Technology Management in E&P

A new regime for innovation and technology management in the E&P industry
McKinsey Research Project
July 2001
010731Technology in E&P-main pack.ppt.ppt
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.
Independent studies conclude that new technologies have created significant value in the industry
EU study: Reserves gains 1990-1997
Billion boe oil and gas reserves in UK, Norway and Denmark Seismic Floaters Other 4,1 3,8 Well
Shell study: Total pre-tax benefit in 5 Shell units

US$ billions (1991-1993)
Subsurface
Drilling
Facilities
32
8.3 ~45 X 0,5 X3,3
Reserves 1990 (minus prod 90-97)
Due to Other Reserbetter factors ves tech1997 nology
Operating cost 1991
Source: EU Energie publication, OGJ, EIA
Total benefit from new technologies
Total cost of R&D and impl.
Op. cost 1994
However, too many potentially high-impact technologies have failed to materialise

Text
February 28, 2000 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 technology than on branch technology in the Year 2001. Financial institutions will spend more on electronic commerce Now its the turn of the small companies ecommerce promised a level playing field. Now its the turn of the small companies ecommerce promised a level playing field.
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 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
Direct Hydrocarbon Indication and slimhole drilling cuts exploration cost by 70%
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
Now its the turn of the small companies ecommerce promised a level playing field. Now its the turn of the small companies ecommerce promised a level playing field.
First platform free deep-water development in operation cost down by 50%
Gas-to-liquid plant to be built with total cost of USD 15/boe
Now its the turn of the small companies ecommerce promised a level playing field.
Downhole separation.multiphase Financial institutions Now its the pumpingsmart wells will Financial turn of the
institutions will spend more on electronic commerce small Financial institutions will spend more on electronic commerce
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? 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
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?
Recent organizational trend has resulted in less willingness and capacity for new technologies
Sourcing: How could we work with our suppliers to maximize value creation from new technology?
Currently there are limited incentives for suppliers to push forward new technologies
McKinsey conducted a knowledge building initiative to gain understanding of the issues and to identify solutions
Phase 1 Develop perspective on innovation and technology in E&P 2001: January-March Phase 2 Share with E&P Co and Technology Co. and adjust April-June Phase 3 Present and support teams and projects July-Dec
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
Interviews 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
15 questions
Ranking of 8 E&P
companies
Participants: leading
OFSEs/technology companies in Houston, London, Oslo, Stavanger
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 Yellow: Technology case studies performed
Subsea and pipeline Subsea trees Multiphase metering Risers and pipelines Subsea separation Topside and platform Generators Separators Valves and pumps FPSO Processing GTL LNG
6
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
Oil and gas supply are predicted to grow faster than other energy sources
World energy supply (Mtoe) 6000 Oil supply 5000 Oil 20002020 2.0 0.6 Gas supply 20002020 19802000 2.9 2.1 Total energy consumption Nuclear Hydro 20002020 1.8 1.3 Average annual growth rate (%)
19802000
4000
Gas 3000
Coal 2000
1000
Other renewable
19802000
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Source: International Energy Agency
The E&P industry faces a dramatic growth challenge

Region Change mmb/d 2000-2020 +9 -3 +10 +15 +6
140
120
Global oil* production medium scenario Million b/day

Region
Latin America Europe FSU M.East Asia Pacific Change (mmb/d) 1980-2000 +5 +2 +5
Technology challenge: +80 mmb/d
100
80
Region
North Sea South America Other Change (mmb/d) 1960-1980 +20 +12 +12
New fields outside M.East Increased recovery
60
40
Middle East FSU / China Other
20
Existing fields and Middle East fields
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
* 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, 9 World Petroleum Assessment 2000 (Reston, VA, July 2000), McKinsey
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
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).
10
Deep water exploration is high on the agenda for leading international petroleum companies
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
Exploration/ Deep water/ rough water
Focus areas: Deepwater Gulf of Mexico, West Africa (Angola, Nigeria), South America, Caspian Region, Eastern Canada, Middle East
Texaco-Chevron June 2001 ExxonMobil Annual report 2000

11
But successful deep water exploration and development requires technological breakthroughs
Exploration/ Deep water/ rough water
Reduce exploration drilling costs Reduce development costs Resolve environmental issues regarding
gas processing
Direct Hydro Carbon Indication (DHI)

(using seismic attributes) Dual-gradient drilling Deepwater slimhole drilling Subsea processing Downhole separation
12
Mature offshore areas could be further exploited through new technologies
Mature area offshore - IOR
Increased oil recovery Improved economics of marginal fields
Smart wells Downhole separation 4C/4D seismic Reservoir optimisation and management
13
The shift to gas poses additional technological challenges

