Oil innovation after years of caution

At Prudhoe Bay in Alaska, BP is pumping tiny particles like miniature pieces of popcorn into its oil field. The process is a perfect demonstration of how oil companies have been cautious about innovation.

As with most of BP’s production, output at Prudhoe Bay is sustained by pumping in water to push out the oil. But the water can leak through porous rocks, losing pressure and often leaking through into the oil wells.

The little particles, known as Bright Water, “pop” when they reach a pre-set temperature underground, expanding to fill the holes in the porous rocks and prevent the water leaking.

It is a sophisticated solution to a widespread problem. Using Bright Water could raise the amount of oil that can be recovered from a field by up to 35 per cent.

At a time when big western oil companies are struggling to obtain access to new sources of oil and gas, that is a precious prize. But it is not a benefit BP will be able to keep to itself.

Bright Water has been developed with Chevron of the US and Nalco, a US water treatment company that holds the trademark.

Over the past decade, oil companies have preferred to share technology rather than set themselves apart from their peers.

For such a technically complex industry, the oil and gas business spends remarkably little on research and development.

Royal Dutch Shell, which has the biggest commitment of any oil company, came a mere 104th in a global ranking of companies by R&D spending in 2006-07 compiled by Britain’s Department for Business and Enterprise.

Even its 2007 expenditure of $1.2bn would have only just pushed it into the top 50.

Arguably, the figures are misleading. Developing an oilfield often means pushing back the frontiers of what is technically possible, just like R&D, but it is not defined as such under standard accounting rules.

The oil and gas industry has made great technical progress in the past two decades with innovations such as horizontal drilling.

For the big international companies, however, there is little competitive advantage in these innovations.

The technology is either widely held, or in the hands of service companies, which began to overtake the big integrated oil companies in the mid-1990s and are now far ahead in terms of numbers of new patents granted.

“International oil companies’ R&D spending was quite high in the 1980s but was slashed at the insistence of the financial community,” says Robin West, of PFC Energy, the consultancy. “Anything that didn’t generate cash today was viewed very sceptically.”

Companies tried to share the risks of innovation. Bright Water, for example, came out of a joint initiative that brought together BP, Chevron, Mobil and Texaco.

As a result, big oil companies do not generally control much distinctive technology that only they can offer.

But as the oil price has soared, the climate has changed. R&D budgets have risen and there is a new awareness of the importance of technology. For example, Shell has kept a tight grip on its processes for converting natural gas into liquid fuels.

Jorma Ollila, Shell chairman, says an oil company is essentially a technology business. Steven Koonin, who joined BP as its chief scientist from Caltech in 2004, says he thinks BP is “in a good place” thanks to the 43 per cent rise in its R&D budget over the past two years.

“When I started working in the energy industry, it occurred to me there was a lot that could be done in terms of research and development,” he says. “Opportunities are there, but in part for economic reasons and in part because of insularity on the part of energy companies, they have not been taken up.”

The question remains, however, whether the awareness is too little, too late.

The oil companies are also researching biofuels and other renewables such as solar energy. But this comes at a time when many other companies are competing for the next breakthrough.

The first commercial production of ethanol from municipal waste, for example, is being pioneered by Ineos, a chemicals group.

As in IT, where Microsoft came from nowhere to soar past IBM, the next big step forward in energy technology may be more likely to come from outside the ranks of today’s industry leaders.