Process Development Disruption in the Oil & Gas industry: Open Innovation to Drive Value in UK Under-Explored Areas
In 2015 and 2016 the UK Government took a new approach to attract interest to its oil & gas resources, adopting an open innovation model as a short and long term value driver in the country’s energy sector. First steps included large investments in acquisition of seismic data to be later published openly to academia and companies. Further measures included the creation of an oil & gas national data repository to provide enhanced and trusted data on the widest possible terms. In this essay, I describe the UK Government’s incentives to adopt this megatrend; additionally, some further questions are outlined in relation to the sector’s motivations to further commit to this development process.
In early 2016 in the midst of the oil price crisis, David Cameron, former UK Prime Minister, announced an action plan to boost the oil & gas industry in the country. Included in this package was a £20 million UK Government-Funded seismic program to promote exploration activity in under-explored off-shore areas. This data would then be openly available to allow academia and companies to identify and target a range of opportunities [1]. Traditionally, seismic acquisition expenditures are directly incurred by companies; also, as costly information, this data is not openly shared. What encouraged the UK Government to take this approach? What was the value proposition of this open innovation model in this industry?
Seismic surveying is a key aspect of the oil & gas exploration process. Geologists use seismic surveys to produce detailed images of the various rock types and their location beneath the Earth’s surface and they use this information to determine the location and size of oil and gas reserves [2]. From this information, an expected economic value can be estimated and, if the expected economic benefits are greater than the costs, an exploratory drilling campaign is planned. Drawing a parallel to a product development funnel, the seismic acquisition could be considered one of the earliest phases in the concept development; the analysis of this information narrows uncertainty and leads to greater product definition [3].
The acquisition and use of seismic data depict in several ways the overall situation of data in the industry. The oil & gas sector generates large amount of data, according to IHS Markit, data volumes are now exceeding 10TB of data per day for a single well [4]. However, the information is generated through expensive process, creating high entry barriers. Moreover, the data is considered proprietary information, controlled by firms to safeguard its competitive edge.
By publishing the seismic data under open licenses, the UK government is embracing a process development megatrend: open innovation [5]. According to one of the project stakeholders “The completion of the data acquisition stage of the seismic programme is very good news at a time when the sector is challenged with attracting fresh investment into the UK. It clearly demonstrates that government and industry can work together to make a significant contribution to developing understanding of the basin. By ensuring that the data will be made available to both industry and academia, the Oil & Gas Authority (OGA) is promoting maximum value from the surveys, which will help to stimulate further exploration activity in the UK.” [6]
The UK Government is using open innovation to reduce entry costs, generate more ideas, and accelerate the exploration process in UK under-explored offshore basins. Under-analyzed basins information is being allowed to go “outside” to be incorporated freely in other’s innovation process. And the strategy seems to paying off, according to the UK OGA, in October 2016 promising applications were received for this frontier licensing round. Multinational companies and new company entrants submitted high quality applications on blocks that did not attract interest in previous licensing rounds. [7]
The UK Government has push even further, adopting the open innovation model as a long term driver of value and investment in UK’s oil & gas sector: in 2018 the UK’s OGA announced the publication UK petroleum-related information (such as well, geophysical, field and infrastructure data), the UK Oil and Gas National Data Repository – NDR. By enhancing collaboration and driving innovation and learning as an industry, the NDR is expected to deliver 3 billion barrels of production over the next 17 years. [8]
External stakeholders, including well stablished industry leaders, see this megatrend as great promise to the oil & gas industry. According to Chevron’s Upstream Europe Managing Director “(…) we need a shared understanding and commitment to collaboration for digital in the industry. The Oil and Gas Authority (OGA) has launched their Open Networks which enables anyone to access a wealth of public data on the United Kingdom Continental Shelf (UKCS) in an amazingly easy way. It’s for anyone to use to drive better business decisions.” [9]
From a government perspective, the value proposition of the open innovation model in the oil & gas industry is clear. However, several questions remain regarding whether this model can be used by the entire industry:
- Are the open innovation incentives high enough to encourage companies to give public access to their proprietary, and expensive, information?
- The digital disruption will reshape the current operating procedures in the oil & gas industry; however, is people in the industry prepared with the right set of skillsets?
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[1] GOV.UK. (2016). PM announces further boost for UK oil and gas industry. [online] Available at: https://www.gov.uk/government/news/pm-announces-further-boost-for-uk-oil-and-gas-industry [Accessed 13 Nov. 2018].
[2] Seismicsurvey.com.au. (2018). Seismic Survey | A vital part of oil and gas exploration. [online] Available at: http://www.seismicsurvey.com.au/ [Accessed 13 Nov. 2018].
[3] Product Development Fundamentals. (2016). Harvard Business School, (9-617-024).