180 160 140 120 100 80 60 40 20 ExxonMobil web annual report 2001 Oil and HC liquids
ExxonMobil is exploring the opportunity to apply its proprietary GTL technology by developing a world-scale GTL plant in Qatar
Million boe/day
Gas
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Source: OGJ
14
Stranded gas reserves* need new technology to be monetised

Trillion cubic feet U.S. 53 Norway 49
ESTIMATE
Qatar 226
FSU 1,340
Algeria 67 Nigeria 86
Malaysia 38
Indonesia 47
Venezuela 52
Reduce processing costs Reduce transportation costs and

connect gas fields to markets
Iran 505
LNG technologies Gas-to-liquid technologies (GTL) Sour gas processing

technologies
Abu Dhabi 154

Australia 47
* 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 15
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
Reduce CO2 emission, including gas flaring Reduces oil to water Gas re-injection technologies Decarbonisation technologies GTL
16
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
700-800
Higher productivity More onshore work Group work Streamlined work processes
400-500
Broadband communication
200-300
and remote real-time operations Visualisation and groupware
70-100 1980
100-150
1990
2000
2010
2020
17
Business challenges Mature Area/ Brownfield Possible new technologies
Increase oil recovery rate Improve economics of marginal

fields Reduce operating costs
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
Reduce exploration drilling

Deepwater costs Reduce development costs
Gas e.g. in Middle East
LNG technologies Reduce processing costs Reduce transportation costs and Gas-to-liquid technologies (GTL) Sour gas processing technologies connect gas fields to markets Reduce CO2 emission, incl. gas
flaring
Environmental
Gas re-injection technologies Decarbonization technologies GTL Broadband communication and

remote real-time operations Visualization and groupware
18
Productivity
Higher productivity Demanning offshore Streamlined work processes
19
The role of smaller players has been crucial in the innovation and technology development process
Role* of various players through the development process (based on 15 technology case studies) [%]
15
8
14 1
38
14 0
25
2 0 18 17
Non E&P
Academic SME
40
2 12 23 2 17
9 22
21 Big 3 OFSE Other E&P
29
32
43 Majors
Idea
Prototype
1st field test
Commercially available
50% Penetration
* 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 20 Source: Industry journals, interviews
Development timelines of key E&P technologies

Sub-sea trees GTL MWD Horizontal drilling 3D seismic FPSO Multiphase metering Subsea processing Downhole separation 4C seismic
? ? ? ? ? ? ? ? ? ?
Idea to
prototype Prototype to field test Field test to commercial Commercial to 50% penetration Successful cases
Slag cement Expandable casing

Dual gradient drilling Seismic while drilling Smart wells Deepw.slimhole drilling Visualisation
1960
Source: Industry journals, interviews
1965
1970
1975
1980
1985
1990
1995
2000
21
Visualisation technologies have been developed efficiently

1995 2000 More than 100 large screen visualisation centers are expected by the end of 2001
Pioneers Norsk Hydro, Phillips, Statoil and Arco and Texaco initiate others install visualisation development visualisation centers centers. Experience is drawn from space, BP tests medicine and construction successfully, Norsk Hydro installs plans to build virtual reality center 15 centers worldwide
Value impact:
Drivers:
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
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
22
The success of 3D seismic required both pull from E&P companies and push from technology companies
2 streamers 5 streamers 12 streamers
1970
Better positioning made 3D possible (Norwegian shipping tradition met E&P)
1980
1990
2000
Delay in development
Elephant fields (Statfjord) fully covered by 3D Increased computing power
New entrant (PGS) pushed development;

multi-streamer, onboard processing Multiclient seismic acquisition
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 (19851994) 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
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 23 technology supplier
There have been significant delays for most technologies

Sub-sea trees GTL MWD Horizontal drilling 3D seismic FPSO Multiphase metering Subsea processing Downhole separation 4C seismic
? ? ? ? ? ? ? ? ? Cases examples ?
Periods with low activity

? Not yet successful commercialized
Slag cement Expandable casing

Dual gradient drilling Seismic while drilling Smart wells Deepwater slimhole drilling Visualisation
1960
1965
1970
1975
1980
1985
1990
1995
2000
24
Measurement While Drilling (MWD) was very slow to develop

