In a related update published last week, we described how the brute force enterprise of nano-darcy E&P is becoming more elegant. Elegance is achieved as sub-surface understanding moves closer to a realistic picture of the reservoir.
Enhancing sub-surface understanding is where leading innovators in shale are focused today. They are building tools that empower operators to apply brute force in formations with higher degrees of sophistication.
In Houston in November, we spent a day at the intersection of technology and shale. A structured discussion between operators and innovators hosted by Darcy Partners fostered collaborative evaluation of bleeding edge completions technologies.
The specific technologies we saw were interesting, offering compelling value propositions and fresh ideas around modern unconventional pain points. But most striking were the underlying themes that revealed themselves during the day of conversation.
As shale tech start-ups and operators interacted, some themes were explicitly stated and others were implied by the discussion. We chose the five themes that resonated most with us to share in this update. These concepts will influence completions market dynamics this year and for years to come.
Five Innovation Themes For 2017 That We Saw In Action At The Darcy Completions Forum
- Giant Operators And Tiny Start-ups Need Each Other. This is more than just a customer / supplier relationship. Behaving more like partners, 12-man shops and billion dollar companies are diving into problems together because they can find solutions faster together. Through a highly iterative process between giant operators and tiny start-ups, new solutions are being refined and optimized faster than ever before in shale. Here’s a few benefits from close collaboration we see for each side:
A. Operators Need Start-ups
- There is efficiency in small specialized teams focused on niche solutions. Many oil companies do not have internal technology research and development teams (or they’ve been downsized)
- Relentless entrepreneurs focused on survival move faster than comfortable bureaucracies
- Diverse solutions advancing independently create an “efficient frontier” for technology
- Operator toolboxes fill with synergistic, low-cost tools
- Early adopters accrue advantages when experiments work
B. Start-ups Need Operators
- Access to wells and internal workflows of operators is a requisite for testing new ideas and building performance history
- Operator questions focus the entrepreneurs on issues that really matter
- Initial customer references can unlock expansion to other operators and attract capital to grow their ventures
- Better Off Alone. While the proliferation of startups creates a hotbed of new ideas, internal operator R&D also drives technological discovery. Instead of trying to keep a lid on the technology, operators have realized that good new ideas may be choked out if kept internal. To reach full potential, niche solutions need to be tested by many operators in many settings. So operators are increasingly taking a build, implement, sell approach to R&D. An example is Statoil’s fracture mapping technology that is soon to be the foundation of a technology / service spin-off. In spinning off the tech to stand alone, operators benefit from a) better returns on R&D investment and b) better solutions in the field.
- Internal Tech Venture Capital Groups. For years, some of the largest majors have invested directly to support innovative O&G tech pioneers. For example, Chevron Technology Ventures has been a conduit for early adoption of emerging technologies since 1999. As shale demands more elegant solutions, this venture capital model is receiving serious consideration from the Independents. Companies like Pioneer Natural Resources and Marathon have recently formed internal groups to evaluate and source innovation. Internal “innovation teams” may be a precursor to outright venture capital groups forming at the Independent E&P level.
- Darwinian Innovation Is US Shale’s Competitive Advantage. For every technology home run, there will be many strike-outs. Darcy Partners invited only 11 elite start-ups to participate in the event from a field of more than 100 firms they studied. Life at the bleeding edge of technological change is hard. But in this Darwinian nature of the US shale tech start-up landscape lies its competitive advantage. An incredibly powerful innovation engine is churning in the US shale industry, and no other market can duplicate it. US tight oil doesn’t have the natural cost advantage of OPEC’s vast conventional reserves, but no other country or play in the world can match shale’s innovation game.
- Crossing The Chasm. Many technologies fail not because they don’t work, but because they don’t scale up quickly. The founders either lose stamina or run out of cash. Investors are not interested in long sales cycle ventures. The key to success is to prove the technology in a few field trials and then quickly scale. New platforms like the Darcy Partners completion forum – which connects the winners of the Darwinian technology game to the right people from the right operators – can shave off months if not years from the historically slow adoption cycle in oil and gas.
Disruptive Tech Is No Longer A Luxury
Shale is at the technological forefront of the oil and gas industry these days, for exploiting nano-darcy permeability rock at $50 oil makes disruptive technology a requisite not a luxury. Innovation is happening in the construct of our five themes.
Operators are investing hundreds of millions of dollars fostering and identifying the best new ideas. Their door is open wide to innovation but finding the right ideas (low-cost, scalable, adaptive) to improve completion designs can be a challenge as the field of folks pitching ideas grows.
We came away from the day in Houston impressed by the technologies developed by the innovators and openness in sharing learnings among operators and hopeful that with the right structure and careful curation of these ideas, Darcy can accelerate the rate of adoption in the industry and improve US tight oil’s global competitiveness at $50 oil.