Innovation seems to be one of the more prominent management buzzwords today, with energy companies competing with one another to demonstrate their leadership in this area. Despite its position on the hype curve, IHS CERA contends that Innovation truly does matter and that energy companies are pursuing, yes, more innovative ways to develop and then leverage solutions. The upcoming IHS CERAWeek conference will explore many of these new pathways through both our Energy Innovation Pioneers Program and some of our more focused strategy sessions.

Too many equate the state of energy innovation to how much companies are spending on traditional research and development (R&D). That's a mistake. Such thinking fails to recognize how technology development actually takes place and is accounted for within the oil and gas sector. Energy companies have long looked beyond their own corporate research laboratories for solutions that can address the business and operational challenges they're encountering and can capture the next set of opportunities they're pursuing. University collaborations and field-based piloting and experimentation are two noteworthy examples that don't always show up in official financial filings. Additionally, one might argue that a substantial portion of exploration and field development activities actually should be classified as R&D. Other industries lauded as innovation pioneers, such as Pharmaceuticals, do include such equivalent activities (e.g., the drug discovery phase) in their R&D totals.

The growing vibrancy of energy-related innovation is most strongly evidenced in the expansion of what we refer to as companies' Innovation Portfolios. Just as executives seek to actively manage their asset portfolios to secure the highest return, so too are they assessing in what areas and at what levels they should be investing in technology development to deliver the most value to their businesses, over both the short- and long-terms. Their options are growing:

• The Globalization of Innovation. Whether because of incentives, stipulations, or business need, companies are looking beyond the traditional research hubs of the US and Western Europe and toward emerging regions. Brazil alone is projected to see nearly $1 billion in additional upstream oil and gas-focused technology development funding annually over the coming decade.
• Open Innovation. Many companies are beginning to emphasize a long-term, high-value approach to university partnerships over a more common hands-off one in order to achieve higher levels of collaboration and a greater say in directing technology development. Crowd sourcing is a slightly more radical approach that has shown niche applications.
• Alternative Investment Vehicles. Recognizing that good ideas come from diverse sources, many Major oil companies have now established Corporate Venture Capital groups that allow them to access early stage technologies across a range of scientific disciplines.

In balancing their portfolios, business executives must weigh the benefits and needs of owning the developed intellectual property, of meeting local content and technical development requirements, and of aligning with broader business strategies.

An analysis of upstream oil and gas R&D spending trends does, however, reveal several interesting insights about evolving industry dynamics. Figure 1 charts R&D spending rates over the past few decades by both the oilfield services sector and one segment of exploration and production (E&P) firms. Declining spending on the part of oil companies from the mid-1980s until 2003 reflects in part industry consolidation, the squeeze of lower commodity prices, and some Independents shuttering their research programs altogether as they came to the realization that "size matters." Over the latter part of this same period oilfield services firms have nearly tripled their research investments to reflect their expanding industry role. It's only recently that oil companies as a group have begun to re-assert their technology leadership role through sharply higher spending rates as they head into more challenging operating environments such as the Arctic and seek to confirm themselves as the partners of choice to major resource holders.

Posted 28 February 2013

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.