Long before the slowdown of the Asian economy in early 1998 triggered the collapse of crude oil, petroleum companies around the world had been altering the way that they dealt with research and development. In this third in a series of articles, The RECORDER examines the impact of the latest merger and acquisition phase on R&D.
Soon after graduating with a Ph.D. in mathematics, Sam Gray joined Amoco and went to work at the Tulsa Research Lab in Oklahoma. “The lab was a separate building with state-of-the-art equipment and a well-stocked library,” he recalls. “We had some far-out research projects - there were even people looking at cold fusion.”
The time was the early 1980s, the ‘golden age’ of R&D in the petroleum sector. “Geophysical research has taken a big beating in the last 15 years or so,” says Gray. “Research funding for the sector has dropped from its peak of the early 1980s and below its mean level of 1990 or so.”
The position of Talisman Energy, a major independent based in Calgary, is representative of the industry today. “We adopted a philosophy of dropping all R&D 10 years ago,” says Mo Crous, manager of exploration technology for Talisman. “We had some people in our group doing applied research in seismic processing, but we could hardly do it justice. We didn’t have enough people, time and resources to do it professionally. The value of proprietary research was less than the cost.”
Yet studies indicate that R&D creates value in the petroleum sector. In a paper recently published in THE LEADING EDGE, Roger Anderson of Columbia University’s Energy Research Center looked at those oil companies that invested the largest percentages of their E&P budgets in R&D over the last 15 years. The market evidence showed that most of the super majors with superior R&D budgets, such as Exxon, Shell, and Mobil, clearly outperformed their competitors. “The conclusion is that the super majors have indeed reaped significant advantages from their technological leadership of the industry,” he noted. “Yet the R&D/E&P expenditure ratio for all companies has steadily declined throughout the 1990s.”
There are many opinions regarding the causes of geophysical R&D vicissitudes in the last decade, but it is worthwhile to start by examining the business evolution that has occurred within the major oil companies. One of the most basic changes is the way that oil companies internally evaluate their own businesses. Prior to the 1990s, many firms looked upon their entire operation as one profit making entity. Over the last decade however, the business model has shifted to examine each department for its contribution to the total picture. “The business structure has illuminated the relatively poor internal rate of return that oil companies have gotten for their internal R&D,” noted Thomas Bates, senior vice president of Baker Hughes, at a recent conference.
There has also been a shift of focus from exploration to lowering the cost of production. David Bamford, BP’s head of exploration, recently noted that his company’s new approach is to attack the total cost of a barrel, which is the sum of finding, development and production costs. “Geophysicists must take their focus away from exploration and more toward production, development and appraisal.”
For many years, oil companies also jealously guarded their R&D, prizing new technology as a competitive advantage. Now, many view knowledge as just another asset that forms part of a portfolio of goods. “It is up to those that own intellectual property to decide which is best kept in house as a strategic differentiator and which is monetizable, generating extra profit,” said Matthias Bischel, a director of Shell Deepwater Services.
“Management’s attitude now is that oil companies can go and purchase whatever research or new technology they need to reduce risk at the geophysical supermarket,” says Rob Vestrum, manager of R&D for Kelman Processing, in Calgary. “It’s a better business model, because the geophysical research is focused at companies that make research their core business, and at well-funded university consortia.”
Seismology also finds itself more and more in competition with other technologies, such as gas-to-liquids (GTL), for R&D funding. “If you look at the money we’re laying out for the next generation of integrated imaging tools versus gas-to-liquids R&D, the seismology is a quarter of the liquids,” said Don Paul, vice president of Chevron, at a recent SEG conference. “That’s because the net positive value of the likely outcome is five times greater.
Mergers and acquisitions have contributed to the trend of fewer research dollars and opportunities by eliminating some companies. For instance, Mobil, Elf and Amoco, all of which were known for their aggressive research labs, have been swallowed up. “Essentially, BP outsourced most of their research in the early 1990s, and when they merged with Amoco, they eventually closed the Tulsa R&D shop,” says Gray. “BP Amoco chose selected technologies to move to London and Houston. They took what started as 11/2 research facilities in 1999 and reduced them to about a half by 2000, continuing the process when BP Amoco acquired ARCO. Back in 1990, there were probably around 40-50 research geophysicists at the Amoco facility. My guess is that five to ten remain. That’s an 80% reduction.”
