Upstream Business of the Future: Funneling Changes Everything

Dutch Holland, Chairman, Holland & Davis LLC

While the “digital oil field of the future” is generating lots of excitement, this enthusiasm should not dominate the industry’s thinking about the real upstream business of the future. But it is, and it is time that this changed.

Although nobody knows exactly what the upstream business of the future will look like, shaping forces are already in motion. In addition to the digital oil field’s bright lights, shaping forces are coming from three other innovation areas or fronts: conventional technologies, management disciplines, and technologies from the manufacturing industry, with technology defined as any know-how vital to a business. The latter includes hardware and software.

The business problem is that innovation areas outside of conventional technologies typically do not receive their fair share of attention or funding. What is needed is a single, big “funnel” through which all technologies sift, allowing operators and service providers to choose the most promising ones based on merit rather than the newest fad, conventional wisdom, or long-followed business practices. Balance is the key.

It is not surprising that conventional technologies get the lion’s share of R&D money because conventional technology has produced a wealth of new E&P techniques over the years. Those technologies have dramatically helped companies find hydrocarbons more easily and cheaply, as well as produce them more efficiently and in greater volume than ever before. Horizontal drilling is a prime example.

Look more closely at three innovation fronts other than conventional technologies. One promising front is the aforementioned digital oil field of the future, also called the e-field or even “drilling on the computer.” It is defined as the application of information technologies and computer applications to the various upstream operations. The automated oil field might enable an individual at headquarters to monitor production wells, open and close valves, and determine when it is time for certain wellsite operations. Or it may be remotely controlled actuator valves or wireless communications with handheld devices that make invoicing obsolete. The digital oil field is a seemingly endless innovation generator.

But equally significant is the adoption of best practices and proven technologies from what amounts to a revolutionized field of manufacturing techniques that could produce increased savings and higher productivity in upstream operations. Examples include flexible manufacturing techniques that have made ultradeep offshore drilling attractive to independents, process improvement techniques that reduce downtime on rigs, and work process standardization for drilling operations that allows continuing improvement in performance and reduction of human errors.

The third innovation area outside of conventional technologies—management disciplines—focuses on more robust project and program management. Certainly, capital projects have been project managed in the oil and gas industry for decades. But at what “real” cost? Studies show that less than 5% of all projects actually meet project managers’ key objectives such as being on time and on budget. That clearly needs major improvement, and it will be necessary to shift from informal project management “on the back of an envelope” to a more disciplined approach of managing projects with their inherent risks.

How can management help ensure that its company’s journey to the upstream business of the future will be successful? Executives must “think implementation” from the outset of any innovation. In E&P, that means recognizing that eventually new technologies must be put to work in the field, but there is real risk that the technologies will not be adopted as rapidly as they could be. So, key operations people who determine the adoption rate must be tapped early, and technologists must be linked closely with key operations personnel for effective deployment of any new technology.

The bottom line? Yes, an emphasis on balancing conventional and nonconventional technologies is a radical departure from having virtually all money going to conventional technologies. But balancing can offer substantial rewards. Realistically, not everybody can be given limitless funds for experimentation. Management must declare flatly that there is now a single funneling mechanism sifting all new technologies without bias and acting on the most promising ones.

Based on transition methodology, funneling just makes sense. One, keep a balanced focus on innovation fronts that can deliver value to upstream business of the future. Two, build awareness and educate on the possibilities of the most promising technologies. Three, conduct multiple pilots of the most promising new technologies. And, four, focus on efficiently integrating the best new technologies into the company’s daily operations. Of course, these steps alone will not tell us what the upstream business of the future will look like this year or next. The steps do, however, give companies the clear opportunity to shape their own upstream future more effectively.

So, the next time an executive is pitched the newest digital oil field of the future fad, he can say, “That sounds good, but we will have to see where that fits in our innovation funnel.” What are the relative merits of investing in that vs. improving project management? Why won’t a U.S. $1 million project leveraging flexible manufacturing deliver more bang for the buck than putting $10 million into new horizontal-drilling techniques? What is the potential return on investment?

When deciding on investment in innovation, the message resounds: Management must look at all new technology fronts through a single funnel, provide balanced funding for the most promising innovation areas, and think implementation from the start—to optimize the upstream business of the future.

Dutch Holland is Chairman and founder of Holland & Davis LLC. He has worked as a management consultant since the 1960s, developing a wide range of tools and concepts for managing change. Holland focuses on strategy, organizational design, management of technology, team building, management of quality, and executive coaching. He has been an adviser on industrial innovation to the U.S. President and Secretary of Commerce. Holland has taught in executive programs at Rice University, University of Houston, University of Texas at Austin, and the Wharton School Securities Industry Institute.