Relationship within the Context of Joint R&D and Development of Technology

Joint R&D and development of technology is a prime example of the deep and close relationship between OSCs and IOCs.

IOCs use new technologies to gain competitive advantage and access to new oil reserves. There is a continual need for international oil companies to develop new and improved technologies in order to remain forerunners in the industry. Although they are significant users of new technological progress, IOCs have pushed practical R&D and the creation of new technologies onto oil services companies for several reasons.

The first reason is commercial. Due to their specialization, OSCs are better positioned to benefit more from a new technology within their area of expertise. Because OSCs can utilize the new technology in more projects in any given period, they have the potential to generate higher returns on their investments compared to IOCs. In addition, OSCs can further develop and refine the new technology quicker by leveraging feedback received from multiple clients.

Furthermore, the benefits of technological development in the oil sector are often not realized over a short period. Cost and efficiency savings often take many years to be fully realized. There are certainly a few breakthrough and game-changing technologies in the oil industry, but most technologies represent incremental progress. Moreover, new technology spreads very quickly thanks to JVs in each oil field. If an IOC develops a new technology, it is difficult to keep it for its own exclusive use, owing to the nature of the industry and the close working relationships that take place within it. Therefore any competitive advantage based on a new technology is likely to disappear quickly.

As a consequence, IOCs have pushed practical R&D and the creation of new technology onto oil services companies. Hence, OSCs have started initiating the development of technology, as well as assuming the risks involved. However, as discussed, while the progress of new technological development in the oil industry is now largely carried out by OSCs, IOCs remain engaged in the process and have considerable influence on the evolution of new technologies, guiding the R&D efforts of OSCs.

The influence of IOCs on OSCs regarding the development of new technology can be analysed from multiple aspects. First of all, new concepts in the oil industry such as deepwater exploration, high temperature or unconventional fields are often formed by IOCs. Each time an IOC explores an oil field that presents unique challenges, it researches and investigates the best approach for harnessing the natural resources of that oil field. For example, IOCs investigate the most appropriate technology to implement in the harsh operating conditions in the Arctic region. IOCs tend to explore in deeper, hotter and more technically challenging areas. These technical challenges in field development drive and determine the R&D priorities for OSCs. While IOCs do not typically dictate explicit strategic priorities for OSCs, they influence OSCs to prioritize certain technologies.

In certain cases, IOCs generate an approach for improving the quality and durability of equipment and processes, but do not possess the technology or economies of scale in-house to finance the research required to develop their concepts further. They then partner with OSCs under research agreements in order to develop these ideas. For example, Total, Chevron and Schlumberger jointly developed INTERSECT, a next-generation reservoir simulator (Schlumberger 2012b).

Sometimes the influence of IOCs may be more direct. For instance, they may directly request new technologies or services from OSCs by creating a request for a proposal (RFP) for a specific requirement. OSCs then formulate a solution to meet the new requirements and develop the necessary equipment, technology and processes. For example, Saipem created a new technology in its Blue Stream project as a direct response to demand from ENI and Gazprom. The operator had recognized a shortcoming with the quality and durability of pipes during a key phase of a project. Saipem developed and proposed the J-Lay solution, which reduced the stress placed on the pipe and increased reliability. Saipem’s collaboration with the operator was essential in order to allow Saipem to understand the precise needs and requirements and develop an appropriate solution to meet them.

From the perspective of the oil services companies, the ability to remain competitive in the market relies on investigating and developing new technologies which meet their customers’ current or future requirements. R&D departments of OSCs try to identify technology that will either be of interest to their clients or reduce the costs of delivering services. OSCs carefully research and consider prospects and opportunities in the market in order to anticipate changes in demand and meet the future requirements of their clients. Because OSCs aim to customize their R&D to the needs of their clients, they share their R&D plans with IOCs at an early stage to ensure alignment. OSCs aim to balance the necessity of keeping advancements in technology confidential from other OSCs while validating the requirements of their clients. IOCs indicate the potential for growth in the market and help OSCs to anticipate the market trends.

Most OSCs have regular meetings with their customers to understand their needs and challenges. Some OSCs even have an official Client Advisory Board, which consists of representatives of IOCs. This forum provides an opportunity for IOCs to guide the development of new technologies by OSCs.

In addition to influencing the direction of R&D, IOCs also influence the speed of adoption and spread of use of new technologies. A number of OSCs revealed that IOCs direct other OSCs to implement new technologies once they have been developed, as they try to foster competition in the market by ensuring no single OSC has a monopoly on a new technology over an extended period of time.