1970 1980 1990 1995
Elf and Raymond incorporate Teleco to push development of MWD Teleco Industry outsider demonstrates Raymond Engineering MWD develops mud pulse telemetry Elf research initiated
EWR MWD devel oped
Price shock. Full Amoco, Exxon, penetration Shell... begin using MWD Revenue: US $m Teleco 132 Schlumb. 70 Other 70
Schlumberger research initiated
Schlumberger acquires Analysts to develop MWD (but do not launch MWD)
GeoLinks Orienteer MWD system
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
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 25
Deepwater Slimhole Drilling has been slow to take off

Value Impact
Smaller rigs and less

Description
Use of thinner pipes with stronger materials and

narrower well diameters for drilling
Hive compensation
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
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)
Conventional
Slimhole
26
The key drivers of innovation and technology
Drivers
Examples
Strategy
E&P players with strong strategic

interest (few portfolio alternatives) in the new technology are involved
Need for horizontal drilling in Austin

chalk + Troll field (Hydro)
Funding
Decision makers that will commit

money are in charge Developments are asset-light
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
Organisation
Organizational culture, systems

and incentives to foster and test ideas
Sourcing
Technology companies exist which

have strong incentives to push new technologies E&P companies create demand for new technology
PGS pushed 3D seismic Teleco pushed MWD Demand in E&P companies induced
OFSEs to provide MWD
27
Barriers to technology development
Idea
Prototype
1st field test
Commercially available
50% penetration
Barriers
Weak understanding of strategic rationale for being technology leader Lack of stability in funding
Lack of Patent protection
Organisational Insufficient conservatism and cooperation with risk averse approach technology to technology suppliers decisions
Not invented here syndrome
28
With a few exceptions the main classes of new technology are still moving slowly
Classes of technologies Communication and visualisation Current status Comment 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
Reservoir
Downhole
Drilling and logging
Subsea and pipeline
Processing
Topside and platform
Currently very little innovation around separators, generators, pumps, etc. 29
The pace of innovation in E&P has been slow relative to that in other industries
Average duration of the four phases in different industries
Consumer products (US average) Medicine (Merckaverage) ADSL (broadband telecom) E&P industry (15 tech. Cases) 0 5 10 15 20 25
Idea to
prototype Prototype to field test Field test to commercial Commercial to 50% penetration
30
35
Time (years)
30
31
The conduct of E&P companies and OFSEs directly influences innovation and technology development
Factors influencing innovation and technology
Level of influence
Geological realities
Patenting Government policies Field investments
Oil price
Macro economy
Cyclical mindset
None
Talent attention
Low
Techn. R&D investments
E&P Co. Organization
Innovation and technology development

E&P Co. strategy Sourcing
High
32
Player conduct has varied significantly and today leads to a poor environment for technology and innovation
Oil Price Macro trend Actual price
Environment for technology and innovation
++ Very positive + o Positive Neutral Negative
-- Very negative
1980
1985
1990
1995
2000
++ ++ ++ +
+ 0
++ + + +
0 0 0
+ + 0 +
--0
0 0 -0
33
Influenced by macro trend
Macro trend downward is partly a result of the cyclical behaviour following the industry cycles
Oil Price
Environment for technology and innovation
Industry cycles
++ Very positive
Actual price
+ o -
Positive Neutral Negative
-- Very negative
1980
1985
1990
1995
2000
++ ++ ++ +
+ 0
++ + + +
0 0 0
+ + 0 +
--0
0 0 -0
34
Follow industry cycle
Few companies have been able to identify and execute on a technology based strategy
Distinct technology based strategy (V) (V) (V) (V) (V) (V) (V) - No apparent technology-based strategy (V) Elements of a technology based strategy V Fully implemented technology based strategy
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
Our growth strategy is based on privileged relations within specific countries. Technology plays a minor role
E&P company
E&P company
We have been in the technology forefront many times, but it has been bits and pieces. We never developed any distinct strategy
35
Some companies cite the lack of correlation between performance and innovation as a reason for not taking a stronger role in technology and innovation
25%
Total return to shareholders 1994-2001 ENI
20%
TotalFinaElf Shell ExxonMobil
BP
15%
ChevronTexaco Norsk Hydro Unocal
Free rider mentaity
10%
5%
0% 1.5 2.0 2.5 3.0 3.5 4.0 4.5

