The oil and gas companies are posting huge annual profits, prices are at record highs – and are still rising in places – and reserves are dwindling. Yet the major suppliers are coming under fire for not doing enough to remain sustainable by maximising their reinvestment in R&D and in turn helping to exploit new resources and meet environmental targets.

But this does not mean R&D is dead. The truth of the matter is, the current high cost of oil production, along with the shortage of skilled workers and the increase in demand is opening the door for a new market filled with smaller players, eager to take on speciality roles and undertake research for the greater good of the majors as they carve a new niche in the market that is evolving as we hit a new era of resource production.

Oil and gas analyst for Brewin Dolphin Investment Banking Iain Armstrong says companies can now embark on a new phase of R&D precisely because the price of oil is so high. "The [large] oil companies were already doing pretty much what they could in terms of R&D," he says.

"But now, thanks to the high oil price, a lot of projects on operators' desks have moved, so to speak, from the 'pending' to the 'action' tray."


What may not have been economically feasible a couple of years ago has now become feasible and, as Armstrong says, worthwhile, especially for smaller players as an emphasis can now be placed on smaller oil companies to develop the smaller fields.

How well do you really know your competitors?

Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.

Company Profile – free sample

Thank you!

Your download email will arrive shortly

Not ready to buy yet? Download a free sample

We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form

By GlobalData

The bad news for the majors, however, is that with their mature fields comes an increasing cost. Alec Carstairs, an oil and gas partner at Ernst & Young, says: "In the North Sea, for example, production levels have been falling rapidly while costs have been rising fast over the past 12 months. And some people in the major suppliers are saying the high oil price is unsustainable."

“What may not have been economically feasible a couple of years ago has now become feasible.”

These companies are also suffering an industry skills crisis. Peter Hitchens, oil and gas analyst at Seymour Pierce, says this means that big majors have problems converting their cash into opportunity. "R&D is only a part of the picture. The majors have the cash coming in but they can't convert it into opportunity. Their big problem is a lack of skilled staff," he says.

So the majors are outsourcing areas of their R&D to small and medium enterprises (SMEs), who are developing technologies with their support, allowing the suppliers to concentrate on their core operations and proprietary R&D.

A pivotal player here is the Industry Technology Facilitator (ITF), a not-for-profit global organisation owned and governed by operators and service companies that was set up in Aberdeen in 1999 to foster relationships between the oil and gas operators and technology providers, of all types and sizes. Bringing the two sides together allows the operators to gain access to technologies which they can apply to their business.

Each year the ITF publishes calls on its website for technology proposals on particular themes. This year it includes asset integrity (now closed), decommissioning, flow assurance, subsea / ultra-deepwater and drilling / wells cost reduction. Anyone can submit a proposal.

"We are now looking for technologies that have the potential to increase production activity, improve recovery rates and/or extend the life of a facility," the ITF says. It also plans to call for proposals to promote technology transfer from other industries, such as military, medical and aerospace.


A classic example of what the ITF process can achieve comes from Brinker Technology. An SME formed several years ago as a spin-off from Aberdeen University, Brinker has won a clutch of industry awards for its platelet technology for sealing underwater pipes. As the name suggests, the technology seals pipe leaks using the same principle blood platelets use to seal cuts in our skin.

The bad news for the majors is that with their mature fields comes an increasing cost.”

The company says that, unlike the traditional clamping method, the technology can be deployed at the platform and is about 10% of the cost. From its initial focus of operation in the North Sea, it is now in use all over the world.

But Brinker's experience of getting the technology developed and deployed highlights another issue in the industry – its ingrained conservatism. As Klaire Evans, business development manager at Brinker Technology, says, "The big oil companies think they're doing enough in R&D but they also need to be a bit braver in actually adopting new technology.

"For example, getting one asset manager at a large oil company to adopt the technology doesn't mean the other asset managers in the company will adopt it – getting it into one operation doesn't mean a global buy-in.

"We were working with one large oil company a while ago and we asked them what it would take for us to prove our technology. They said we would first have to achieve a Technology Rating of 10 with them. We asked how we could do that and they said they couldn't give us a '10' until we'd done a job for them. It can be a catch-22 situation at times.

Evans says smaller oil companies can be a lot easier to deal with, as the decision to adopt the technology usually rests with only one person, rather than the series of committees that often exists with the big players.

"So there's been a long lead-in time for us, a lot of development [with the major players]." Evans says.


To be fair to the majors though, they are like large companies in any sector in that they operate through all manner of committees. And as David Marshall, senior vice-president of operations at subsea technology SME Oilexco North Sea, points out, the majors have more to lose if they back the wrong technology horse. "The small companies are better at accepting new technology but then they're not open to the same capital risk as the bigger players," he says.

“In the UK, an operator has to be spending a certain amount on R&D to get and keep its licence.”

It's a similarly mixed picture on the environmental side. Oil & Gas UK, the leading representative organisation for the UK offshore oil and gas industry, says in its Sustainable Development report for 2007, "Working in accordance with various pieces of legislation, targets have been achieved and in some cases exceeded – as in the case for the reduction of oil in produced water discharged to sea."

But as Seymour Pierce's Hitchens points out, "The regulations are so tight anyway that in general the oil companies are not unclean, as it were, and oil spills and other accidents are far more costly to the companies than the costs of keeping to the regulations."

And it is not just legislation that drives the R&D here, says Andrew Sneddon, managing director of environmental consultancy Cleanwater Systems. In the UK at least, there is government encouragement. "In this country, an operator has to be spending a certain amount on R&D to get and keep its licence," he says. "The UK government does incentivise R&D, and other countries have similar requirements."


Other parts of the world are already well ahead in areas of R&D that will open future doors for SMEs currently working in the UK market. The Persian Gulf, for example, is more advanced than the North Sea with regard to environmental protection.

That applies to the issue of renewables too. For example, Carstairs at Ernst & Young says, "On the environmental side, I don't think the big oil and gas companies are investing enough in renewables, and that is where some of their surplus cash should be going."

"Historically, the oil and gas companies have not invested enough in their infrastructure and maintenance, but they are now going back to their budgets so I'd be looking at the oilfield maintenance sector and the service companies in it," Carstairs says. "Also, while the North Sea is now declining in activity it has allowed Aberdeen to build for itself a reputation as a worldwide centre of excellence, so I think there are a lot of opportunities for investing in service companies based there."

So R&D at present may not be something the major players are overly concerned about, but it is an area where smaller players can really start to make a mark in offshore operations, especially with the buoyancy of the market at present and requirements to manage our natural resources even better in future.