Moreover, the relationship between IOCs and OSCs in relation to their R&D activities has been changing. Historically the R&D of OSCs has been self-centred and internal with little direct impact from IOCs. However in recent years, R&D in OSCs has been evolving towards an outward-looking model where IOCs have started to take a more active role to the point of actually financing R&D projects at OSCs. The financial participation of IOCs is important for OSCs as it shows IOCs’ commitment to their relationship. Similarly, IOCs see value in these partnerships as a mechanism for developing better technologies for challenging oil fields such as ultra-deepwater offshore.

This collaborative approach to R&D mutually benefits both parties and can speed up the commercialization of new technologies. For example, directional drilling, which was developed forty to fifty years ago, has become prevalent only in the last five years. Strategic alliances on R&D projects establish long-term relationships between IOCs and OSCs and hence improve the synchronization between the needs of the market and the development of products. An example of collaborative approach can be seen in the partnership between Total and Halliburton in 2009 to jointly develop a suite of ultra-HPHT measurement and logging while drilling (LWD) sensors. In collaboration with Total, Halliburton worked on the development of the Prometheus suite of LWD tools specifically for the ultra-HPHT environment of some North Sea fields, where harsh conditions challenge the limits of current technology (Dirksen 2009).

Although there are many common characteristics in relationships between IOCs and OSCs, different types of joint ventures and partnerships exist. In some cases, new technology is developed by both the international oil company and the oil services company, with each party taking explicit responsibility for key tasks and outputs. In these instances, the cost of developing the technology is shared between the IOC and OSC. In general if the product is developed together, the IOC maintains exclusive utilization rights for a specified period of time. After this period has lapsed, the OSC has the opportunity to bring the technology to the market and sell it to other clients. For example, the reservoir simulator INTERSECT was created by Schlumberger and Chevron initially. Total came in later, wanting to buy the technology and participate in its further development. Another example which highlights the value of forming joint ventures to develop costly R&D projects is provided by Shell. Shell developed the initial concept of ‘expendable tubulars’8 where expandable tubular material is placed inside the well, which provides more flexibility than standard tubing (Cassidy and Butterfield 2002). Shell secured the patent for the product and then contacted Baker Hughes to jointly develop and commercialize the technology. A company called e2TECH has been established as a 50/50 joint venture of Shell and Baker Hughes in order to develop and market expanded-tube well construction and remediation technology. According to a press release at its time of creation, ‘e2TECH will combine Shell’s novel expanded tube technology with Baker Hughes’ renowned international oilfield service capabilities to reshape the current well construction industry through “in situ steel tube expansion” ’. This innovation is aimed at substantially reducing well repair costs and restoring asset integrity while removing many current design limitations (Flaharty 1999). In these circumstances, the IOC has the power to determine the price of the technology and the terms on which it is brought to the commercial market. Time and price advantage is granted to the IOC for technologies developed in partnership.

In other cases, an IOC provides an OSC with the proof of concept for given technology and requests that the OSC develop it according to specifications. Depending on the relationship between the IOC and the OSC, the IOC may agree to finance the development of technology. If the specific technology will be available to other customers on the market, the IOC may negotiate a significant discount or agree to receive royalties, as it generated the initial concept.

Sometimes the IOC develops the technology itself but gives it to an OSC for its commercialization. An example described by an interviewee is in the seismic area. Exxon developed the Surface Slice Application9 (a seismic data interpretation tool) and allowed Geoquest to further develop and maintain it. In exchange, Geoquest agreed to charge a reduced tariff to Exxon for its services.

There are also cases where an OSC may create a partnership with another OSC in order to use their joint expertise to develop a solution for an IOC. While these partnerships between OSCs are not as common as joint ventures between international oil companies and oil services companies, they do occur. An oil company requested Technip to develop a new technology for subsea integrity and surveillance of flexible pipes. Recognizing the challenge of developing this technology on its own, Technip formed a partnership and signed a global cooperation agreement with Schlumberger. ‘By combining Technip’s technical and manufacturing knowledge of flexible pipe with Schlumberger surveillance technology, a new generation of intelligent flexible pipe will be created’, said Alain Marion, senior VP, Subsea Assets and Technologies, Technip (quoted in Baxter 2009). The partnership between Technip, JGC Engineering and Technical Services and Tecnicas Reunidas in Vietnam concerning the development of a refinery is another prime example of cooperation between multiple OSCs. A consortium formed by Tecnicas Reunidas, Technip and JGC Corporation has obtained a $5 billion contract to build an oil refinery in Vietnam (Reuters 2011).

In all the cases above, IOCs give direction to the technological progress either by proposing the idea initially or by developing the technology themselves or in partnership. They may also provide seed funding. For example, Shell formed a venture capital fund to encourage the development of critical technologies.

 
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