36
The free rider mentality is a significant strategic weakness in the industry

What is apparently a rational decision for an individual company. has negative consequences for all when aggregated up to the industry level
If someone launches a new, good technology, our suppliers will give us access to it within less than 6 months
Why invest, it is safer to wait and see
Hey, why do we need to wait so long for new technologies
Our investments has not paid off, now it is our turn to wait for others to carry the R&D burden
E&P comp any
E&P company
Industry spokesman
Technology company
37
Slow growth in E&P patents is symptomatic of poor patent protection for the industry
Number of patents as a fraction of number in 1976-80 8 Pharmaceutical Industrial automation We have many patents, but we nevertheless see similar products showing up rather fast.
7
6 5
4
Automobile 3 2 1 0 1976-80 1981-85 1986-91 1991-95 1996-01
Construction
E&P
Technology company
Source: US Patent and Trademark Office
38
R&D is increasingly outsourced, and central funding has been reduced drastically
R&D funding in the E&P industry
Year 2000 US$ (billions)
4,1 3,6
OFSEs R&D 1,1
1,7
Oil and gas companies
3,0 1,9
Business units/ Licenses Central
1990
2000 E
39
R&D in E&P is also low compared to other industries

R&D Investment (%)
Software & IT
Pharma
Health
13.6 13.5 11.0 6.1 5.3 4.4 4.3 4.3 2.4 1.8 1.5 0.9 0.9 0.8
40
Chemicals
Electronics Aerospace/Defence Media Automobiles Telecoms Construction Metals Oil & Gas Beverage Tobacco
R&D expenditure has dropped by 50% in the last decade with sharpest decline in the US
1999 US$/boe (adjusted by E&P share of total revenues)
0.20 0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00
Average R&D spend 1995-2000 cent/boe

Norsk Hydro 35 28
Statoil
Shell ENI-Agip
9,3
9,0 8,5 7,6 6,5 5,8
Chevron
BP Chevron Conoco Shell Exxon Phillips Texaco 1991 1995 2000 BP Texaco Exxon Philips Conoco
5,7
5,1
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
41
There is no master plan behind academic and government driven R&D
There is a hopeless duplication of Academic R&D efforts and no master plan
Neither governments nor companies have focused on R&D, and the result is fragmented activity in many different academic institutions
Director, E&P company
R&D manager, E&P company
42
The consequence is that nobody takes responsibility for long-term R&D
Long term R&D
E&P companies
Service companies
Technology is not
core Technology will become available we will then be fast followers Institutes / academia
We are not paid for Duplication Lack resources Lack of practical

exposure and business judgment that It could even hurt our business And do we know what they need?
43
Different opinions persist regarding the shift in approach to R&D

OFSEs can do long term R&D 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 OFSEs cannot do long term R&D Dont expect anything real new from the big OFSEs 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
Small technology company
US E&P company First and recordsetting performance
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
44
Schlumberger web-site
Investments have been very cyclic in the E&P industry

Investments US$ (billions) Oil price US$/bbl
30 25 20 15
35 30 25 20 15
Development cost Nominal oil price Exploration cost
10 5 0
10 5 0
77
79
81
83
85
87
89
91
93
95
97 19
19
19
19
19
19
19
19
19
19
19
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 45
19
99
Capital intensive technologies are often stranded in a funding Death Valley for years
E&P industry
Field test to commercial 4C seismic

Offshore slimhole drilling Slag cement
Downhole separation
Cash flow
Subsea separation
Multiphase metering
Time
R&D funds available
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
46
The Death Valley
The average field size has decreased, and fields are no longer sponsors of new technologies
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
137 118 105 96

78
49 25
11 16 12 7 3
68-75 76-80 81-85 86-90 91-95 96-00
17
Without Ormen Lange gas field
68-75 76-80 81-85 86-90 91-95 96-00
47
There is a shortage of funding available for the remaining smaller players

Absolute size USD millions in equity funds in Europe 1999 Communication IT Chemicals/ material Pharma
1,342 1,006 842 639 518 453 202 2,915 2,718
Relative size Equity funds/market cap

0.16 1.45 0.95 0.23 0.69 0.43 0.28 0.02 0.02
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
Transport Construction
Electronics Financial services Energy
A Venture Capital partner
48
The move from functional to asset-based organisations has weakened the ability of some companies to innovate and develop new technology
E&P Expl orati on Field deve lopm ent Oper ation Cons tructi on Sup port Asset 1
E&P
Asset 2 Asset 3
All vital functions within assets
Functional 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
Asset-based organisation
Strengths: Strong business focus, good coordination 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 49
Safety concerns also limit the willingness of E&P organisations to test new technologies
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
We are dealing with people in high risk environments, we cannot risk life and property by playing around with fancy new technologies
Technology company E&P manager
50
Survey results from suppliers indicate that E&P companies need to improve in most areas
Survey question Key Success Factors Range of survey results
Best in class
Generate ideas internally In relation to technology to Understand the value what degree does Use external ideas / products the E&P Share ideas / products externally company... Communicate new tech. internally
Worst in class
Companies in survey BP ChevronTexaco ENI Exxon Norsk Hydro Shell Statoil TotalFinaElf Unocal Companies surveyed
Fund during early phase development

