective on innovation and technology in E&P Share with E&P Co and Technology Co. and adjust Phase 1 Phase 2 2001: January-March Present and support teams and projects April-JuneJuly-Dec Phase 3 20 with E&P Companies, e.g. : Shell, Norsk Hydro, Exxon, Statoil, Enterprise, Unocal, ENI, Amerada Hess, Conoco, Adnoc 15 with OFSEs/ technology companies, e.g: Halliburton, Schlumberger, Baker Hughes, Roxar, Read Well Service, PGS, ABB, Stolt 10 with banks, governments. and R&D Institutions, e.g.: Imperial College, First securities, Simmons, DDB, CERA, Chr. Michelsen Survey on E&P companies by OFSEs Interviews 15 questions Ranking of 8 E&P companies Participants: leading OFSEs/technology companies in Houston, London, Oslo, Stavanger

7 010731Technology in E&P-main pack.ppt.ppt 6 We conducted many case studies within the main categories of technologies Communication and visualisation Broadband and remote operations Visualisation Subsurface Seismic (2D, 3D, 4C,4D) Reservoir simulation and management software Monitoring Downhole Smart wells Downhole metering Downhole separation Drilling and logging MWD Horizontal drilling Slag cement Expandable casing Dual gradiant drilling Offshore slimhole drilling Subsea and pipeline Subsea trees Multiphase metering Risers and pipelines Subsea separation Topside and platform Generators Separators Valves and pumps FPSO Processing GTL LNG Yellow: Technology case studies performed

8 010731Technology in E&P-main pack.ppt.ppt 7 A new regime for innovation and technology management in the E&P industry New technologies are required to meet the opportunities and challenges in the E&P industry Innovation and introduction of new technologies in E&P is inefficient The conduct of E&P companies and OFSEs is the prime cause of this inefficiency This technology gap is an opportunity for value creation provided that a new regime for technology management is successfully introduced

9 010731Technology in E&P-main pack.ppt.ppt 8 Oil and gas supply are predicted to grow faster than other energy sources Source: International Energy Agency World energy supply (Mtoe) Average annual growth rate (%) 0 1000 2000 3000 4000 5000 6000 19701975198019851990199520002005201020152020 Oil Gas Coal Nuclear Hydro Total energy consumption 0.6 1980- 2000 2000- 2020 2.1 2.9 1980- 2000 2000- 2020 Oil supply Gas supply 1.3 1.8 1980- 2000 2000- 2020 2.0 Other renewable

10 010731Technology in E&P-main pack.ppt.ppt 9 Technology challenge: +80 mmb/d The E&P industry faces a dramatic growth challenge * Including HC liquids and NGL Source: IEA, EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000), McKinsey 140 120 100 80 60 40 20 0 New fields outside M.East Global oil* production medium scenario Million b/day Increased recovery Existing fields and Middle East fields Region Latin America Europe FSU M.East Asia Pacific Change mmb/d 2000-2020 +9 -3 +10 +15 +6 Region Middle East FSU / China Other Change (mmb/d) 1960-1980 +20 +12 Region North Sea South America Other Change (mmb/d) 1980-2000 +5 +2 +5

11 010731Technology in E&P-main pack.ppt.ppt 10 Source:EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000). The Middle East, FSU and deep water regions will be the main growth areas Exploration/ Deep water / rough water Mature area offshore - IOR Mature area onshore - IOR Middle East

12 010731Technology in E&P-main pack.ppt.ppt 11 Source:EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000). Deep water exploration is high on the agenda for leading international petroleum companies Texaco-Chevron June 2001 Our highly focused exploration program is concentrated in deepwater Gulf of Mexico, Latin America and West Africa, while our core production areas also include the US, UK, North Sea, Middle East and the Pacific Focus areas: Deepwater Gulf of Mexico, West Africa (Angola, Nigeria), South America, Caspian Region, Eastern Canada, Middle East ExxonMobil Annual report 2000 Exploration/ Deep water/ rough water

13 010731Technology in E&P-main pack.ppt.ppt 12 Source:EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000). But successful deep water exploration and development requires technological breakthroughs Exploration/ Deep water/ rough water Direct Hydro Carbon Indication (DHI) (using seismic attributes) Dual-gradient drilling Deepwater slimhole drilling Subsea processing Downhole separation … Reduce exploration drilling costs Reduce development costs Resolve environmental issues regarding gas processing

14 010731Technology in E&P-main pack.ppt.ppt 13 Source:EIA, Office of Integrated Analysis and Forecasting, World Energy Projection System; and U.S. Department of the Interior, U.S. Geological Survey, World Petroleum Assessment 2000 (Reston, VA, July 2000). Mature offshore areas could be further exploited through new technologies Smart wells Downhole separation 4C/4D seismic Reservoir optimisation and management Increased oil recovery Improved economics of marginal fields Mature area offshore - IOR

15 010731Technology in E&P-main pack.ppt.ppt 14 20 40 60 80 100 120 140 160 180 Source: OGJ The shift to gas poses additional technological challenges Million boe/day ExxonMobil is exploring the opportunity to apply its proprietary GTL technology by developing a world-scale GTL plant in Qatar ExxonMobil web - annual report 2001 Gas Oil and HC liquids

16 010731Technology in E&P-main pack.ppt.ppt 15 Australia 47 Malaysia 38 Iran 505 Abu Dhabi 154 Qatar 226 FSU 1,340 Norway 49 Nigeria 86 Algeria 67 Venezuela 52 U.S. 53 Indonesia 47 Trillion cubic feet *Gas reserves exceeding current or anticipated commitments in large quantity and sufficiently accessible location to support potential international gas trades Source:Janson Association; McKinsey analysis Stranded gas reserves* need new technology to be monetised ESTIMATE LNG technologies Gas-to-liquid technologies (GTL) Sour gas processing technologies Reduce processing costs Reduce transportation costs and connect gas fields to markets

17 010731Technology in E&P-main pack.ppt.ppt 16 Growing environmental concerns add to the need for new technologies Continuing technology advances are essential for meeting expanding energy needs and reducing its environmental impact Phil Watts, Managing Director of Shell Innovation is making it possible to produce and to use energy products in ways which dont damage the environment Sir John Brown, Chief Executive BP Gas re-injection technologies Decarbonisation technologies GTL Reduce CO 2 emission, including gas flaring Reduces oil to water

18 010731Technology in E&P-main pack.ppt.ppt 17 New technology is required to enable companies to successfully achieve the forecast increases in labour productivity Boe/day per E&P employee for selected E&P companies 19902000201019802020 Broadband communication and remote real-time operations Visualisation and groupware Higher productivity More onshore work Group work Streamlined work processes