The overall result has been an off-loading of R&D. In some cases, the oil industry has imported technology from other sectors, such as computers and information technology, but in most cases, the slack has been taken up by service companies. “In 2000, Schlumberger spent over US$1 million per week on seismic R&D,” says Al Chateney, Canadian land manager for Western Geco. “We have 4,000 technical experts and over 1,000 scientists in R&D. Schlumberger’s commitment exceeds the rest of the service industry combined.”
Most of Schlumberger’s geophysical R&D effort is going toward the development of Q-acquisition systems, such as Q-Marine and Q-Land. Q-Marine is a towed-streamer seismic data acquisition system that combines streamer steering technology with single-sensor recording. Exploiting recent advances in both electronics and data communication networks, the system allows recording by more than 4,000 individual hydrophones on each of as many as 20 streamers, giving a maximum of 80,000 channels.
The Q-Land system can acquire seismic wavefields recorded on as many as 30,000 single sensors in real time. The technology delivers an optimally sampled seismic wavefield corrected for the intraarray perturbations that degrade the seismic signal with conventional acquisition systems. “The system has been deployed in the Middle East to collect single-sensor data,” says Chateney. “It can record 20,000 channels live. We’ll have a vastly improved image of the subsurface.”
Schlumberger has also developed Navpac, a new, inertial positioning system that can be used in marine and land surveys. “On land, you can prepare a line without having to cut trees,” says Chateney. “GPS doesn’t work well under forest canopies, but an inertial navigation system does. Your line preparation costs are the same, but because there is no forest timber damage, you save on that cost.”
Many local companies have also taken up the R&D gauntlet. Kelman processing in Calgary has assembled a staff of 12 scientists and technicians to research new processing techniques. “One of our projects is complex structural imaging,” says Vestrum. “There are some large 3D data sets being shot in the Gulf of Mexico, for instance, and we need to handle them efficiently. We’re looking at several different migration algorithms. The big job is understanding what the trade-offs are - you might be able to deliver it in half the time and half the cost, but steeply dipping events won’t have a good image.”
While most of the projects are two-to-three years in length, several companies have expressed interest in longer-term projects, as well, and Kelman is looking at a new type of funding model, similar to a consortium, to handle a nine-year project. “It will be a three-step project with deliverables at three-year intervals,” says Kelman. “We’ve got three companies that want to buy in. They get new technology, and get paid back in free processing services over an exclusivity period.”
But what about pure research? Is anyone still doing the basic work that may not bear fruit for decades? Fortunately, oil companies are still supporting academic programs. “Talisman now contributes $150,000 per year to four consortia,” says Crous.
Two of the projects, Fold/Fault and CREWES, are located at the University of Calgary. In its 10 years of existence, CREWES has pioneered a wide range of experimental data and innovations in the fields of multi-component acquisition, migration and AVO. One of its breakthroughs has been an inexpensive 3C geophone that can automatically level the elements, even if it is 30 degrees off vertical. The recently renamed Fold/Fault project explores techniques (such as 3D pre-stack migration), that can be used to allow much better resolution in complex structural areas with problem lithologies, like shale.
Has the University of Calgary suffered from the effects of M&As? “We’ve seen reductions in our sponsors,” says Larry Lines, chair of exploration geophysics. “BP absorbed Amoco and ARCO, Exxon took in Mobil and Chevron and Texaco merged. Instead of seven sponsors, we now have three sponsors (at $35,000 each). We’ve brought in new sponsors, but mergers have decreased our net membership.”
Michael Slawinski is a 39-year old professor of mathematics at the University of Calgary. “I have been working on the interpretation of seismic data based on mathematical concepts of wave phenomena,” he explains. “It is used to design the acquisition of seismic data.” Slawinski considers himself fortunate that his sponsors, PanCanadian and Talisman, have not been bought out. “At the present time, the funding situation is fairly good. It’s not rosy sailing, but it’s not a panic situation. The key for me is that my projects are small.”
