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

July 2001

McKinsey Research Project

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

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

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

2

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 70’s and 80’s…

… 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

OtherDrilling

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.

0,5X-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

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




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 it’s the turn of the small companies e-commerce promised a level playing field.


Now it’s the turn of the small 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-lineFinancial institutions will spend more on electronic commerce

Now it’s the turn of the small companies e-commerce promised a level playing field. Now it’s the turn of the small companies e-commerce promised a level playing field.




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

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

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-June July-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

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

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

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

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Oil

Gas

Coal

Nuclear

Hydro

Total energy consumption

0.61980-2000

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

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

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

140

120

100

80

60

40

20

0

New fields outside M.East

Global oil* production medium scenarioMillion b/day

Increased recovery

Existing fields and Middle East fields

Region

Latin AmericaEuropeFSUM.EastAsia Pacific

Change mmb/d 2000-2020

+9-3

+10+15

+6

Region

Middle EastFSU / ChinaOther

Change (mmb/d) 1960-1980

+20+12+12

Region

North SeaSouth AmericaOther

Change (mmb/d) 1980-2000

+5+2+5


11Source: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



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



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



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


151900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

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

Australia47

Malaysia38

Iran505

Abu Dhabi154

Qatar226

FSU1,340Norway

49

Nigeria86

Algeria67

Venezuela52

U.S.53

Indonesia47

Trillion cubic feet

*Gas reserves exceeding current or anticipated commitments in large quantity and sufficiently accessible location to support potential international gas tradesSource: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

Growing environmental concerns add to the need for new technologies

Continuing technology advances are essential for meeting expanding energy

needs and reducing its environmental impactPhil Watts, Managing Director of Shell

Innovation is making it possible to produce and to use energy products in ways which don’t damage the environment

Sir John Brown, Chief Executive BP

• Gas re-injection technologies• Decarbonisation technologies• GTL

• Reduce CO2 emission, including gas flaring• Reduces oil to water


18

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

400-500

100-150

200-300

70-1001990 2000 20101980 2020

• Broadband communication and remote real-time operations

• Visualisation and “groupware”

• Higher productivity• More onshore work• Group work• Streamlined work processes


19


Deepwater

Mature Area/ Brownfield

Gas e.g. in Middle East

Business challenges Possible 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

Environmental

Productivity • Broadband communication and

remote real-time operations • Visualization and “groupware”

• Higher productivity• Demanning offshore • Streamlined work processes


20







21

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

Idea Prototype 1st field test 50% Penetration

23 29 3243

1217

22

21

2

2

9

17

40

3825

188

1 0

015 14 14

2

The role of smaller players has been crucial in the innovation and technology development process


221960 1965 1970 1975 1980 1985 1990 1995 2000

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

…?

…?

…?

…?

…?

…?

…?

…?

…?

…?

…?



23

Visualisation technologies have been developed efficiently

Pioneers Norsk Hydro, Arco and Texaco initiate visualisation development centers. Experience is drawn from space, medicine and construction

1995 2000

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



24

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

1970 1980 1990 2000

2 streamers

New entrant (PGS) pushed development;

5 streamers 12 streamers

Multiclient seismicacquisition

Increased computing power


multi-streamer, onboard processing

Delay in development


251960 1965 1970 1975 1980 1985 1990 1995 2000

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



26

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 outsiderRaymond Engineeringdevelops mud pulse telemetry

Elf and Raymond incorporateTeleco to push development of MWD

1970 1980 1990 1995

GeoLink’sOrienteerMWD 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 developed

Revenue: US $mTeleco 132Schlumb. 70Other 70

Full penetration



27

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)



28

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

Commercially available

Idea Prototype 1st 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

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

The pace of innovation in E&P has been slow relative to that in other industries

0 5 10 15 20 25 30 35

E&P industry(15 tech. Cases)

ADSL (broadbandtelecom)

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



32







33

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 ofinfluence

None

Low

High

Factors influencing innovation and technology

Patenting


34

1980 1985 1990 1995 2000

Player conduct has varied significantly and today leads to a poor environment for technology and innovation

Actual price

++

++

++

+

-

-

+

0

++

+

+

+

0

-

0

0

+

+

0

+

-

--

--

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

1980 1985 1990 1995 2000

Macro trend downward is partly a result of the cyclical behaviour following the industry cycles