19 010731Technology in E&P-main pack.ppt.ppt 18 New technologies are required to meet the opportunities and challenges in the E&P industry DeepwaterMature Area/ Brownfield Gas e.g. in Middle East Business challengesPossible new technologies Smart wells Downhole separation 4C/4D seismic Reservoir optimisation and management Direct Hydro Carbon Indication (DHI) Dual-gradient drilling Deepwater slimhole drilling Subsea processing Downhole separation LNG technologies Gas-to-liquid technologies (GTL) Sour gas processing technologies Gas re-injection technologies Decarbonization technologies GTL Increase oil recovery rate Improve economics of marginal fields Reduce operating costs Reduce exploration drilling costs Reduce development costs Reduce processing costs Reduce transportation costs and connect gas fields to markets Reduce CO2 emission, incl. gas flaring EnvironmentalProductivity Broadband communication and remote real-time operations Visualization and groupware Higher productivity Demanning offshore Streamlined work processes

20 010731Technology in E&P-main pack.ppt.ppt 19 A new regime for innovation and technology management in the E&P industry New technologies are required to meet the opportunities and challenges in the E&P industry Innovation and introduction of new technologies in E&P is inefficient The conduct of E&P companies and OFSEs is the prime cause of this inefficiency This technology gap is an opportunity for value creation provided that a new regime for technology management is successfully introduced

21 010731Technology in E&P-main pack.ppt.ppt 20 Commercially available Role* of various players through the development process (based on 15 technology case studies) [%] Non E&P Academic SME Big 3 OFSE Other E&P Majors * The role is defined as the financial value of resources devoted to the effort (i.e. direct funding, expertise, laboratory time etc.), for phase 2-4. For the first phase intellect contribution is also assessed and included Source: Industry journals, interviews IdeaPrototype1 st field test50% Penetration 23 29 32 43 12 17 22 21 2 2 9 17 40 38 25 18 8 1 0 0 15 14 2 The role of smaller players has been crucial in the innovation and technology development process

22 010731Technology in E&P-main pack.ppt.ppt 21 196019651970197519801985199019952000 Visualisation Deepw.slimhole drilling Smart wells Seismic while drilling Dual gradient drilling Expandable casing Slag cement 4C seismic Downhole separation Subsea processing Multiphase metering FPSO 3D seismic Horizontal drilling MWD GTL Sub-sea trees Development timelines of key E&P technologies Idea to prototype Prototype to field test Field test to commercial Commercial to 50% penetration Successful cases …? Source: Industry journals, interviews

23 010731Technology in E&P-main pack.ppt.ppt 22 Visualisation technologies have been developed efficiently Pioneers Norsk Hydro, Arco and Texaco initiate visualisation development centers. Experience is drawn from space, medicine and construction 19952000 Phillips, Statoil and others install visualisation centers BP tests successfully, plans to build 15 centers worldwide Drivers: Pull from E&P: –Low risk, limited capital involved –Immediate value impact – fine-tune well –Appealing technology - excitement Push from technology companies: –Basic technologies from other sectors –Non-E&P players have nothing to lose Value impact: Better detailed design of well paths in reservoir has significantly improved well production - e.g. in Hydro an online decision on well extension improved recovery by 750 barrels Better general understanding of reservoir has improved development solutions, reduced cost of overall well program and increased recovery Simulation models have improved significantly More than 100 large screen visualisation centers are expected by the end of 2001 Norsk Hydro installs virtual reality center Source: Industry journals, interviews

24 010731Technology in E&P-main pack.ppt.ppt 23 The success of 3D seismic required both pull from E&P companies and push from technology companies Drivers: Pull from E&P: –Huge value potential acknowledge –Funding available from elephant fields –Organization eager to implement –Best people in R&D in the 80ies Push from technology companies: –New entrant with nothing to loose –Business model that allows value to technology supplier Value impact: Savings USD ~200 billion 1986-2000, or ~50 cent/b Enhances value through detection of small pools Revitalised mature basins (e.g. Gulf of Mexico) Doubled exploration success rate (1985–1994) Improved risk evaluates from volume data Acquisition and processing speed up from 25 sq.km/month in 1990 to 2000 sq.km/month in 1998 Better positioning made 3D possible – (Norwegian shipping tradition met E&P) Elephant fields (Statfjord) fully covered by 3D 1970198019902000 2 streamers New entrant (PGS) pushed development; 5 streamers12 streamers Multiclient seismic acquisition Increased computing power Source: Industry journals, interviews multi-streamer, onboard processing Delay in development

25 010731Technology in E&P-main pack.ppt.ppt 24 196019651970197519801985199019952000 Visualisation Deepwater slimhole drilling Smart wells Seismic while drilling Dual gradient drilling Expandable casing Slag cement 4C seismic Downhole separation Subsea processing Multiphase metering FPSO 3D seismic Horizontal drilling MWD GTL Sub-sea trees There have been significant delays for most technologies …? Periods with low activity Not yet successful commer- cialized …? Cases examples Source: Industry journals, interviews

26 010731Technology in E&P-main pack.ppt.ppt 25 Measurement While Drilling (MWD) was very slow to develop Teleco demonstrates MWD Schlumberger research initiated Schlumberger acquires Analysts to develop MWD (but do not launch MWD) Price shock. Amoco, Exxon, Shell... begin using MWD Elf research initiated Industry outsider Raymond Engineering develops mud pulse telemetry Elf and Raymond incorporate Teleco to push development of MWD 1970198019901995 GeoLinks Orienteer MWD system Drivers: Pull from E&P: –When cost became an issue in 1986 Push from technology companies: –Primarily from industry outsiders Barriers: Major OFSEs held back the technology for a long period to protect existing service lines –Industry leaders slow to adapt Focus on log quality and not cost / value benefit Value impact: Reduced drilling time – no stop to log and cost reduced by ~USD 400k per well EWR MWD made formation evaluation better – discoveries of e.g. turbidites MWD essential tool in horizontal drilling EWR MWD devel oped Revenue: US $m Teleco 132 Schlumb. 70 Other 70 Full penetration Source: Industry journals, interviews

27 010731Technology in E&P-main pack.ppt.ppt 26 Deepwater Slimhole Drilling has been slow to take off Value Impact Smaller rigs and less equipment needed Reduced investment by ~50%+ Reducing expl. drilling cost –Casing: 65% –Mud Cost: 70% –Cement: 80% –Personnel: 25- 30% Reduced cost: –40-45% in shallow water, –50% deep water Use of thinner pipes with stronger materials and narrower well diameters for drilling Description Conventional Slimhole Hive com- pensation Barriers : Development stopped –No support from major OFSEs or existing rig owners (to protect existing service lines?) –No E&P company wants to be first mover (risk aversion) Source: Industry journals, interviews

