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Ducker Worldwide - Examination Reveals Innovation Derailment is Problematic for Oil & Gas Industry

04.26.12

Growth Attracts Investment

With the U.S. economy stuck in a slow recovery, the oil and gas industry continues to attract attention.  Crude prices are expected to remain above $100/bbl for the foreseeable future.  Adoption of unconventional natural gas has rapidly transformed the U.S. from an importer to an exporter.  Offshore drilling continues to find success pushing the limits of ultra-deep water, while rig costs soar past $500,000 per day. And in a recent survey of industry executives1, nearly two-thirds plan to somewhat or substantially increase capital spending over the next year, an increase of more than 25 percent.

With this kind of sustained growth and optimism, business planners from many other struggling industries are asking the same question… “How can I benefit?

Much of the current attention is centered on the upstream segments – exploration and production - where technology and innovation have stimulated new possibilities.  Hydraulic fracturing and directional drilling are some of the more familiar advancements which have helped the industry push past historical limits.  However, it is a perilous mistake to assume that more opportunities for innovation exist based on industry expansion and high prices alone.

The extraction and conversion of oil and gas is a capital intensive exercise, which means that business managers focus hard on protecting these investments and are therefore highly risk averse.  The adoption of innovation tends to be very slow against such pressure.  To complicate matters, regulatory obligations and safety requirements further limit the industry’s flexibility.  So how can innovators and suppliers drive successful adoption of their products and services?

The high rate of adoption failures within oil and gas tell us that problems abound.  The market is cluttered with quality concepts that failed to achieve their potential as a result of poor planning discipline.  Oil and gas innovation, particularly that which comes from outside the industry, suffers unnecessarily from the following derailment themes:

  1. Reliance on innovative technology
  2. Poor planning assumptions
  3. Lack of alignment with stakeholders

These errors can be avoided by business planners who take the initiative to build an intelligence advantage prior to launch.

Market Intelligence Helps Manage Risk

Risk abounds within oil and gas.  The industry’s conservative nature means that adoption is more likely to occur with technology transferred from other industries/applications where it has been proven.  At the same time, successful experiences outside of oil and gas are frequently disarming to planners and can lead to the transfer of old assumptions that are poorly aligned with the needs of oil and gas industry participants.    Finally, the oil and gas industry is highly interdependent, with expertise often residing across separate organizations; each stakeholder having different needs and interests.

Primary market research, however, can help planners identify critical needs, as well as effectively map and address stakeholder relationships.  This form of market intelligence can also be used to identify key organizations that already have established relationships in place to help ensure an efficient effort that is targeted to the right stakeholders.

To address these issues the introduction of any new oil and gas concept should consider whether its value proposition specifically addresses:

  • How well the concept addresses cost control?
  • Who the key stakeholders are?
    • What are their relationships to each other and the industry, contractual or otherwise?
    • What are their unique interests/needs?
  • What incumbent technology or concept may be displaced?
  • What burden of proof is required by stakeholders for the concept to be acceptable?

Primary market research can answer these questions and will create an intelligence advantage that can dramatically increase a supplier’s likelihood of success.  In the same manner that the use of 3D seismic survey information helped double the success rate of exploratory wells in the US2, the use of market intelligence can help transform assumptions into a wise investment.

1Big spenders - The Outlook for the Oil and Gas Industry in 2012.  Published by The Economist Intelligence Unit, January 23, 2012
2Crude Oil and Natural Gas Exploratory Wells, Selected Years 1949-2005, Energy Information Administration, US Dept. of Energy
2Crude Oil and Natural Gas Exploratory and Development Wells, Selected Years 1949-2005, Energy Information Administration, US Dept. of Energy

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