How will low oil prices affect energy research?

Back in May, when oil was still above $100/b, one-third of international oil companies (IOCs) expected their R&D budgets to increase by 10% over the next two years. The main focus areas for innovation then were cost reduction, safety improvements and increased efficiency, according to Lloyd’s Register Energy.

With oil now at $49/b (WTI) and large energy companies like BP and ConocoPhillips announcing two-digit reductions in their capital expenditures—13% and 33%, respectively—many wonder what will become of these R&D goals.

It is not unusual for R&D to decline in harsh times: Both Shell and Total cut their R&D spending during the financial crisis, for example. But if short-term R&D cuts are tempting to keep IOC’s bottom lines afloat, long-term cuts are sure to sink them.

IOCs, whose direct control of global oil production has fallen from 70% in 1972 to 10% today, depend on innovation more than ever before. Squeezed out by national oil firms, many of them have had to prospect, extract and produce oil and gas from increasingly challenging environments, including deep-sea areas and the Arctic. Doing so profitably when oil is below the $100/b mark will require innovations from supercomputers able to map and analyse massive reams of geophysical data to new, cleaner and more efficient methods of extraction—notably with deep-water and hydraulic fracturing.

Tight budgets and high innovation needs will make open-innovation strategies increasingly attractive. GE and Statoil, for example, are now cooperating in power-drilling operations with gas that would otherwise be burnt away— nearly one-third of North Dakota’s gas production is lost that way. Last month, the two companies also issued a $500k challenge to decrease sand use in unconventional production.

Another change in innovation may come from market dynamics. As in the late 1990s, low oil prices may lead to consolidation in the industry. Should today’s low prices be sustained, smaller players will struggle with debt loads, while larger ones will try to acquire the most innovative of them in the hopes of extending their market share.

The innovation imperative for the oil and gas sector hasn’t changed. But the forms in which it will be pursued might.

This article is published in collaboration with GE Look Ahead. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Drew J. Hart writes for GE Look Ahead.

Image: A worker walks past a pump jack on an oil field owned by Bashneft company near the village of Nikolo-Berezovka. REUTERS/Sergei Karpukhin