28 010731Technology in E&P-main pack.ppt.ppt 27 Drivers E&P players with strong strategic interest (few portfolio alternatives) in the new technology are involved Decision makers that will commit money are in charge Developments are asset-light Organizational culture, systems and incentives to foster and test ideas Technology companies exist which have strong incentives to push new technologies E&P companies create demand for new technology Examples Need for horizontal drilling in Austin chalk + Troll field (Hydro) Statfjord funded 3D in 1980 Visualisation is asset-light Shell deepwater-team Norsk Hydro culture open to try wild idea of horizontal drilling (Troll) Separate JV with open culture PGS pushed 3D seismic Teleco pushed MWD Demand in E&P companies induced OFSEs to provide MWD The key drivers of innovation and technology Funding Strategy Organisation Sourcing

29 010731Technology in E&P-main pack.ppt.ppt 28 Commercially available IdeaPrototype1 st field test 50% penetration Barriers to technology development Weak understanding of strategic rationale for being technology leader Lack of stability in funding Lack of Patent protection Organisational conservatism and risk averse approach to technology decisions Not invented here syndrome Insufficient cooperation with technology suppliers Barriers

30 010731Technology in E&P-main pack.ppt.ppt 29 With a few exceptions the main classes of new technology are still moving slowly Classes of technologies Communication and visualisation Reservoir Downhole Drilling and logging Subsea and pipeline Processing Topside and platform Current status Rapid introduction of broadband, remote operations and visualisation Fast introduction of new software, but slower on next generation seismic Many ideas introduced, but slow pilot testing phase due to high risk Radical ideas developed, but limited push for testing Currently some push from deep-water, but conservative attitude from E&P Much focus around gas conversion, but few breakthrough results Currently very little innovation around separators, generators, pumps, etc. Comment

31 010731Technology in E&P-main pack.ppt.ppt 30 The pace of innovation in E&P has been slow relative to that in other industries 05101520253035 E&P industry (15 tech. Cases) ADSL (broadband telecom) Medicine (Merck- average) Consumer products (US average) Time (years) Average duration of the four phases in different industries Idea to prototype Prototype to field test Field test to commercial Commercial to 50% penetration Source: Industry journals, interviews

32 010731Technology in E&P-main pack.ppt.ppt 31 A new regime for innovation and technology management in the E&P industry New technologies are required to meet the opportunities and challenges in the E&P industry Innovation and introduction of new technologies in E&P is inefficient The conduct of E&P companies and OFSEs is the prime cause of this inefficiency This technology gap is an opportunity for value creation provided that a new regime for technology management is successfully introduced

33 010731Technology in E&P-main pack.ppt.ppt 32 The conduct of E&P companies and OFSEs directly influences innovation and technology development Innovation and technology development Oil price Cyclical mindset Macro economy Field investments E&P Co. Organization E&P Co. strategy Techn. R&D investments Sourcing Talent attention Government policies Geological realities Level of influence None Low High Factors influencing innovation and technology Patenting

34 010731Technology in E&P-main pack.ppt.ppt 33 Player conduct has varied significantly and today leads to a poor environment for technology and innovation Actual price ++ + --+0--+0 ++ + 0-000-00 ++0+++0+ - -- 0 -- 0 Oil Price Very positive Positive Neutral Negative Very negative ++ + o - -- Environment for technology and innovation Influ- enced by macro trend Macro trend

35 010731Technology in E&P-main pack.ppt.ppt 34 Macro trend downward is partly a result of the cyclical behaviour following the industry cycles Industry cycles Actual price ++ + --+0--+0 ++ + 0-000-00 ++0+++0+ - -- 0 -- 0 Oil Price Follow industry cycle Very positive Positive Neutral Negative Very negative ++ + o - -- Environment for technology and innovation

36 010731Technology in E&P-main pack.ppt.ppt 35 Our growth strategy is based on privileged relations within specific countries. Technology plays a minor role Companies: ExxonMobil Shell/ Royal Dutch BP Amoco TotalFina Elf ChevronTexaco Conoco Phillips Unocal Norsk Hydro Statoil Petrobras ENI Saudi Aramco Adnoc Anadarko BHP Enterprise Amerada Hess We have been in the technology forefront many times, but it has been bits and pieces. We never developed any distinct strategy E&P company Distinct technology based strategy - (V) - (V) - (V) - (V) - (V) - (V) V No apparent technology-based strategy Elements of a technology based strategy Fully implemented technology based strategy E&P company Few companies have been able to identify and execute on a technology based strategy

37 010731Technology in E&P-main pack.ppt.ppt 36 ExxonMobil ENI Shell ChevronTexaco BP TotalFinaElf Innovation index Total return to shareholders 1994-2001 Unocal Norsk Hydro Some companies cite the lack of correlation between performance and innovation as a reason for not taking a stronger role in technology and innovation Free rider mentaity

38 010731Technology in E&P-main pack.ppt.ppt 37 If someone launches a new, good technology, our suppliers will give us access to it within less than 6 months E&P comp any Why invest, it is safer to wait and see E&P company Our investments has not paid off, now it is our turn to wait for others to carry the R&D burden Technology company What is apparently a rational decision for an individual company…. …has negative consequences for all when aggregated up to the industry level Hey, why do we need to wait so long for new technologies Industry spokesman The free rider mentality is a significant strategic weakness in the industry

39 010731Technology in E&P-main pack.ppt.ppt 38 Source: US Patent and Trademark Office 0 1 2 3 4 5 6 7 8 1976-801981-851986-911991-951996-01 E&P Construction Automobile Industrial automation Pharmaceutical Number of patents as a fraction of number in 1976-80 We have many patents, but we nevertheless see similar products showing up rather fast. Technology company Slow growth in E&P patents is symptomatic of poor patent protection for the industry

40 010731Technology in E&P-main pack.ppt.ppt 39 R&D funding in the E&P industry Year 2000 US$ (billions) 3,0 1,1 1,9 1,7 OFSEs R&D Business units/ Licenses Central 19902000 E 4,1 3,6 Oil and gas com- panies R&D is increasingly outsourced, and central funding has been reduced drastically

41 010731Technology in E&P-main pack.ppt.ppt 40 R&D in E&P is also low compared to other industries Software & IT Pharma Health Chemicals Electronics Aerospace/Defence Media Automobiles Telecoms Construction Metals Oil & Gas Beverage Tobacco R&D Investment (%)

