Oil&Gas Innovations needs to be TRANSFORMATIONAL

E&P in 21st Century

Upstream Oil&Gas industry is also called Exploration & Production business. Dealing with characterization,  discovery, assessment, development, production and abandonment of oil, gas, and may be gas-hydrates fields.
Supplying the energy needs of the modern world. E&P is a critical business needing quantum innovation to meet the growing demands.
This Post deals with:

1. Will the Oil prices be Tamed?
2. What kind of Innovation is needed in E&P?
3. Research Quotient as a measure to scale the R&D. 

Which is the Horse to bet on?

PEOPLE, PROCESSES and TECHNOLOGY are the three contenders in the race. One of them is a race-Horse; another is a Bull and the third a Rabbit. It is unclear which of the PPT are HBR. {PPT=People Processes & Technology; HBR=Horse Bull & Rabbit}

This race has already started and will be run until 2020.

Ironically all thought processes on PPT tend to be on ‘.ppt’ (PowerPoint)! Ideas in this post on PPT are taken from articles in HBR (Harvard Business Review)!

At the end it is more about business continuity, growth and sustenance. E&P business is all I know of and the principles are elaborated with regards to Oil & Gas upstream.

Innovation for the 21^st Century

• Amid knowledge of all corporate management that “the YoY viability depends on its ability to innovate”, continuing uncertainty, keeps strategy and investments OFF innovation.
• People throughout your organization are energetically pursuing the new. But does all that add up to a strategy?

Context in India is like a “primary production” in an O&G field – just open the wells and make huge money. Often with 6-15% recovery and depleted resources – fast buck (early high rate production) at cost of EUR (expected ultimate recovery). Not much different from the fable – killing the golden goose! Fast growth companies in developing, poorly regulated, corrupt and free-filing economies grow at very fast levels that drain the resource desperately, while reaping disparate profits! The need for innovation as sustainable model emerges for those who stay beyond this aberration and don’t become fly-by-wire operators.

• Making matters worse, executives tend to respond with dramatic interventions and vacillating strategies. 
• Incremental innovations tend to split the pie with little or no real growth. 
• Transformational innovation needs proper structure and process – often directly contravening the normal ‘growth’ companies.

Innovation Ambitions

1.      Level-1: Enhancements to Core Offerings (C)

2.      Level-2: Pursuit of Adjacent opportunities (A)

3.      Level-3: Ventures into Transformational Territory (T)

Ambition matrix is dependent on 3 factors – i) Talent, ii) Management Approach, & iii) Metrics

Right balance between the 3 levels CAT is dependent on the business nature and the 3 factors. 

1. C:A:T=80:18:2  Incremental innovation focused on Core. Linear or Survival strategy 
2. C:A:T=70:20:10 Some support to Transformational. Opened Opportunity
3. C:A:T=45:40:15 Strong Adjacent and Transformational focus. Desire & Vision drivers

These are different focus ratios towards Level-3 Transformational allocations in different contexts

How innovation pays the bills

Among the high performers with favorable factors, distribution of total returns occurs in C:A:T=10:20:70 ratios, largely driven by 70% returns from Level-3 Transformational innovations. Just keep in mind that E&P is a transformational business. So are biotechnology, drug research and high-end computer science.

Organize and Manage the Total Innovation System

Healthy balance of Core, Adjacent & Transformational innovation is difficult to realize as companies are inadequately equipped in the 3 factors. Transformational innovation – to do different things – an organizational unit has to ‘do things differently’ to the rest.  Support to such units is often missing. 5 key areas of management that serve the 3 levels of innovation ambition are:

1.      Talent

2.      Integration

3.      Funding

4.      Pipeline management

5.      Metrics

E&P needs Innovation, driven by Metrics that assure the organized efforts. A clarity on strategy is the beginning. These 5 point to - PEOPLE (Talent+Integration); PROCESSES (Funding, Management & Metrics=Governance) and TECHNOLOGY (4th Paradigm Science)

The Trillion $ R&D Fix

TRILLION $ increase in market cap is lost due to top 20 companies in US have failed to optimize their R&D spending using Research Quotient (RQ) method? E&P majors Exxon Mobil, Chevron, Conoco-Phillips are assessed to have missed together $333,768 MM, which is 47% of their revenue. Analysis had shown for over 3 decades that the E&P companies invest far less in R&D than other transformation seeking businesses world-wide.

--> Do you see why oil sells at > $100+? NO TRANSFORMATIONAL INNOVATION!!

RQ (Research Quotient) is a measure of productivity of R&D investment using well known economic formula.

TO calculate your RQ for your business (E&P or entire diversified) you need several years’ of data on revenues and annual expenditures on PP&E (Property, Plant & Equipment), Labor (People), and R&D. After Logarithmic transformation the values are used to derive γ .

RQ is not a fancy new math. It is a measure to realize the significance of transformational innovation to business in 21^st century.

RQ is a good measure

1.      Universality

2.      Uniformity

3.      Reliability

RQ is a very accurate predictor of profits and share price performance. Unlike traditional measures that loosely measure R&D performance, RQ provides a measure for managers to optimally adjust the Innovation agenda (Budgets, Resources, Talents, Processes and Technology)

E&P is an Innovative Business

·         Classical 100+ year models of all E&P majors are built on innovation in CORE & ADJACENT areas of innovation.

·         TRANSFORMATIONAL innovation in E&P are rare, far between and most needed

·         21st century will distinguish those E&P companies that can bring forth transformational innovation.

·         There is a severe dearth of TALENT and MANAGEMENT VISION to perceive the $333BILLION and cognitive action to achieve it.

·         4th Paradigm Science – Big Data Analytics and Associated Collaborative (integrated) discovery – spurred by the huge instrumental data that occur in modern Oil&Gas fields is RIPE for TRANFORMATIONAL discovery

·         Be wary of the Killer Phrases

Killer Phrases

A killer phrase is a negative word or statement that is inevitably hurled at any new idea. Frequently the result is to shoot down the idea without a fair evaluation. Examples of killer phrases are . . .

•        “We tried that before.”

•        “That’s irrelevant.”

•        “Don’t waste time thinking.”

•        “It’s not in the budget.”

•        “Your ideas only have limited use in their present format.”

•        “It will be more trouble than it’s worth.”

•        “We’ve done all right so far.”

•        “No.”

•        silence

Are you ready to Bet?
Which to bet on?

1.      Technology: Big Bull. It can break all limitations. Mature. Powerful. READY. Note that it is ESSENTIAL that METRICS (Measures = Data, Analysis & Integration) is TECHNOLOGY driven when in action.

2.      Processes: Innovation is intensely untethered. It is more through culture, trust and spirit. A Rabit. Cute but sensitive. PROCESSES need to emulate collective discovery like in Proteomics (e.g. Taverna)

3.      People: The Horse. It pulls the company. It reaches far. Strong and resilient. Talented People are the horses for driving Innovation. The Horse (People) need to be adapting METRICS and TECHNOLOGY to be relevant in the Innovation game.

There is RISK – some money will be lost. UNCERTAINTY – transformational finding may not occur. BUT E&P is the game of RISK-UNCERTAINTY.

Supporting Innovation is Seed Money for the $333billion lost opportunity.

CHOICE is based on

DO YOU TRUST “THE FUTURE IS NOT WHAT IT USED TO BE?”