Industry cycles Actual price

++

++

++

+

-

-

+

0

++

+

+

+

0

-

0

0

+

+

0

+

-

--

--

0

0

0

--

0

Oil Price

Follow industry cycle

Very positive

Positive

Neutral

Negative

Very negative

++

+

o

-

--

Environment for technology and innovation


36

Our growth strategy is based on privileged

relations within specific countries. Technology

plays a minor role

Companies:

ExxonMobilShell/ Royal Dutch BP AmocoTotalFina ElfChevronTexacoConocoPhillipsUnocalNorsk HydroStatoilPetrobrasENISaudi AramcoAdnocAnadarkoBHPEnterpriseAmerada 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)-

- (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

0%

5%

10%

15%

20%

25%

1.5 2.0 2.5 3.0 3.5 4.0 4.5

ExxonMobil

ENI

Shell

ChevronTexaco

BPTotalFinaElf

Innovation index

Tot

al r

etur

n to

sha

reho

lder

s 19

94-2

001

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

If someone launches a new, good technology, our suppliers will give us access to it within less than 6 months

E&P company

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

Source: US Patent and Trademark Office

0

1

2

3

4

5

6

7

8

1976-80 1981-85 1986-91 1991-95 1996-01

E&P

Construction

Automobile

Industrialautomation

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

R&D funding in the E&P industryYear 2000 US$ (billions)

3,0

1,1

1,9

1,7

OFSEs R&D

Business units/ Licenses

Central

1990 2000 E

4,1

3,6

Oil and gas com-panies

R&D is increasingly “outsourced”, and central funding has been reduced drastically


41

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

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

BP Chevron Conoco Shell

Phillips

1999 US$/boe (adjusted by E&P share of total revenues)

1991 20001995

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 afterSource: Herold’s; PetroCompanies; BP;10Ks, annual reports

ExxonTexaco

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 spend1995-2000 cent/boe

9,0ENI-Agip


43

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

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

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 ourselvesE&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

Don’t expect anything real new from the big

OFSEsSmall technology company

OFSEs cannot do long term R&DOFSEs can do long term R&D


46

Investments have been very cyclic in the E&P industry

0

5

10

15

20

25

30

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

0

5

10

15

20

25

30

35

Development cost

Nominal oil price

Exploration cost

InvestmentsUS$ (billions)

Oil priceUS$/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

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

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

68-75 76-80 81-85 86-90 91-95 96-00 68-75 76-80 81-85 86-90 91-95 96-00

17Without Ormen Lange gas field


49

2,915

2,718

1,342

1,006

842

639

518

453

202

Absolute sizeUSD 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

0.16

0.95

0.23

0.69

0.43

0.28

0.02

0.02

1.45

Relative sizeEquity 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

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

Exploration

Field development

Operation

Construction

E&P

Support

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

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 government’s 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

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

BPChevronTexacoENIExxonNorsk HydroShellStatoilTotalFinaElfUnocal

Companies surveyed

Brit BitFMCHalliburtonInside RealityPGSReadSchlumbergerSPS-AFOSStolt

Best in class

Worst in class

Poor ExcellentModerate


53

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

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

Poor Moderate Excellent

Average of all questions


55

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,

Lo

wH

igh BP

Conoco

ExxonMobil

Shell

TotalFinaElf

ChevronTexaco

ENI

Statoil “External oriented Leaders”

“External oriented

followers”

“Internal oriented leaders”

“Internaloriented

followers”

Amerada Hess

Enterprise

R&D investments


56

Each group has some typical ways to approach technology and innovation

Source: 10 Ks/annual reports, Survey, Interviews; Team analysis,

Norsk Hydro

Conoco

ExxonMobil

TotalFinaElf

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

Internal External

Shell


57

Number of E&P professional job applications to a major oil company (% of 1990 applications)

100 98

5940

1990 1992 1995 2000

64

11992 1995 2000

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

20

40

60

80

100

1980 1985 1990 1995

Required level

1,61,4

1,120,8

0,6 0,5

1980 1985 1990 1995 2000 2005

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

10

12

14

16

18

20

22

24

26

28

30

1975 1977 1979 1981 1983 1985 1987 1989 1991

Petroleum

The best talent was attracted to petroleum studies in the 1980’s, 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

25

30

35

40

45

50

55

60

65

70

1993 1995 1997 1999

Product Design

Electrical Engineering

ArchitecturePhysics and Math.