42 010731Technology in E&P-main pack.ppt.ppt 41 BP Chevron Conoco Shell Phillips 1999 US$/boe (adjusted by E&P share of total revenues) 199120001995 R&D expenditure has dropped by 50% in the last decade with sharpest decline in the US Note: All R&D figures are adjusted according to average E&P share of total revenue, BP figures include Amoco in 1997 and after; Exxon figures include Mobil in 1997 and after Source: Herolds; PetroCompanies; BP;10Ks, annual reports Exxon Texaco 35 28 9,3 8,5 7,6 6,5 5,8 Norsk Hydro Statoil Shell Chevron BP Texaco Exxon Philips Conoco 5,7 5,1 Average R&D spend 1995-2000 cent/boe 9,0 ENI-Agip

43 010731Technology in E&P-main pack.ppt.ppt 42 There is a hopeless duplication of Academic R&D efforts and no master plan Director, E&P company Neither governments nor companies have focused on R&D, and the result is fragmented activity in many different academic institutions R&D manager, E&P company There is no master plan behind academic and government driven R&D

44 010731Technology in E&P-main pack.ppt.ppt 43 The consequence is that nobody takes responsibility for long-term R&D Long term R&D E&P companies Technology is not core Technology will become available – we will then be fast followers Service companies We are not paid for that It could even hurt our business And do we know what they need? Institutes / academia Duplication Lack resources Lack of practical exposure and business judgment

45 010731Technology in E&P-main pack.ppt.ppt 44 Different opinions persist regarding the shift in approach to R&D We tried to get an OFSE engaged in our long term project, but they thought it was too far a way to go -- we had to do it ourselves E&P company We are more hungry and efficient than E&P companies internal departments, and thus create higher impact R&D. But E&P must finance it, OFSEs do not want to finance long term R&D Independent R&D institution We used to have an R&D department but shut it down – we trust in the service sector (or other E&P companies) to do the breakthrough R&D US E&P company First and record- setting perfor- mance… Schlumberger web-site Dont expect anything real new from the big OFSEs Small technology company OFSEs cannot do long term R&DOFSEs can do long term R&D

46 010731Technology in E&P-main pack.ppt.ppt 45 Investments have been very cyclic in the E&P industry Development cost Nominal oil price Exploration cost Investments US$ (billions) Oil price US$/bbl Correlation between exploration cost and oil price = 0,89 Correlation between development cost and oil price = 0,53 Note: Domestic and foreign investments by US oil companies registered in EIA database Oil price is US average domestic first purchase price

47 010731Technology in E&P-main pack.ppt.ppt 46 Capital intensive technologies are often stranded in a funding Death Valley for years The Death Valley No more R&D funding available Small companies do not have balance sheet to carry risk Big 3 do not push due to existing cash cows E&P companies wait for others to test, or expect free test equipment Limited VC available, regarded as too risky digital risk R&D funds available Downhole separation Subsea separation 4C seismic Multiphase metering Offshore slimhole drilling Slag cement Cash flow + - E&P industry Time Field test to commercial

48 010731Technology in E&P-main pack.ppt.ppt 47 Average field size at the UK sector Million toe after year of discovery Average field size at Norwegian sector Million toe after year of discovery The average field size has decreased, and fields are no longer sponsors of new technologies 68-7576-8081-8586-9091-95 96-00 68-7576-8081-8586-9091-95 96-00 17 Without Ormen Lange gas field

49 010731Technology in E&P-main pack.ppt.ppt 48 Absolute size USD millions in equity funds in Europe 1999 There is a shortage of funding available for the remaining smaller players Communication IT Chemicals/ material Pharma Transport Construction Electronics Financial services Energy Relative size Equity funds/market cap VC in Oil and gas is too risky – too dependent on a very few customers and it is difficult to really understand the very complicated technology A Venture Capital partner

50 010731Technology in E&P-main pack.ppt.ppt 49 Functional organisation Asset-based organisation Strengths: High attention on R&D and strategic technology development Easy to enforce consistent technology and methodology approaches across fields Issues: Weak business coordination within asset (e.g. how to proactively optimise infrastructure through satellite tie-ins) Focus towards disciplines generates academic interests that might not pay off Too complex when many fields Strengths: Strong business focus, good coor- dination across phases at asset level Non-bureaucratic and empowered organisation Lean and mean Issues: Weaker processes for optimising and sharing of technology-related results Incentives might be too short-sighted Less capacity for strategic technology development E&P Expl orati on Field deve lopm ent Oper ation Cons tructi on E&P Sup port Asset 1 Asset 2 Asset 3 All vital functions within assets The move from functional to asset-based organisations has weakened the ability of some companies to innovate and develop new technology

51 010731Technology in E&P-main pack.ppt.ppt 50 We are dealing with people in high risk environments, we cannot risk life and property by playing around with fancy new technologies E&P manager With the governments current focus on safety, it is very difficult to get support for using any technology that does not have a proven track record Technology company Safety concerns also limit the willingness of E&P organisations to test new technologies

52 010731Technology in E&P-main pack.ppt.ppt 51 Survey results from suppliers indicate that E&P companies need to improve in most areas Survey question In relation to technology to what degree does the E&P company... To what degree does the E&P company have appropriate... Range of survey resultsKey Success Factors Source: McKinsey surveys Generate ideas internally Understand the value Use external ideas / products Share ideas / products externally Communicate new tech. internally Fund during early phase development Provide field testing opportunities Effectively manage JIPs Collaborate with small tech. companies Commercial skills Internal processes / procedures Company structure Internal incentives External contractor incentives Implement new technology effectively Companies in survey BP ChevronTexaco ENI Exxon Norsk Hydro Shell Statoil TotalFinaElf Unocal Companies surveyed Brit Bit FMC Halliburton Inside Reality PGS Read Schlumberger SPS-AFOS Stolt Best in class Worst in class Poor ExcellentModerate

53 010731Technology in E&P-main pack.ppt.ppt 52 OFSEs and technology companies do not rate oil companies highly in technology development and innovation There is a tendency to stick to tried and tested technologies Joint Industry Projects are not well managed Not enough funding or testing opportunities are provided Ideas from technology companies are not well adopted The problem lies with the oil companies internal structure, processes and procedures Incentives to promote new technology are poor

54 010731Technology in E&P-main pack.ppt.ppt 53 Suppliers rank Norsk Hydro and BP as technology leaders Source: McKinsey surveys of 9 technology suppliers: Brit Bit, FMC, Halliburton, Inside Reality, PGS, Read, Schlumberger, SPS-AFOS, Stolt Norsk Hydro BP Shell Statoil ChevronTexaco TotalFinaElf Unocal ENI Exxon PoorModerateExcellent Average of all questions