Provide field testing opportunities Effectively manage JIPs Collaborate with small tech. companies Implement new technology effectively
To what degree does the E&P company have appropriate...
Commercial skills Internal processes / procedures Company structure Internal incentives External contractor incentives
Brit Bit FMC Halliburton Inside Reality PGS Read Schlumberger SPS-AFOS Stolt
Poor
Source: McKinsey surveys
Moderate
Excellent
51
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
52
Suppliers rank Norsk Hydro and BP as technology leaders
Average of all questions Norsk Hydro
BP
Shell Statoil TotalFinaElf ChevronTexaco Unocal ENI
Exxon
Poor Moderate Excellent
Source: McKinsey surveys of 9 technology suppliers: Brit Bit, FMC, Halliburton, Inside Reality, PGS, Read, Schlumberger, SPS-AFOS, Stolt
53
E&P companies can be classified in four distinct groups when evaluated for their technology leadership and external cooperation R&D
Internal oriented leaders
Technology and innovation orientation (Average R&D spend level* (1996-2000) + total survey score) Shell High Statoil
investments
Norsk Hydro BP
External oriented Leaders
ENI TotalFina Elf ChevronTexaco
Low
Internal oriented followers
ExxonMobil Enterprise Conoco Amerada Hess
External oriented followers
Low High External cooperation orientation (Score on survey - external orientation + qualitative assessment )
Source: 10 Ks/annual reports, Survey, Interviews; Team analysis, 54
Each group has some typical ways to approach technology and innovation
Leading in some technologies Large central technology
departments Often want to own technologies themselves
Shell Statoil Norsk Hydro 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
Leader
ENI TotalFina Elf
ChevronTexaco
Enterprise
Follower
ExxonMobil Conoco Amerada Hess
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
Internal External
Source: 10 Ks/annual reports, Survey, Interviews; Team analysis,
55
A talent shortage in the E&P industry is cited as a key barrier to technological innovation
Number of E&P professional job applications to a major oil company (% of 1990 applications) Top tier recruits in a major oil company (% of total recruitment)
Disguised Client Example
100
98 59 40 2000
6 4 1
1992 1995 2000
1990
1992
1995
Recruitment of staff with potential to become senior management, in a major oil company (% of 1980 intake)
100 8 0 6 0 4 0 2 0
Headcount in 25 largest E&P companies (millions)

1,6 1,4 1,12 0,8
Required level
0,6
0,5
0 1980
1980 1985 1990 1995
1985
1990
1995
2000
2005 56
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) 70
(Changed formula)
30
65
28 26 24 22 20 18 16
Petroleum
Top 2% of cohort
Product Design
60 55 50 45
Industrial Economics Physics and Math. Architecture Electrical Engineering Marine Engineering Mech. Engineering Civil Engineering
Top 10% of cohort
Petroleum
Top 30% of cohort
40 35
Chemistry Engineering
14 12 10
30
25 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993
1995
1997
1999
57
The OFSE industry is highly concentrated

Market share - selected segments Revenue 1999 $Million 15,664 9,568 5,080 1,087 775 475 6% Veritas Wireline logging 14% 57% 20%
Company Halliburton Schlumberger Baker Hughes BJ Services PGS CGG
Cement 38% 29%
3D seismic 5%
50%* 5%
20%
10%
12%
265
* 50/50 joint venture of Western GECO Source: Spears and Associates, Inc. 58
And the Big 3 OFSEs have primarily entered new technology markets through acquisitions
In-house innovation*
Acquired**
Adaptor No role played
No. of new technologies Halliburton
Schlumberger
Baker Hughes
* 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
59
With a mindset of selling products rather than value some companies hold technologies back
We were not engaged in wireline logging, and therefore pushed MWD aggressively at an early stage
We would rather sell a large number of commodity wells than a few advanced ones
Baker Hughes An OFSE
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
60
Some companies have focused on selling value and have been innovative
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
61
Smaller companies have major difficulty in accessing E&P companies
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 An 50% OFSE
Our company is built to flip [sell company], we dont get anywhere alone marketing etc. will be far too expensive
Smaller technology company Offshore & Marine
62
In summary, several barriers impede the four key drivers of technology

Strategy
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)
Funding
Organisation
Sourcing
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 63
With the result that the industry dynamics for technology have become dysfunctional
E&P companies
Increasingly expecting others to do

