Oil and gas investors focusing on new reservoir technology

By Elliott Bouillion, Murphree Venture Partners, Boulder, Colorado

It has often been said that competition, costs, and crises are key drivers to accelerating innovation in any industry. Consider this:

• New oil and gas discoveries are smaller, and reservoirs are becoming depleted more quickly.

• Finding and development costs are up substantially.

• Publicly held exploration and production companies are under intense pressure to improve short-term profitability, production, and reserves.

• Worldwide demand for energy is outpacing the E&P industry’s ability to find and develop new reserves.

In recent years, investment money has flowed to advancing technology innovation in the exploration side of the E&P business. The result has been a sharp upswing in discovery rates. Today, approximately 85 percent of newly drilled wells find hydrocarbons.

Although discovery rates are higher, there is general industry belief that up to 65 percent of discovered hydrocarbons are being left in the ground. Despite these facts, the industry has only been able to stay even in producing oil and gas. As many industry pundits have said, we are “running up the down escalator.”

So, what’s next for meeting the energy demand? Many venture capitalists are betting their investment money on new technology focusing on reservoir production, especially technologies that help recover part of the 65 percent of hydrocarbons that are currently unexploited.

And with the industry having downsized significantly in the last two decades while capital spending has doubled, companies must accept the fact that there are fewer people handling more responsibilities. Couple the above with the looming talent void as workers are aging, companies would do well to realize that reservoir production technology could aid them in leveraging the expertise and knowledge of their workforce.

Oil and gas companies are no strangers to technology. Prior to the 1980s, E&P companies invested in research and development with many innovations such as 3D seismic exploration, horizontal drilling, and measurement while drilling (MWD) coming out of these efforts.

The price crash in the 1980s saw R&D spending fall to about one percent of E&P company budgets, resulting in the service sector doubling its investment to deliver new technology. Yet new technology has been hampered by slow adoption, little incentive to be an early adopter, and a “prove it” mentality.

A McKinsey study showed that the E&P industry on average takes more than 20 years longer to adopt new technology compared to the fastest adoption cycles, which occur in consumer products.

Recognized as one of the most revolutionary technologies in the oil patch, 3D seismic technology moved through the adoption cycle a bit faster than the average. As a result of the financial community embracing 3D seismic and its ability to deliver superior results, oil and gas companies either adopted the technology or faced losing out on investment dollars.

Traditionally, early technology adopters are visionaries or enthusiasts who embrace technology for technology’s sake or are seeking a solution to a previously unsolvable problem. Early adopters in the E&P industry are generally rare, with most seeking new technology only for the most difficult and complex problems. Although this industry is fraught with risk, it becomes nearly risk-adverse when approached with new technology.

Today’s increasing competition, rising costs, and looming oil crisis may just be the needed drivers to accelerate technology adoption. To be sure, the financial community is betting on technology that has been proven in other industries, such as aerospace, industrial engineering, and information technology, and is ripe to be applied to the E&P industry.

To this end, venture capitalists are joining hands with forward-thinking oil companies and service companies and taking an active role in introducing new technologies to the E&P industry through newly formed energy forums.

It is the intent of both groups to bring together entrepreneur-innovators, O&G industry players, and investors to break down barriers to new technology adoption. Both hope collaborative partnerships between innovators and users will increase understanding of the technology’s value and usefulness.

Ultimately, each believes these forums will lead to E&P company executives endorsing new technology more quickly and investing alongside VCs and service companies in jointly developing new technology