55 010731Technology in E&P-main pack.ppt.ppt 54 E&P companies can be classified in four distinct groups when evaluated for their technology leadership and external cooperation Low Technology and innovation orientation (Average R&D spend level* (1996-2000) + total survey score) External cooperation orientation (Score on survey - external orientation + qualitative assessment ) Norsk Hydro High Source: 10 Ks/annual reports, Survey, Interviews; Team analysis, Low High BP Conoco ExxonMobil Shell TotalFina Elf ChevronTexaco ENI Statoil External oriented Leaders External oriented followers Internal oriented leaders Internal oriented followers Amerada Hess Enterprise R&D investments

56 010731Technology in E&P-main pack.ppt.ppt 55 Each group has some typical ways to approach technology and innovation Source: 10 Ks/annual reports, Survey, Interviews; Team analysis, Norsk Hydro Conoco ExxonMobil TotalFina Elf ChevronTexaco ENI Statoil Amerada Hess Enterprise BP Leading in many technologies Asset based organizations, but strong competence networks Use of incentives in contracts Open to let technology companies own the technology Leading in some technologies Large central technology departments Often want to own technologies themselves Focus to standardize and reuse technology internally Central departments approve all important technology decisions Wait for others to pioneer new technology – prefer field tested technologies Low budgets, and explicit policy of being fast followers Asset based - no own R&D department Open to use turnkey solutions from suppliers Leader Follower InternalExternal Shell

57 010731Technology in E&P-main pack.ppt.ppt 56 Number of E&P professional job applications to a major oil company (% of 1990 applications) 100 98 59 40 1990199219952000 6 4 1 199219952000 Top tier recruits in a major oil company (% of total recruitment) Recruitment of staff with potential to become senior management, in a major oil company (% of 1980 intake) 0 2020 4040 6060 8080 100 1980198519901995 Required level 1,6 1,4 1,12 0,8 0,6 0,5 198019851990199520002005 Headcount in 25 largest E&P companies (millions) Disguised Client Example A talent shortage in the E&P industry is cited as a key barrier to technological innovation

58 010731Technology in E&P-main pack.ppt.ppt 57 Petroleum The best talent was attracted to petroleum studies in the 1980s, but this is no longer the case Entrance score of Norwegian Institute of Technology (no. 1 Engineering School) Top 2% of cohort Top 10% of cohort Top 30% of cohort Product Design Electrical Engineering Architecture Physics and Math. Industrial Economics Marine Engineering Civil Engineering Chemistry Engineering Mech. Engineering (Changed formula) Petroleum

59 010731Technology in E&P-main pack.ppt.ppt 58 The OFSE industry is highly concentrated Company Market share - selected segments Wireline logging 14% 57% 20% Cement 38% 29% 5% 20% Revenue 1999 $Million 3D seismic 5% 10% 12% 6% 15,664 9,568 5,080 1,087 775 475 265 Halliburton Schlumberger Baker Hughes BJ Services PGS CGG Veritas * 50/50 joint venture of Western GECO Source: Spears and Associates, Inc. 50%*

60 010731Technology in E&P-main pack.ppt.ppt 59 Halliburton Schlumberger Baker Hughes And the Big 3 OFSEs have primarily entered new technology markets through acquisitions No. of new technologies In-house innovation* Acquired** Adaptor No role played *In-house innovation is any innovation by OFSE before 1990 or an innovation by a division after 1990 that was part of the OFSE before 1990 **Acquired innovation is any innovation that was acquired through an acquisition after 1990 or was developed by a division acquired after 1990

61 010731Technology in E&P-main pack.ppt.ppt 60 With a mindset of selling products rather than value some companies hold technologies back We would rather sell a large number of commodity wells than a few advanced ones An OFSE We were not engaged in wireline logging, and therefore pushed MWD aggressively at an early stage Baker Hughes We contacted one of the big service companies to get their support in developing our new technology. They were positive, but nothing materialised. They had all kinds of excuses, but after a while we realised that they were not really interested in success due to their existing service line An E&P company

62 010731Technology in E&P-main pack.ppt.ppt 61 PGS has been a pioneer in developing a business model focused on selling value rather than just sell products They have (as a result?) been pioneers and technology pushers within the both the seismic business (3D acquisitions and processing, vertical cable acquisitions, 4C-seismic) and small field production (FPSOs). However, they have not (yet?) capitalised on many of their inventions, e.g 4C seismic Unlike other OFSEs, they have taken significant geological and reservoir risks Some companies have focused on selling value and have been innovative

63 010731Technology in E&P-main pack.ppt.ppt 62 Smaller companies have major difficulty in accessing E&P companies An OFSE Our company is built to flip [sell company], we dont get anywhere alone – marketing etc. will be far too expensive Smaller technology company E&P companies are listening only to the three big OFSEs. Therefore we do not get access to E&P companies with our slimhole technology that will reduce drilling cost by 50% Offshore & Marine

64 010731Technology in E&P-main pack.ppt.ppt 63 In summary, several barriers impede the four key drivers of technology Weak understanding of strategic rational for being a technology leader Lack of ability to identify and execute on a technology based strategy Ambiguity about whether technology is core business Notion that being a technology free-rider makes sense –Easy to be fast follower - no efficient patent protection Lack of companies taking the shaper role Lack of stability in funding Lack of elephants to sponsor new technologies Each downturn has resulted in unreasonable cut in good projects Especially difficult to fund field test phase – none take the responsibility Lack of tools to do valuation of new technologies – insufficient funding Limit Venture Capital available Organisational conservatism and risk aversion in technology decisions Power moved from center to assets – less strategic/holistic perspective Increased focus on short term performance targets – uptime focus Safety, health and environmental issues driver for using known technology Homogenous demographics and strong professions – wild ideas stopped Lack of talents with time and incentives to engage in new technology Lack of openness for external ideas (the not-invented-here syndrome) Insufficient cooperation with technology suppliers Significant cannibalization issues stops suppliers from pushing technologies –Contracts has wrong incentives - sell products/hours rather than value Independent players with great ideas/products have limited access Poor set-up of many joint industry projects – lack ofwin-win incentives Funding Strategy Organisation Sourcing

65 010731Technology in E&P-main pack.ppt.ppt 64 E&P companies Increasingly expecting others to do R&D Not changing contractual models accordingly With the result that the industry dynamics for technology have become dysfunctional Big 3 OFSEs Important cash-flow from existing products - no incentives for proactively introducing new technologies under current contractual regime Limited tradition for in-house breakthrough innovation Controlling distribution channels Other technology companies Often innovative, but –difficult to get funding –difficult to get access to E&P companies

