During the downturn, becoming more efficient with funding is key

New Technology Magazine — Despite being hit by lower commodity prices and clobbered by correspondingly weaker revenues, sending companies into cost-cutting mode, the importance of research and development and its implications on the industry's future health and prosperity seem to still be resonating in oil and gas circles.

R&D budgets have been a fairly easy target for the budgetary hatchet in past downturns as companies worked to keep costs in check during stormy times. Unlike the past, though, the pressure on the oil and gas industry by government and the general public to improve its environmental record persists, even during this turbulent period.

Ian Potter, vice-president of energy with the Alberta Research Council, says the energy industry in Alberta seems to be maintaining its overall investment in R&D.

"Regardless of the current and historical economic challenges, it's been evident in my time ... at ARC that if a research and development project can show a clear line of sight to commercial viability, the companies will normally invest in these projects," he says. "In some cases, the research and development needs are addressing shorter developmental needs, but in other areas there's an even greater emphasis on the game-changing, longer-developmental term, technology thrust."

What's changed is additional scrutiny that each project goes through for approval in terms of cost/ benefit and return on investment and a higher authority sign-off level within companies.

"As for the focus for technology research and development, to be honest, over the last decade we've seen a move to adoption and adaptation of existing technology from other sectors and the larger-scale piloting and demonstration of technology in the field," Potter says. "In the case of level of investment, it's been evident in previous downturns that companies that maintain the research and development investment are stronger in the longer-term.

"Obviously, government-levered investment in innovation has been instrumental in helping these companies through these downturns." An example is Alberta's large investment in technology to develop carbon capture and storage.

The path to lowering greenhouse gas emissions is going to be paved with technology development, a point that was made clear recently by Eric Newell, chair of Alberta's Climate Change and Emissions Management Corporation. The arm's-length provincial entity is charged with managing the province's climate change fund, which to date has collected over $120 million. The first call for proposals closed on Sept. 30 and generated tremendous interest.

Now the organization will shuffle through the applications and dole out cash to help promising technologies that could lower GHGs, an issue which is now also prominent for investors. But while the economic crisis sparked widespread gloom, there is a silver lining for R&D, observers say.

The collaboration imperative

Soheil Asgarpour, president of Petroleum Technology Alliance Canada, says that while fewer dollars are available for research because industry's revenues are down, it's forcing R&D cash to be used more efficiently by tackling the job collaboratively.

"Clearly, when revenue drops, we see that R&D spending goes down," he says. "There are clear connections between the two."

Based on historical experience, companies will look at their revenue and from there decide how big the slice of pie will be for R&D. That's mainly because research spending has no immediate payoff as companies are spending millions now with rewards not coming possibly for a decade hence.

"This has happened in the past," Asgarpour notes. "We have noticed that many R&D centres that companies had were shut down.

"In the 1980s, we had thousands and thousands [of people] working in research and development centres for big companies. [Since then] I think many of these companies have reduced the size of their research and development activities significantly."

But by working jointly and combining research dollars and expertise, it gives the money more mileage and improves the quality of the work, he adds.

"Collaboration usually occurs through formation of consortia consisting of industry and government funders who manage projects through steering committees. When you have a steering committee of experts from different companies that look at the projects, the knowledge that they bring to the table would be complementary," Asgarpour says. "Not only do you get better financial leveraging, you get expertise leveraging and you reduce both the manpower that you would have required if 10 companies had gone and implemented a project [each on their own], reduce costs and [have better] results."

He hopes that increased collaboration will spark a shift for companies to revisit their view on whether their technologies are really competitive. "I'm hoping that we are getting to an environment where we are going to expand areas of non-competitive technologies and reduce the areas that ... are competitive," he says. "This collaborative approach makes perfect sense."

Robert Peterson, a Houstonbased consultant with Charles River Associates, says companies are increasingly partnering with firms from outside industry, such as General Electric, Siemens and DuPont, for R&D opportunities, including for chemical processes or using biological techniques for upgrading.

Also, the oil and gas industry has generally favoured incremental technology development, he notes.

"If you look at a typical oilsands technology budget, a general characterization is that 80% to 90% of the spend is on short-term technology and technology application," Peterson says, adding the remaining is on fundamental breakthrough science.

But breakthrough technologies are critical, notes Asgarpour, pointing to horizontal drilling, which helped to change the face of industry.

"Those are still needed but I would say right now we've got to look at areas of focus," he says. "To me, the major areas that we need to focus on are reducing costs, managing environmental impacts and improving recovery from our world-class resources," he says. These must not be looked on in isolation during R&D, but examined as complementary. "To me it's doable," Asgarpour adds. "What we have here in Canada is no lack of innovative people and creative people."

As an example, he says PTAC helped to facilitate the development of a detection system for fugitive emissions, which had the dual effect of saving natural gas and reducing environmental impacts.

Research spending trends

Earlier this year, Peterson found that R&D spending had been flat in 2009 compared to the previous year, a trend that he says remains essentially unchanged.

"Firms weren't immediately responding to the downturn with knee jerk, large reductions in research and development," he says. "Some of the bigger firms in Canada, the U.S. and international that were scaling up their R&D [efforts] ... weren't able to staff up.

"Lots of people ... had empty positions. They decided not to fill those positions."

The other trend is that international operators with ambitious agendas around renewable energy development such as wind and biofuels have deferred these programs. Since most of the Canadian oilsands operators didn't have renewable energy operations, the effect is virtually nil.

"[Oil prices] have seemed to find a base ... so companies have breathed a sigh of relief," he says. "They've taken the view that there is a future.

"In general, supply costs for oilsands have come down and most operators are seeing their costs are now about $60 per barrel."

The overarching point to technology development that hasn't been a factor in previous downturns is a vigorous focus on environmental stewardship by the public, which is helping drive the political agenda.

"[Companies] fully believe that technology is critical to the efficient, large-scale production of the oilsands," Peterson says. "Carbon will have to be managed. Legislation will come in the U.S. around carbon management. [It's] not clear whether it will be cap and trade or a tax.

"The expectation was there would be some definitive regulation this year but it's likely to be next year."

In the oilsands specifically, an area of focus is on improving in-situ production techniques such as steam-assisted gravity drainage (SAGD ). "They understand the immature nature of the process and are investing aggressively in technologies to optimize [SAGD ]," he says. "Also being investigated are options for what might replace SAGD in 10-plus years."

By The Numbers

According to a recently-released survey of overall corporate R&D expenditures in Canada by Research Infosource, spending dropped amongst the country's top 100 R&D spenders to $10.09 billion in 2008 from $10.10 billion the previous year.

EnCana Corporation was the top oil and gas performer on the list at 24th overall. The company spent $88.5 million in 2008, up from $71.9 million the previous year. In terms of research intensity, EnCana's R&D spending as a percentage of revenue was 0.3%.

Husky Energy was a big mover, jumping to number 66 from 101 the previous year by boosting R&D spending 122.2% to $30 million in 2008, a research intensity of 0.1%.

Other oil and gas companies cracking the list that had year-over-year increases were Penn West Energy Trust, which upped its R&D expenditures 46.5% to $29 million, while service and supplier Trican Well Service hiked spending 21.5% to $17.8 million.

Those that recorded declines were Imperial Oil Limited, which spent $83 million, down 6.7%; Syncrude Canada Ltd. dropped 5.2% to $50.3 million; Petro-Canada's R&D expenditures fell 23.1% last year to $40 million, while Nexen had a 25% drop to $30 million. (The world economic crisis didn't begin fully hitting the oil and gas sector until late last year).