R&D Not changing contractual models accordingly
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
64
65
The conduct of E&P companies and OFSEs directly influences innovation and technology development
Level of influence
Oil price
Macro economy
Cyclical mindset
None
Talent attention
Low
Techn. R&D investments
E&P Co. Organization
Innovation and technology development

E&P Co. strategy Sourcing
High
66
Core elements in the new regime for innovation and technology management
Strategic role
Valuation methodology Funding Processes Technology as a business project Organisational structure Culture
Supplier incentives Links with smaller players Successful alliances

67
Determining your role
Observations that say Lead
Observations that say Follow
The demand for new oil will be huge

Lack of appropriate technology is still a show stopper for many fields
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
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
Also in Oil and Gas we see that

technology companies are taking over R&D and a larger part of the value chain
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
68
Some companies have taken the role of technology leaders

Examples
BHP Petroleum was a pioneer in FPSO developments in

The FPSO expert Australia, and has leveraged this in Vietnam
Shell recognised the potential early, tied up more than

The deepwater expert 600 deepwater blocks in GoM with a dedicated organisation Petrobras became a leading deepwater player in South America Anadarko has developed superior skills within sub-salt imaging, deepwater exploration and option based risking
The sub-salt exploration expert
Statoil has aggressively invested in IOR-technology for

Mature giant field expert extending life of own giant fields in the North Sea
The arctic expert
Yet to be seen?
The environmental expert
Yet to be seen?
69
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**
27 24 21
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
13
Shell
Land position Blocks
Average field size MMBOE
Water depths >1,500 feet ** to 1991
Exxon
633 200 8
Conoco Onyx
135 128 5 115 128 3 3 90 901 70
Number of finds
Unocal had a Follower role that has also been successful in drilling
Well time, days
153
-55%
68
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

Industry average comparable Garden Banks wells Spirit Energy Garden Banks 74 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
71
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
Deal Making
Gain access to new opportunities and add value by applying technology

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
72
Select what role you want to play for each technology cluster
Examples
Look at clusters of technologies
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.
Leader
After the leader/follower decision, decide on

cooperation strategy internal versus external/collaborative
Follower
Source: BBC; press clippings 73
Be sophisticated when choosing approach for each technology cluster

ILLUSTRATIVE
Overall approach of E&P companies E&P companies approach to Leader each specific cluster of technologies Follower Internal Leader
Shell
ENI TotalFina Elf ChevronTexaco Statoil Norsk Hydro
External
BP
Leader
Follower
Enterprise Conoco Amerada Hess
Follower
Exxon Mobil
Internal
Leader Follower Internal
External
Internal
External
External
74
There are four main technology strategies for each technology cluster
Description Be an innovator but keep cards close Actively use patents as protection Establish internal R&D projects Corporate initiatives BU or cross-BU Leader 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 When to use
Be architect/facilitator When technology is of Lead and drive through key financial and strategic
collaborative efforts JV / JIP Alliances/partnerships Corporate venture capital importance, but company believes that joint R&D is most efficient, lacks some skills and/or wants to share the risk
Innovate Lead and and protect collaborate Prepare and adapt Internal Pick and play External 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 75
Follower
Description When to use Let others drive When technology is of development but actively moderate importance monitor and test and could give Experiment/prepare competitive advantage internal systems to allow if rolled out rapidly, but fast roll-out others lead
Strategic role

76
Systematic valuation of your technology portfolio is vital for investment decisions

Identify technologies Calculate value
Categorise and prioritise
What
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
Identify value creation

opportunities of the selected technologies Identify and understand key uncertainties Identify options Calculate the value
Evaluate value creation

potential vs. ease of capture for individual technologies Evaluate connectivity between technologies Identify and prioritise groups/clusters of technologies
End List of key technologies products to be evaluated
Estimate value for

individual technologies
Prioritisation of
technology clusters and individual technologies
77
Use an appropriate valuation methodology according to the development stage
Life cycle stages
Idea
Development and early implementation
Commercialisation
Mature products
Level of uncertainty
True ambiguity High uncertainty
Continuous or discrete uncertainty
Useful prediction
Stable situation Low uncertainty
Level of flexibility
Appropriate metrics
Very high
High
Medium
Low
Preliminary Detailed real option analysis of option valuation (ROV*) value
Discounted cash flow (DCF)
Economic Profit (IRR)
* ROV methodology is discussed further in the Appendix
78
Secure stability, scale and value chain mindset (idea to full use) in funding of technology projects
Life cycle stages
Idea
Development and early implementation
Commercialisation
Mature products
Funding need in each phase
Moderate
High
Very high
Low
Total funding see life cycle need
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
79
Strategic role