66 010731Technology in E&P-main pack.ppt.ppt 65 New technologies are required to meet the opportunities and challenges in the E&P industry Innovation and introduction of new technologies in E&P is inefficient The conduct of E&P companies and OFSEs is the prime cause of this inefficiency This technology gap is an opportunity for value creation provided that a new regime for technology management is successfully introduced A new regime for innovation and technology management in the E&P industry

67 010731Technology in E&P-main pack.ppt.ppt 66 The conduct of E&P companies and OFSEs directly influences innovation and technology development Innovation and technology development Oil price Cyclical mindset Macro economy Field investments E&P Co. Organization E&P Co. strategy Techn. R&D investments Sourcing Talent attention Government policies Geological realities Level of influence None Low High Factors influencing innovation and technology Patenting

68 010731Technology in E&P-main pack.ppt.ppt 67 Core elements in the new regime for innovation and technology management Strategic role Valuation methodology Funding Supplier incentives Links with smaller players Successful alliances Processes Technology as a business project Organisational structure Culture

69 010731Technology in E&P-main pack.ppt.ppt 68 Determining your role Observations that say Lead The demand for new oil will be huge –Lack of appropriate technology is still a show stopper for many fields New geographies are opening up –Technology could be the ticket to entry Technology companies have not had the strengths or interests to be shapers of breakthrough technologies The capacity for innovation and technology development is currently low It is not obvious that a single approach (leader or follower) to all E&P technologies is the best strategy The macro trend in most industries is that value chains are split up into global niches dominated by technology specialists, i.e. it is difficult for users like E&P companies to keep ahead as leaders Intellectual property rights are not easily obtained/enforced Also in Oil and Gas we see that technology companies are taking over R&D and a larger part of the value chain Observations that say Follow

70 010731Technology in E&P-main pack.ppt.ppt 69 Some companies have taken the role of technology leaders The FPSO expert The sub-salt exploration expert Mature giant field expert The arctic expert Examples BHP Petroleum was a pioneer in FPSO developments in Australia, and has leveraged this in Vietnam Anadarko has developed superior skills within sub-salt imaging, deepwater exploration and option based risking Yet to be seen…? The deepwater expert Shell recognised the potential early, tied up more than 600 deepwater blocks in GoM with a dedicated organisation Petrobras became a leading deepwater player in South America The environmental expert Statoil has aggressively invested in IOR-technology for extending life of own giant fields in the North Sea

71 010731Technology in E&P-main pack.ppt.ppt 70 Shell recognised the potential of deepwater exploration in GOM before most other players SHELL IN DEEPWATER EXPLORATION Success rates in deepwater exploration Gulf of Mexico* Percentage of wells with finds >100 MMBOE** ShellExxonConocoOnyx Land position Blocks Average field size MMBOE Number of finds 6331351153 200128 90 853901 Shell was in the 80s and early 90s an early mover in deepwater exploration and production Tied up deepwater blocks Invested heavily in skilled personnel Led the development in technology to exploit deepwater fields Water depths >1,500 feet ** to 1991

72 010731Technology in E&P-main pack.ppt.ppt 71 -55% Unocal had a Follower role that has also been successful in drilling Industry average comparable Garden Banks wells Spirit Energy Garden Banks 74 Well time, days Unocal approach to achieving drilling cost reductions Maintain a supportive culture –Encourage and reward innovation, open communication, effective teamwork and fast decision making Instil the right philosophy –Geoscientists, engineers, drillers, financial staff and contractors work as a team and share commitment to succeed Provide the right incentives –Compensation of deepwater teams directly linked to 50% cost goal Employed innovative, state-of-the-art technology –Advanced interpretation –Improved well design (slim holes, fewer sections) –Premoored anchors –BOPs on the rig floor –Synthetic muds –LWD evaluation Source: Unocal PIRA conference presentation

73 010731Technology in E&P-main pack.ppt.ppt 72 Key success factors in a Follower role Speed Develop a flexible organisation to respond to opportunities Networks Develop internal and external global networks with other companies Keep visible possible new technology clusters on the horizon Contractor relationships Leverage relationship with contractors to track knowledge on new technology clusters and potential opportunities for application Superior operating and development performance Application of new technologies under a performance culture to extract the best in class performance Willingness to accept new technologies from outside as well as inside the company Cultivate a culture that willingly accepts and understands the introduction of new technologies Deal Making Gain access to new opportunities and add value by applying technology

74 010731Technology in E&P-main pack.ppt.ppt 73 Select what role you want to play for each technology cluster Look at clusters of technologies Source: BBC; press clippings Leader Follower Examples For each cluster, take deliberate decisions on where to be leader and where to be follower based on: –Value potential of the technology –Overall and business area strategy –Current and future assets –Technological capabilities –Organisational capacity –Technology status by suppliers –Competitors ambitions and actions –Governments expectations etc. After the leader/follower decision, decide on cooperation strategy – internal versus external/collaborative

75 010731Technology in E&P-main pack.ppt.ppt 74 Be sophisticated when choosing approach for each technology cluster Norsk Hydro Conoco TotalFina Elf ChevronTexaco ENI Statoil Amerada Hess Enterprise Leader Follower InternalExternal Overall approach of E&P companies E&P companies approach to each specific cluster of technologies Exxon Mobil Shell BP Leader Follower InternalExternal Leader Follower InternalExternal Leader Follower InternalExternal ILLUSTRATIVE

76 010731Technology in E&P-main pack.ppt.ppt 75 There are four main technology strategies for each technology cluster Lead and colla- borate Innovate and protect Prepare and adapt Pick and play Description Be an innovator but keep cards close Actively use patents as protection Establish internal R&D projects –Corporate initiatives –BU or cross-BU When to use When technology is of key strategic importance and could give unique competitive differentiation (none/little to gain from others), and risk is acceptable Description Let others drive development but actively monitor and test Experiment/prepare internal systems to allow fast roll-out When to use When technology is of moderate importance and could give competitive advantage if rolled out rapidly, but others lead Description Keep watch over development Adopt fast when commercially available When to use When technology is of moderate importance, but others are better positioned to drive it, and it is easily available in the market Description Be architect/facilitator Lead and drive through collaborative efforts –JV / JIP –Alliances/partnerships –Corporate venture capital When to use When technology is of key financial and strategic importance, but company believes that joint R&D is most efficient, lacks some skills and/or wants to share the risk Leader Follower InternalExternal

77 010731Technology in E&P-main pack.ppt.ppt 76 Core elements in the new regime for innovation and technology management Strategic role Valuation methodology Funding Supplier incentives Links with smaller players Successful alliances Processes Technology as a business project Organisational structure Culture