Industrial Economics

Marine Engineering

Civil Engineering

Chemistry Engineering

Mech. Engineering

(Changed formula)

Petroleum


59

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

Halliburton

Schlumberger

Baker Hughes

And the “Big 3” OFSEs have primarily enterednew 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

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

• 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

Smaller companies have major difficulty in accessing E&P companies

An OFSE

Our company is “built to flip” [sell company], we

don’t 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

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 of”win-win” incentives

Funding

Strategy

Organisation

Sourcing


65

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







67

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. strategy


Sourcing

Talent attention

Government policies


Level ofinfluence

None

Low

High

Factors influencing innovation and technology

Patenting


68

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

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

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…?

• 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

Shell recognised the potential of deepwater exploration in GOM before most other players

SHELL IN DEEPWATER EXPLORATIONSuccess rates in deepwater exploration Gulf of Mexico*Percentage of wells with finds >100 MMBOE**

27

24

21

13

Shell Exxon Conoco Onyx

Land positionBlocks

Average field sizeMMBOE

Number of finds

633 135 115 3

200 128 128 90

8 5 3 901

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

-55%

Unocal had a “Follower” role that has also been successful in drilling

153

68

Industry average comparable Garden Banks wells

Spirit Energy Garden Banks 74

Well time, daysUnocal 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

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

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

Be sophisticated when choosing approach for each technology cluster

Norsk Hydro

Conoco

TotalFinaElf

ChevronTexaco

ENI

Statoil

Amerada Hess

Enterprise

Leader

Follower

Internal External

Overall approach of E&P companies

E&P companies’ approach to each specific cluster of technologies

ExxonMobil

ShellBP Leader

Follower

Internal External

Leader

Follower

Internal External

Leader

Follower

Internal External

ILLUSTRATIVE


76

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


moderate importance and could give competitive advantage if rolled out rapidly, but others lead

Description• Keep watch over

development• Adopt fast when

commercially available


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

Internal External


77


• Strategic role





78

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

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

IdeaLife cycle stages

* ROV methodology is discussed further in the Appendix

Use an appropriate valuation methodology according to the development stage


80

Funding need in each phase

Development and early implementation

Commer-cialisation

Mature products

• Moderate • High • Very high • Low

IdeaLife 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 1990’s and 10-15 cents in the last part – stability of funding is the key to keep momentum

Total funding – see life cycle need


81


• Strategic role





82

• 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

Exploration

Field development

Operation

Construction

E&P

Support

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

Technology

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

Key building blocks are a “VC unit” and technology architects that act as “businesses”

E&P

Technology units

Asset 1

Asset 2

Asset 3


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

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 company’s own assets)


85

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

Support

Asset 1

Asset 2

Asset 3


Increase the future value through proactively positioning in strategic assets


86

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

Choose organisational solution based on synergy potential across assets vs. within assets

Asset 1 Asset 2 Asset 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


High Moderate Low

Degree of operational and technology control

Technology units

Contract support

“Venture capital unit”


88

Asset 1

Asset 2

Asset 3Best 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

Create a new culture through best practice support processes and systems

• Talent management

• Performance management

• Knowledge management

Technology market organisation

E&P

Support

Asset 1

Asset 2

Asset 3

Technology projects “give and take”


• 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


• Strategic role





91

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


• 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

Technology units

Small Supplier 1

Small Supplier N


92

Set up cooperation agreements to match the specific project needs

Type of cooperation partnerForm 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

Experience shows that JV and JIPs require carefulconsideration to achieve success

Example Pros Cons

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 ProjectHIP (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

‘To-do’s for E&P companies

Innovation and technology development


E&P Co. strategy


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

‘To-do’s 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 ofinfluence

None

Low

Oil price

Cyclical mindset

Macro economy

Field investments

Talent attention

Government policies


Level ofinfluenceFactors influencing innovation and technology

Patenting


96

‘To-do’s 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


OFSESourcing

Documents

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