The overall decrease in industrial support has had an impact on big budget research projects, however. “Geophysical research will continue, but not at the same level of intensity as it once did in the industrial sector,” says Lines.
What effect has the evolution of geophysical R&D had upon researchers themselves? After graduating with his MSc, Rob Vestrum went to work at Shell Canada. After three years of depth imaging, he discovered he enjoyed doing research. “I like to see the impact of my work — I like to see oil companies saving millions of dollars.”
Vestrum wanted to return to university and complete his Ph.D., so he approached his manager at Shell to discuss R&D prospects within the company. “Essentially, he said, there aren’t any - research was pretty much gone in Calgary. And for the positions that did exist, it was a highly competitive environment and the positions were uncertain.”
Vestrum returned to school anyway, and, after completing his studies, signed on with Kelman processing, and hasn’t looked back since. “Researchers at Kelman don’t have to constantly justify their existence,” he says.
After almost 20 years of research with Amoco, Sam Gray was forced to make a decision about his professional future when his company merged with BP. “I was given the opportunity to move to Houston and stay with BP Amoco. Preferring to remain in Calgary, I declined the invitation.”
Instead, Gray joined Veritas in 1999 as a research scientist in their R&D department. “I now research seismic imaging and velocity analysis techniques to improve the quality and rate of processing of large data sets.”
Gray considers his move to be forward, with no regrets. “Personally, I think oil companies made a mistake downsizing their R&D efforts in the 1980s and 1990s. Oil companies had greater knowledge of and access to their own problems than anyone else can possibly have. But the major oil companies decided to deemphasize R&D based on business drivers, and maybe I’m wrong - maybe that choice makes perfect business sense. Whether it does or not, the R&D burden has clearly shifted to the service industry, a trend I expect to continue.”
What will the future bring? Few oil company insiders expect a return to the good old days. “It’s been so clear to us when we adopted the external business model that it was much more efficient that it’s now a foregone conclusion,” says Crous. “For Talisman, I don’t see it changing.”
Others are bucking the trend. “We’ve recently moved into the Gulf of Mexico and East Coast and North Sea,” says Bill Goodway, the senior researcher in charge of PanCanadian’s research program. “There’s an increasing demand for sorting out imaging problems, and we’ve beefed up what we have.”
Although academic funds have slackened, there still remain ample opportunities for pure research at universities for young professors. “There’s going to be a need for replacement of university faculty in the next 10 years,” says U of C professor Larry Lines.
“I foresee good opportunities in academia, and I intend to pursue a career in academia for a long time,” says Slawinski, who has just taken a chair in applied seismic at Memorial University.
In a recent paper, Sven Treitel hypothesized that MSc and Ph.D. graduates may find progressively less R&D work in the large oil and service companies, but opportunities in alternative science and engineering fields for which the geophysics background is eminently suited, such as medical imaging and acoustic imaging, may emerge. “Imaging of space, planetary and satellite data is facing new challenges in applications that include gravitational lensing and helioseismology.”
Regardless of what the future might bring, Gray enjoys sitting in his office on the 27th floor of Veritas’ building in Calgary and contemplating the changes he has seen over the last 20 years. “In hindsight, the age of corporate-funded R&D in the oil company labs seems unrealistic. With almost guaranteed funding, it was so easy for researchers to put the blinders on and ignore the economic forces driving their companies and they ended up getting blind-sided in the 1990s.”
“Maybe it’s right, maybe it had to happen, but it makes working in the industry less fun. Another way of looking at it is that my colleagues and I got to share in a golden age and things have settled back to the way they need to be. But still...”
The author gratefully acknowledges the contribution of recent articles from The Leading Edge.
About the Author(s)
Gordon Cope has spent many years working in the O&G industry, first as a geologist, then as a business reporter covering the sector for the Calgary Herald. He currently manages his own communications company.