78 010731Technology in E&P-main pack.ppt.ppt 77 Categorise and prioritise Calculate value Identify technologies Map technologies to develop a gross list of promising technologies in each cluster Assess overall attractiveness of the mapped technologies Select key technologies to be further evaluated List of key technologies to be evaluated Identify value creation opportunities of the selected technologies Identify and understand key uncertainties Identify options Calculate the value Estimate value for individual technologies Evaluate value creation potential vs. ease of capture for individual technologies Evaluate connectivity between technologies Identify and prioritise groups/clusters of technologies Prioritisation of technology clusters and individual technologies What End products Systematic valuation of your technology portfolio is vital for investment decisions

79 010731Technology in E&P-main pack.ppt.ppt 78 Level of uncertainty True ambiguity High uncertainty Continuous or discrete uncertainty Useful prediction Stable situation Low uncertainty Appropriate metrics Preliminary analysis of option value Detailed real option valuation (ROV*) Discounted cash flow (DCF) Economic Profit (IRR) Development and early implementation Commer- cialisation Mature products Level of flexibility Very high High Medium Low Idea Life cycle stages * ROV methodology is discussed further in the Appendix Use an appropriate valuation methodology according to the development stage

80 010731Technology in E&P-main pack.ppt.ppt 79 Funding need in each phase Development and early implementation Commer- cialisation Mature products Moderate High Very high Low Idea Life cycle stages Secure stability, scale and value chain mindset (idea to full use) in funding of technology projects R&D cost in E&P is currently typically 5-10 cents per barrel, while cost improvement attributed to new technology was probably 20-40 cents per year in the first half of 1990s and 10-15 cents in the last part – stability of funding is the key to keep momentum Total funding – see life cycle need

81 010731Technology in E&P-main pack.ppt.ppt 80 Core elements in the new regime for innovation and technology management Strategic role Valuation methodology Funding Supplier incentives Links with smaller players Successful alliances Processes Technology as a business project Organisational structure Culture

82 010731Technology in E&P-main pack.ppt.ppt 81 High attention on R&D and functional excellence Consistent technology approaches across fields But… Weak business coordination Risk of becoming too academic Too complex when there are many fields Strong business focus Empowered organisation Lean and mean But… Risk of weak technology optimisation across assets Short-sighted incentives Less capacity for strategic technology Functional organisation Asset-based organisation E&P Expl orati on Field deve lopm ent Oper ation Con stru ctio n E&P Su ppo rt Asset 1 Asset 2 Asset 3 Most vital functions within assets The new regime means stronger technology processes internally and externally New regime: Asset based with technology architects – The best of both worlds E&P Tech nolo gy units Asset 1 Asset 2 Asset 3 Technology architects Keeps strong business focus within assets Achieves focus and scale in R&D and technology development Ensures coordination and proficiency towards suppliers Internal VC ensures secure, professional allocation of funds for technology projects

83 010731Technology in E&P-main pack.ppt.ppt 82 Key building blocks are a VC unit and technology architects that act as businesses E&P Techn ology units Asset 1 Asset 2 Asset 3 Technology architects Central units allocate funds and make policies Supplier 1 Supplier 2 Other E&P companies CTO/VC Technology units control and execute technology standards, supplier relation and some operational tasks Technology architects lead technology development and implementation projects as businesses to maximise value from new clusters of technologies Assets follow policies and interact on commercial basis with technology architects

84 010731Technology in E&P-main pack.ppt.ppt 83 The internal VC unit has some similarities, but also differences from external VC companies Venture capital unit Central R&D E&P Contract support Tasks for the Venture Capital Unit: Value new technology and allocate funds to projects accordingly – Hold expertise in valuation of technology Yearly valuation and reassessment of all technology projects Member of boards for technology projects –Selection of management –Advisor and door-openers on alliance partners, commercial deals etc. Window towards the external would - Initiate projects and get partners in, or propose participation in external projects Similarities to real Venture Capital companies: Allocate funding Select and coach management Support commercial processes Mindset and people skills Difference from real Venture Capital companies: Synthetic NPV of venture based on calculated improvement in cash flow from new technology Accept higher risks (if upside is significant for companys own assets)

85 010731Technology in E&P-main pack.ppt.ppt 84 Set up technology projects as businesses Search for partners with competence and incentives to speed up development phase Create the technology architect as a real champion. Ensure sufficient budget. Key task is to maximise life-cycle NPV of technology for the company Get partners to share investments and ensure sufficient scale in testing phase Apply best practice development projects, inspired by E&P field development projects Venture Capital methodologies Best practice from product development in other industries Buy testing time from assets/ licenses on a purely economical basis Use a business plan approach and create a (synthetic) cash-flow model to calculate option value / NPV, IRR, value of early testing etc. E&P Su ppo rt Asset 1 Asset 2 Asset 3 Technology architects Increase the future value through proactively positioning in strategic assets

86 010731Technology in E&P-main pack.ppt.ppt 85 The use of mini business plans creates discipline and eases the management task Business plan for a technology development project Description of technology platform Organisation and resources required to carry out the project Funding requirement for the projects Value to the Oil Co. and other partner companies Objectives of project (+goals metrics for measuring performance) Impact of the technology on the industry Roles of other players and competitors Market for the technology

87 010731Technology in E&P-main pack.ppt.ppt 86 Choose organisational solution based on synergy potential across assets vs. within assets Asset 1Asset 2Asset 3 Drilling Maintenance/ topside support Subsurface (G&G+reservoir) Engineering/ Construction Logistics and supply Assessment for each technology type: Need to keep resources and operational control in assets. Align work processes, tools and decide R&D centrally, i.e. balanced Need negotiation power towards suppliers, and directive approach towards assets to develop & test new technology, i.e. strong center Need optimisation within assets on often unique installations, but big synergy potential in buying power, standards and R&D if coordinated, i.e. balanced If optimisation is important across assets is strong center natural Need to push concept thinking and challenge suppliers. Cyclical need, i.e. central unit is natural Central R&D E&P Technology architects High Moderate Low Degree of operational and technology control Technology units Contract support Venture capital unit

88 010731Technology in E&P-main pack.ppt.ppt 87 Asset 1 Asset 2 Asset 3 Best practice technology networks Clear membership of each network Dedicated (full time) owners/leaders Committed (part time) leadership group Frequent local and global meetings/ seminars Personal incentives linked to success of network Fully harmonised processes and procedures across assets High quality common databases and systems to support work processes Strong informal networks and a culture to share experience and ask for advice Ad hoc and permanent project groups to follow up/ conduct research on specific tasks Flexible and non-bureaucratic approach to start and stop networks according to changing needs Strong technology networks are crucial when key technology personnel are in assets Technology units Examples of technology/ competence networks (3 types) : Technology focused –4C Seismic –Downhole separation –Etc. Business concept focused –Tail-end production –Sub-salt exploration –Etc. Discipline focused: –Geology –Geophysics –Reservoir engineering –Etc.

