​Thinking like a start-up: Oil and gas innovation needs to go beyond just cool new gadgets

BP once coined the phrase “Beyond Petroleum” as part of an aspirational corporate re-branding strategy to align it with a low-carbon future. It invested into solar and wind development and some manufacturing capability and started putting projects on the ground. But then it sank into the oily mess of the 2010 Deepwater Horizon disaster. Suddenly carbon emissions were the least of its problems.

While other supermajors were snapping up acreage to drill and frac in hot U.S. onshore resource plays such as the Marcellus, Eagle Ford and Permian, BP was selling assets to pay $60 billion in oil spill–related fines, cleanup and restitution. It sold $75 billion of its worldwide assets, including 400,000 acres in the Permian basin for $3 billion to Apache in 2010.

By 2013, climate change slipped lower on the public policy radar, and BP exited renewables entirely. It also had no exposure to the big U.S. shale plays—nothing in the Bakken, Permian, Marcellus, Utica or Eagle Ford.

How would it move forward?

“When we talk about innovation, people think shiny, new, cool things. It’s a very technology-centric mindset, but that’s missing the point of what innovation really is,” says Wally Thorson, director of technology and market intelligence for Kinetica Ventures, an energy-focused program of Innovate Calgary.

What BP needed most was innovative thinking to find its way out of a dire situation. Its balance sheet was heavily stressed. It faced a reputational challenge. And all BP had left in its U.S. onshore portfolio were seemingly uninspiring assets compared to the hot shale plays.

In some ways, the oilsands as an industry finds itself in a similar trough today.

Read all about Canadian oil and gas innovation in the latest edition of Oilweek.

Now versus later

Innovation is about companies finding new ways to solve problems that unlocks more value.

“It’s about future business, not current business,” says Thorson, who urges companies to see innovation in a wider, business-model context.

“Where this becomes a challenge for most people is that organizations are highly tuned to the execution of the present. That’s where they’re making money and where their operational challenges are,” he says.

Thorson claims that most of the disruptive innovation in the last few decades has come from start-ups, many of which are leveraging the internet and data technologies to create entirely new business models. Skype disrupted the long-distance telecom business by exploiting the internet to carry voice calls. Facebook disrupted the print media industry by having its users create the content that draws other users to their platform.

Since start-ups have little to lose by exploring different models of the future, they can look for ways to create value beyond traditional incremental improvement efforts.

In this sense, Thorson describes start-ups as “temporary entities that are searching to discover a desirable and profitable business model that can then be executed at scale.”

“They often try to create value through rapid iteration, versus linearly. According to Steve Blank, a guru of start-up culture in Silicon Valley, almost 90 per cent of successful start-ups end up pivoting several times before they figure out where they need to go in order to succeed in the market,” he says.

Start-ups also spend a lot of time in the exploring and learning stages before jumping to the doing stage. This allows a start-up to more fully understand the problem that needs to be solved and discover what customers really desire.

Unfortunately, the oil and gas industry has “startlingly few” start-ups, according to Thorson. This is partly because the industry is so capital-intensive. Two guys with some time and programming skills can bring something new to the market in Silicon Valley, but it’s not so simple in Alberta’s oilsands. High capital requirements make for a mindset of risk mitigation, which can diminish the appetite for the kind of rapid iteration and experimentation that can lead to discovery, Thorson says.

So the oil and gas industry has to strike a skilful balance between its focus on where it is and where it needs to go. He suggests reframing innovation as “How can we learn faster for less?”

Large producers are likely to have the hardest time shifting mindsets, but they can learn something from the more iterative and faster learning approaches of start-ups.

David Lawler, chief executive of BP’s U.S. Lower 48 onshore business, came from Shell and fully appreciates the challenge he faced in changing the oil giant’s innovation culture.

To stop the bleeding, one of the first things he did was put a halt to the sale of assets before it tested and at least understand what it was selling; in other words, he put an end to missteps, such as its Permian asset sale to Apache.

Lawler recognized its U.S. onshore future was in resource plays. BP’s assets included six million acres of largely untested properties and mature fields in the southern San Juan Basin of New Mexico. But to run resource play exploration and development on its properties would require slightly different skill set.

It needed a nimbler, lower-cost, higher-frequency approach in order to compete with the best resource play operators. It needed to learn faster for less. So rather than follow a grand, aspirational vision for its future, Lawler steered his division back to the basics. This wouldn’t win it any popularity contests, but at least it acknowledged that an oil and gas company may not be in the best position to compete in the manufacture solar panels or to turn a profit in the power business.

So after years of applying the skills it had on the properties it held in the U.S., BP announced this August the discovery of a gem in the largely ignored Mancos shale of New Mexico where it brought on a well that produced 12.9 mmcf/d, the highest output achieved in the San Juan Basin in 14 years, according to BP.

This work brings gas explorers one step closer to unlocking a shale play that, according to the U.S. Geological Survey, is one of the nation’s largest reserves of natural gas. It also potentially re-establishes BP as an oil and gas force in the U.S.

Necessity: The mother of invention

While BP’s experience isn’t a perfect analogy for the challenges facing the oilsands, Alberta’s bitumen industry is severely challenged in the current environment.

“But the low oil prices and the focus on carbon emissions is also providing a real stimulus to innovation,” says Harrie Vredenburg, academic director of the Global Energy Executive MBA at the University of Calgary’s Haskayne School of Business.

Vredenburg sees a lot of cutting-edge innovation right now geared toward eliminating unnecessary costs in the construction of pipelines and facilities by applying the latest IT advances from Silicon Valley to the oil and gas world.

“I see innovation happening at three different levels: at the individual corporate [producer] level individual, the collaborative industry level and at the level of the service companies. All of them are focusing on trying to find a way to survive a $50 oil or even maybe at $45, which means having to grind those costs down,” he says.

Oilsands companies, such as Cenovus, Canadian Natural Resources and Suncor are focusing on efficiency to reduce costs because that also correlates almost directly to reducing carbon emissions.

At the collective industry level, collaboration has emerged as potentially the most effective accelerator of innovation. Collaborative research and development has also expanded into areas that traditionally were considered competitive advantages for companies.

“So groups like [the Canadian Oil Sands Innovation Alliance] have renewed relevance. They’re collaborating as much as is possible without skirting the Combines Investigation Act,” a Canadian regulation aimed a curbing anti-competitive corporate business practices, Vredenburg says.

In service industry, part of innovation is creating cool gadgets, but most of it is happening in the field. This means improved well configurations, the addition of solvents to steam in SAGD, and other advances that continue to reduce costs for oilsands producers right now.

The industry is also working on longer-term innovations, striking a balance between current business and future business. So oilsands facility expansions in the future are envisioned as smaller, more standardized and repeatable, while research continues on more efficient ways to generate steam for SAGD operations, such as direct steam, non-water-based methods to mobilize bitumen in reservoirs and partial upgrading.

“So it’s all three levels of innovation at work because the pressure is there to get the costs down,” Vredenburg says.