80
The new regime means stronger technology processes internally and externally
E&P Expl orati on Field deve lopm ent Oper ation Con stru ctio n E&P E&P
Su Asset Asset Asset 1 2 3 ppo rt Most vital functions within assets
Tech Asset Asset Asset 1 2 3 nolo gy units Technology architects
Functional organisation
Asset-based organisation
New regime: Asset based with technology architects The best of both worlds
High attention on R&D

and functional excellence Consistent technology approaches across fields
Strong business focus Empowered organisation Lean and mean
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
But
Weak business
coordination Risk of becoming too academic Too complex when there are many fields
But
Risk of weak technology

optimisation across assets Short-sighted incentives Less capacity for strategic technology
81
Key building blocks are a VC unit and technology architects that act as businesses
Central units allocate funds and make policies CTO/VC Technology units control and execute technology standards, supplier relation and some operational tasks
E&P
Assets follow policies and interact on commercial basis with technology architects
Techn ology units
Asset 1
Asset 2
Asset 3
Technology architects Technology architects lead technology development and implementation projects as businesses to maximise value from new clusters of technologies
Supplier 1
Supplier 2
Other E&P companies
82
The internal VC unit has some similarities, but also differences from external VC companies
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:
Contract support Venture capital unit Central R&D
E&P
Difference from real Venture Capital companies:
Allocate funding Select and coach

management Support commercial processes Mindset and people skills
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)
83
Set up technology projects as businesses

E&P
Use a business plan approach and create a (synthetic) cash-flow model to calculate option value / NPV, IRR, value of early testing etc. Create the technology architect as a real champion. Ensure sufficient budget. Key task is to maximise life-cycle NPV of technology for the company
Su Asset Asset Asset 1 2 3 ppo rt Technology architects
Increase the future value through proactively positioning in strategic assets
Search for partners with competence and incentives to speed up Buy testing development time from phase assets/ licenses on a purely economical basis
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
84
The use of mini business plans creates discipline and eases the management task
Organisation and resources required to carry out the project
Description of technology platform
Impact of the technology on the industry
Business plan for a technology development project
Objectives of project (+goals metrics for measuring performance)
Value to the Oil Co. and other partner companies
Funding requirement for the projects
Market for the technology
Roles of other players and competitors

85
Choose organisational solution based on synergy potential across assets vs. within assets
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
E&P Contract support Venture capital unit Central R&D
Degree of operational and technology control High Moderate Low
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
Subsurface (G&G+reservoir) Drilling Maintenance/ topside support Logistics and supply Engineering/ Construction Technology units
Asset 1
Asset 2
Asset 3
Technology architects
86
Strong technology networks are crucial when key technology personnel are in assets
Examples of technology/ competence networks (3 types) :
Discipline focused:
Geology Geophysics Reservoir engineering Etc.
Technology focused
4C Seismic Downhole separation Etc.
Business concept focused

Tail-end production Sub-salt exploration Etc.
Best practice technology networks
Technology units
Asset 1
Asset 2
Asset 3
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
87
Create a new culture through best practice support processes and systems
E&P
Knowledge
management
Su Asset Asset Asset 1 2 3 ppo rt Technology architects Technology projects give and take Technology market organisation
Performance
management
Work processes and information
KPIs in use focusing both on flow are mapped, and systems are short and long term objectives. designed to support processes KPIs developed that allow Common platform across Talent valuation of technologies under geographies and field development these KPIs management development phases are should be used to make it implemented that allow efficient possible to value and trade off cooperation between different Continuous recruiting avoid long term development versus competence groups and assets cyclical mindset and on-off shorter term objectives Information and experience recruiting sharing intra-net and extra-net Explicit career path descriptions systems are fully in use to support with big upside for high performers the different knowledge-, Explicit programs for long term technology- and business focused development of professionals, groups including training and rotation
88
Strategic role

89
Use incentives to stimulate suppliers to deliver value, not products align interests, and open the way for SMEs
E&P
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 Techn ology units Asset 1 Asset 2 Asset 3
Technology architects
Supplier 1
Supplier 2 Small Small Supplier 1 Supplier N
Industry outsider
90
Set up cooperation agreements to match the specific project needs