89 010731Technology in E&P-main pack.ppt.ppt 88 Create a new culture through best practice support processes and systems Talent management Performance management Knowledge management Technology market organisation E&P Su ppo rt Asset 1 Asset 2 Asset 3 Technology projects give and take Technology architects Work processes and information flow are mapped, and systems are designed to support processes Common platform across geographies and field development phases are implemented that allow efficient cooperation between different competence groups and assets Information and experience sharing intra-net and extra-net systems are fully in use to support the different knowledge-, technology- and business focused groups KPIs in use focusing both on short and long term objectives. KPIs developed that allow valuation of technologies under development – these KPIs should be used to make it possible to value and trade off long term development versus shorter term objectives Continuous recruiting – avoid cyclical mindset and on-off recruiting Explicit career path descriptions with big upside for high performers Explicit programs for long term development of professionals, including training and rotation

90 010731Technology in E&P-main pack.ppt.ppt 89 Core elements in the new regime for innovation and technology management Strategic role Valuation methodology Funding Supplier incentives Links with smaller players Successful alliances Processes Technology as a business project Organisational structure Culture

91 010731Technology in E&P-main pack.ppt.ppt 90 Use incentives to stimulate suppliers to deliver value, not products – align interests, and open the way for SMEs E&P Asset 1 Asset 2 Asset 3 Technology architects Use KPIs/incentives in a creative way to give suppliers incentives to create value for you as an E&P company, e.g. –Pay per (marginal) barrel produced –Pay linked to field value enhancement (reserve increase, revenue increase and/or cost improvement – use valuation methodology) –Pay linked to HSE indicators Let technology companies own the technology – use contractual means (not ownership of technology) to regulate privileged access to technology Keep channels open for SMEs and industry outsiders with innovative technologies – experience shows the importance of those companies in innovation Supplier 1 Supplier 2 Industry outsider Techn ology units Small Supplier 1 Small Supplier N

92 010731Technology in E&P-main pack.ppt.ppt 91 Set up cooperation agreements to match the specific project needs Type of cooperation partner Form of cooperationRationale Suppliers/customers Downstream industrial players Players with complementary business areas Non-exclusive relationships with large number of individual companies and institutions Gain access to skills the company can not provide Industry expertise Category of relationship Industrial Partners Cooperation agreement with Universities/research centers Exclusive relationship with few strategic partners Large and non-exclusive network with industry and academy Boost idea flow Pre-empt competition Ideas/ technology Venture Capital companies within industry Venture Capital companies outside industry Close relationship with few selected partners Gain smart capital Facilitate exit Smart capital Industrial Partners Local incubators for non-core business Exclusive relationships with few strategic partners Non-exclusive, loose relationship with regional and international players Boost business building skills further Business building Local research institutions International research institutions Loose relationships with top players nationally and globally Signal strength and growth horizons to external stakeholders Capture ideas, talent and capital Reputation

93 010731Technology in E&P-main pack.ppt.ppt 92 Experience shows that JV and JIPs require careful consideration to achieve success ExampleProsCons Joint Venture Partnerships JV Well Dynamics JV merger of smart well and i- well groups (Shell and Halliburton) Clear objectives for JV Separate organisation and culture to parent companies Low commercial viability of venture due to high upfront funding Misalignment of shareholder objectives Lack of knowledge resources within venture Joint Industry Project HIP (US CAR) Deep star JIP –Development of deepwater technology –24 members (both oil companies and OFSE) Broad assessment of technology gaps Helps companies to climb the learning curve Misalignment of objectives between participants Slow implementation speed Lack of direct funding Value impact not understood Lack of knowledge capability within JIP

94 010731Technology in E&P-main pack.ppt.ppt 93 To-dos for E&P companies Innovation and technology development E&P Co. Organization E&P Co. strategy Techn. R&D investments Sourcing Use modern valuation methods as the basis for investment decisions Secure long term stability and scale in funding of technology innovation and development – avoid cyclical behavior Ensure that new, promising technologies are given testing opportunities, e.g. through explicit funds to technology manager to buy testing opportunities Ensure that technology and competence processes across assets are efficient – secure a global approach when appropriate. Use technology architects and internal VC to run technology projects as a business Be open to share and receive ideas with others, avoid not invented here syndrome Stimulate people to drive innovation and technology development Develop a technology based strategy Make deliberate decisions on where to be the technology leader and follower and when to collaborate for each cluster of technologies Protect your intellectual property Understand your suppliers economics, and give them incentives to work jointly with you to to maximise value from new technologies Actively explore alliances with small players

95 010731Technology in E&P-main pack.ppt.ppt 94 To-dos for E&P companies at the industry level E&P companies and technology companies should work at the industry level to… Make patent protection more efficient – give more to the inventors! Make license decision structures more efficient, especially when there are multiple owners (large partnerships) Stimulate Venture Capital into the industry - create independent VC bodies Make a better national and international master plan for academic E&P research Improve recruiting quality and quantity - promote petroleum education for youngsters and the petroleum sector for graduates Level of influence None Low Oil price Cyclical mindset Macro economy Field investments Talent attention Government policies Geological realities Level of influence Factors influencing innovation and technology Patenting

96 010731Technology in E&P-main pack.ppt.ppt 95 To-dos for OFSEs E&P companies R&D drive Secure long term stability and scale in funding of technology innovation and development - get partners (and governments) to commit to fund you throughout the testing phase (to overcome child diseases) Build networks or communities of practice for business issues across org. units – dedicate sponsors to network Be open to share and receive ideas with external parties - avoid not invented here syndrome Make sure that employees understand value drivers in E&P and stimulate them to innovate and sell integrated concepts at high levels in E&P companies Fundamentally rise ambitions towards delivering more value to E&P companies through offering integrated solutions, and capture more of the value through take some of the performance upside and geological/reservoir risk Be the architect of integrated solutions in areas where you can differentiate, and use sub-suppliers when appropriate Be creative and proactive in developing and using contractual models where you get a (larger) proportion of the upside Use JV etc. to secure commitment and long term relation with subsuppliers and customers – but focus on finding business model where value is captured Innovation and technology development OFSE Organisation OFSE strategy Techn. R&D investments OFSE Sourcing


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