[4] IHS Markit. (2018). Data: Is the oil and gas industry’s most valuable resource being overlooked?. [online] Available at: https://ihsmarkit.com/research-analysis/Data-is-oil-gas-industry.html [Accessed 13 Nov. 2018].
[5] Boudreau, K. and Lakhani, K. (2009). How to manage outside innovation. MIT Sloan Management Review, 50(4), p.4.
[6] Oil & Gas Authority. (2015). OGA completes data acquisition in £20m UK seismic campaign. [online] Available at: https://www.ogauthority.co.uk/news-publications/news/2015/oga-completes-data-acquisition-in-20m-uk-seismic-campaign/ [Accessed 13 Nov. 2018].
[7] Oil & Gas Authority. (2016). Promising applications received for UKCS frontier licensing round. [online] Available at: https://www.ogauthority.co.uk/news-publications/news/2016/promising-applications-received-for-ukcs-frontier-licensing-round/ [Accessed 13 Nov. 2018].
[8] Oil & Gas Authority. (2018). The UK’s first Oil and Gas National Data Repository to deliver additional value and inward investment to the UK. [online] Available at: https://www.ogauthority.co.uk/news-publications/news/2018/the-uk-s-first-oil-and-gas-national-data-repository-to-deliver-additional-value-and-inward-investment-to-the-uk/ [Accessed 13 Nov. 2018].
[9] Chevron Policy, G. (2018). The digital transformation opportunity. [online] chevron.com. Available at: https://unitedkingdom.chevron.com/news/latest-news/2018/the-digital-transformation-opportunity [Accessed 13 Nov. 2018].
I would echo your last questions and worry even further – essentially, what will this really change? The idea that academia has access to little-surveyed oceanographic data has unclear benefits, and for private oil & gas companies, simply reading data (and even finding indicators of promising sites in overlooked areas) is not the barrier to starting a project – everything else is! Buying rights, construction & maintenance of extraction facilities, refinement … oil & gas companies are the only ones that could make use of this data in the first place, and now you’re just cutting out one of many large costs from them. From a cynic’s perspective, this effort really just sounds like it made the rich richer.
I can see this being a step in the right direction from the government’s perspective in terms of reducing the cost of entry for new participants in order to generate greater exploration activity, especially around underexplored basins. However, I wonder if a £20 million program is a large enough signal for the industry given that many of the oil & gas companies already have their own acquisition expenditures that go up to billions of dollars? It makes me wonder whether there are any additional levers that the government can pull to really bring in open innovation to this industry.
I really appreciated the insights you shared in your article – especially the nuances in the benefits and the real-world business concerns that you identified.
As I read your article, I immediately thought of the open-innovation model for space exploration that NASA has created. Any information collected by its equipment, such as a Hubble Telescope, is made public within 24 hours. This has resulted in amazing discoveries. Rather than just NASA employees looking at the large volume at data created, hundreds of millions of people around the world look into the data and find insights that lead to unobvious discoveries.
However, given that oil and gas is a very competitive space for private industry, I think open innovation would be hard to sustain unless the number of opportunities vastly outstripped the capabilities of existing companies to make use of them. If a company was convinced that someone else using their data would in no way affect their business prospects, then perhaps the right incentives could be created.
Very interesting article!
I see this government initiative as a great first step to create more value for the UK as a whole. By lowering the costs of acquisition of seismic data, the UK is basically creating a bigger market for the bidding of O&G blocks. Ultimately, this will lead to more bids and a higher return for the UK taxpayers. Therefore, I don’t agree with the comment from Jeff Dean about “making the rich richer”; this initiative will give the chance to any capitalist around the world to invest in this opportunity and to hire a service company (e.g. Schlumberger) to do the exploratory well.
On your question of whether open innovation incentives are high enough to encourage companies to give the public access to their info., I would say this does not change their incentives of not sharing. One of the initiatives the government could implement is actually to pay for the seismic data already acquired from those companies and propose to analyze it for free (leveraging their public universities) only if they concede to share it with other players.
Thank you for sharing this fascinating application of Open Innovation in the Oil and Gas sector. I am not convinced that the use of this model by the UK Government is indicative of a larger shift to open innovation by the industry. I do not see any incentives to justify O&G firms contributing to the publicly available data and expect them to primarily be consumers of such data. The UK Government seems to have had a specific set of motivations around lowering barriers to entry, enhancing competitiveness, and increasing oil production from its offshore deposits. I would be interested to know the level of exploration in UK offshore fields till date and whether it has significantly lagged exploration efforts by oil companies elsewhere, to understand the justification for this model. On a broader note, the spread of this model to other governments around the world would be a disturbing trend – it echoes Jeff Dean’s comment where governments would take on the financial burden of some of the exploratory costs from companies that already have the resources to do so.