Category of relationship Industry expertise Rationale Form of cooperation Type of cooperation partner
Gain access to skills

the company can not provide
Non-exclusive
relationships with large number of individual companies and institutions Exclusive relationship with few strategic partners Large and non-exclusive network with industry and academy
Suppliers/customers Downstream industrial players Players with complementary

business areas Industrial Partners Cooperation agreement with Universities/research centers
Ideas/ technology
Boost idea flow Pre-empt competition
Smart capital
Gain smart capital Facilitate exit Boost business

building skills further
Close relationship with few

selected partners
Venture Capital companies within

industry Venture Capital companies outside industry
Business building
Exclusive relationships
with few strategic partners Non-exclusive, loose relationship with regional and international players Loose relationships with top players nationally and globally
Industrial Partners Local incubators for non-core

business
Reputation
Signal strength and

growth horizons to external stakeholders Capture ideas, talent and capital
Local research institutions International research institutions

91
Experience shows that JV and JIPs require careful consideration to achieve success
Example Joint Venture Partnerships JV Pros Cons
Well Dynamics
JV merger of smart well and iwell 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
92
To-dos for E&P companies

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 Techn. R&D investments Innovation and technology development E&P Co. strategy Sourcing
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 E&P Co. Organization
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
93
To-dos for E&P companies at the industry level

Level Level of of influence influence
Oil price
Macro economy
Cyclical mindset
None
Talent attention
Low
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
94
To-dos for OFSEs

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) Techn. R&D investments Innovation and technology development OFSE strategy OFSE Sourcing
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
OFSE Organisation
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 E&P companies R&D drive
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
95

Technology Management in E&amp;P

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A new regime for innovation and technology management in the E&P industry

McKinsey Research Project

010731Technology in E&P-main pack.ppt.ppt

The E&P industry is technologically one of the most advanced

010731Technology in E&P-main pack.ppt.ppt

Shell study: Total pre-tax benefit in 5 Shell units

Reserves 1990 (minus prod 90-97)

Due to Other Reserbetter factors ves tech1997 nology

Operating cost 1991

Source: EU Energie publication, OGJ, EIA

Total benefit from new technologies

Total cost of R&D and impl.

Op. cost 1994

010731Technology in E&P-main pack.ppt.ppt

However, too many potentially high-impact technologies have failed to materialise

January 15, 2001

First platform free deep-water development in operation cost down by 50%

Gas-to-liquid plant to be built with total cost of USD 15/boe

010731Technology in E&P-main pack.ppt.ppt

Investments in new technology: Should we fund technology development, if so how ?

010731Technology in E&P-main pack.ppt.ppt

Survey on E&P companies by OFSEs

010731Technology in E&P-main pack.ppt.ppt

We conducted many case studies within the main categories of technologies

010731Technology in E&P-main pack.ppt.ppt

Innovation and introduction of new technologies in E&P is inefficient

010731Technology in E&P-main pack.ppt.ppt

010731Technology in E&P-main pack.ppt.ppt

The E&P industry faces a dramatic growth challenge

Global oil* production medium scenario Million b/day

Technology challenge: +80 mmb/d

New fields outside M.East Increased recovery

Middle East FSU / China Other

Existing fields and Middle East fields

010731Technology in E&P-main pack.ppt.ppt

010731Technology in E&P-main pack.ppt.ppt

Texaco-Chevron June 2001 ExxonMobil Annual report 2000

010731Technology in E&P-main pack.ppt.ppt

Direct Hydro Carbon Indication (DHI)

010731Technology in E&P-main pack.ppt.ppt

Mature offshore areas could be further exploited through new technologies

Mature area offshore - IOR

Increased oil recovery Improved economics of marginal fields

010731Technology in E&P-main pack.ppt.ppt

The shift to gas poses additional technological challenges

010731Technology in E&P-main pack.ppt.ppt

Stranded gas reserves* need new technology to be monetised

Reduce processing costs Reduce transportation costs and

LNG technologies Gas-to-liquid technologies (GTL) Sour gas processing

Abu Dhabi 154

010731Technology in E&P-main pack.ppt.ppt

Growing environmental concerns add to the need for new technologies

010731Technology in E&P-main pack.ppt.ppt

010731Technology in E&P-main pack.ppt.ppt

Increase oil recovery rate Improve economics of marginal

Reduce exploration drilling

Gas e.g. in Middle East

Gas re-injection technologies Decarbonization technologies GTL Broadband communication and

Higher productivity Demanning offshore Streamlined work processes

010731Technology in E&P-main pack.ppt.ppt

Innovation and introduction of new technologies in E&P is inefficient

010731Technology in E&P-main pack.ppt.ppt

21 Big 3 OFSE Other E&P

1st field test

Technology Management in E&P

Technology Management in E&P