What Big Oil Can Learn From Big Blue

Robert K. Perrons, SPE Shell International E&P

Let’s face it: everyone likes to feel special. It is therefore somewhat understandable that decision makers in the energy industry often believe that trends and patterns that have emerged elsewhere in the business world do not apply to the oil patch. “The oil business is different!” they proclaim. “That could never happen to us!”

But sometimes we are not exempt from the immutable forces that shape the rest of the business community. Decidedly unoriginal concepts such as supply and demand do tend to be reliable predictors of oil and gas prices, and prospective investors scrutinize energy companies’ profit and loss statements as closely as those from any other industry. It therefore follows that we might be able to learn from other sectors from time to time. The evolutionary history of IBM—frequently referred to as “Big Blue” in the business press—may offer just such an opportunity.

The oil and gas sector historically has been very slow to develop and adopt new technologies, and relative investment in R&D by Big Oil traditionally has been only a fraction of that spent in other industries. But the industry is being forced to change. Future hydrocarbon resources—particularly in non-OPEC countries—will tend to be deeper, harder to find, and in environments that are significantly more difficult to access. There can, therefore, be little doubt that technology will play a pivotal role in the success or failure of tomorrow’s oil and gas firms.

This sharper focus on technology is shaking up the strategic fundamentals of our industry. Many years ago, when innovation was less critical, much of the oil and gas sector’s technology came in the form of know-how and experience that was often uncoded, nonverbalized, and embedded in organizational routines. A country with hydrocarbon reserves usually enlisted the assistance of international oil companies (IOCs) to gain access to engineers who collectively held the knowledge required to turn the country’s energy resources into revenue. The know-how required to achieve this end was both difficult to reproduce and hard to get from any source other than a handful of firms.

A Shift to Science

As the industry has been forced to reach for more technically ambitious reserves, however, this uncoded knowledge is giving way to technologies that are based less on experience and more on hard science. While decisions might have been made a generation ago with rules of thumb and gut instinct, data now reign supreme. Reservoirs are modeled in three or four dimensions with high-end computers not unlike those used by NASA, and the entire production system can be monitored by “smart” sensors that allow engineers to observe various aspects of its performance. Rules of thumb will probably always be handy for engineers, but today’s oil and gas technologies are frequently too complex for unaided human judgment.

This shift from know-how to hard science is, in turn, bringing about a modularization of technology in the industry. Many of the instincts and engineering principles learned throughout Big Oil’s storied history are being captured in new tools and software packages. Once these principles have been coded and formally packaged in a tool design or software algorithm, they can be deployed around the world. This is not to say that experience is no longer needed to develop and produce an asset. Human judgment is and will continue to be a critical ingredient. But at the same time, these technologies are handling many of the more pedestrian tasks and decisions that would have been dealt with by an engineer a decade or two ago. Accordingly, one engineer can now do the work that many used to do—and they can often do it from almost anywhere in the world.

In this more modular and tradable form, this new breed of oil and gas technology is threatening to erode the market power of Big Oil. The industry’s emerging technologies are not being devised in an integrated way on a single company’s workbench; rather, they are being artfully pieced together from a broad range of independent vendors who will gladly assist any paying customer. This piecemeal approach to R&D is intensifying the forces of commoditization within the industry, and Big Oil’s strategic landscape is much more crowded than it once was. With access to much of the same technologies as their IOC rivals, national oil companies have spilled out of their own countries’ borders and are now competing internationally with IOCs. Also, smaller independent oil and gas firms are able to pursue opportunities that would almost certainly have been considered out of their league a generation ago.

Moon Shot Innovations

This strategic shift in the industry seems to hint very strongly at a best way ahead for Big Oil in the future. It will not be enough simply to develop more technology. From the point of view of the IOCs, the architecture of an innovation probably will be more important than the amount of value that it delivers to the customer. Continuing to churn out technologies that can be easily modularized and mimicked will only continue to weaken the strategic footing of these companies. Instead, they should focus on extremely ambitious and complex “moon shot” innovations and accompanying support services that cannot be easily broken apart and duplicated, and that are highly integrated by their very nature. In doing so, IOCs will once again be able to approach petroleum-rich countries with development proposals that are genuinely unique and that leave competitors scratching their heads.

Therein lies the lesson that Big Oil should be learning from Big Blue. IBM already has conveniently demonstrated what happens to firms that modularize technologies without strategically retaining the ability to integrate components and software in a unique value-adding way. As Charles Fine of the Massachusetts Institute of Technology points out, early generations of computers in the 1970s had highly integrated product architectures, but IBM’s managers decided to pursue a modular and highly reproducible architecture for the personal computer (PC) that the company released in 1981. Instead of relying on in-house components, the microprocessor for the new PC was outsourced to Intel and the operating system was developed by a young startup company called Microsoft. This strategy opened the door for a raft of PC-compatible “clone makers” such as Compaq and Amstrad, and IBM shareholders saw nearly $100 billion evaporate from the company’s market value between 1986 and 1992. IBM’s rebound since then has largely been the result of a reversal of this modular approach in favor of a highly integrated business model in which the company offers bundles of technologies, software, and consulting services that IBM’s rivals often have trouble imitating. The firm’s “intelligent oil fields” family of products is an example of this approach.

Although the energy sector is undeniably different from the computer industry in several important ways, decision makers in Big Oil would do well to learn from Big Blue’s hard knocks and its subsequent comeback. Now that the oil and gas business is evolving to become a data-driven industry, it may start to behave as data-driven industries do.

This article reflects the personal views of the author, and should not be interpreted as a reflection of Shell’s official position or policies.

Robert K. Perrons, SPE, is a Smart Fields Consultant in Shell International’s E&P Division and an Affiliated Researcher at the University of Cambridge’s Centre for Strategy and Performance. He earned a BEng degree in mechanical engineering from McMaster University in Canada, an SM degree in Technology and Policy from the Massachusetts Institute of Technology, and a PhD degree in engineering from the University of Cambridge, where he was a Gates Cambridge Scholar. He is chartered as both a C. Eng. (IMechE) and Eur Ing professional engineer. His website is located at www.perrons.net.