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Financial benefits of technological innovation in the oil and gas industry

Written by Jess C.

 

1. Introduction

The oil and gas industry has been demonstrating a steady growth trend in the last several decades (OECD, 2017). However, its development is currently hindered by the depletion of existing minefields, environmental concerns, the need to develop unconventional sources of natural deposits, and volatile energy prices (Graph 1).

Technological innovation is one of the methods utilised by oil and gas industry organisations to address these problems and maintain a proper balance between profitability and sustainability (Zendehboudi and Bahadori, 2016). Nevertheless, it is not clear if this approach can help these firms achieve positive return-on-investment results. The aim of this essay is to analyse the key financial benefits of technological innovation in the oil and gas industry.

 

2. Problems Caused by the Lack of Innovativeness in the Oil and Gas Industry

Oil and gas, the most critical resources in the modern environment, are highly relevant as an energy source and the feedstock necessary for the production of various consumer products (OECD, 2017). Therefore, this industry is highly commercialised and companies operating in it seek to maximise their profits while reducing their operational costs levels. However, the extraction of oil and gas is associated with complex technological procedures and frequently requires innovative approaches due to the depletion of existing minefields and the need to improve the efficiency of the extraction process in general. The implementation of new ideas in the oil and gas industry is often substantiated by the development of new and more effective methods and extraction techniques (Zendehboudi and Bahadori, 2016). These solutions, which often provide substantial cost savings and environmental footprint reductions, can address oil and gas companies’ current problems.

The most recent decrease in oil prices has emphasised the importance of technological innovation for the survival of oil and gas companies (Tebepah, 2015). The benefits from new technologies are primarily realised in the field of drilling, the maintenance of aging fields, deep water extraction and the removal of solids (Mirimoghadam and Ghazinoory, 2015). At the same time, it is not clear if these advantages would result in financial outputs as their application is associated with the depletion of traditional sources of oil and gas sources. There is also a need to extract the mentioned resources from less convenient locations, which may increase operational costs (Zendehboudi and Bahadori, 2016). The reduction of oil reserves forces companies to use non-conventional sources such as shale oil and gas formations (Golden and Wiseman, 2014). The extraction techniques required for maintaining these fields such as hydraulic fracturing require high degrees of competence from the personnel due to their innovative character. Therefore, organisations in the oil and gas industry have to constantly invest into employee training and purchase specialised equipment to work with these new sources of natural reserves.

One more sphere of innovation is associated with liquefied natural gas (Nilsen, 2017). The extraction of this highly demanded resource requires substantial technological competence from both the developers of new sources and the operators of extracting equipment. This further emphasises the problems of preparing qualified staff and developing the technologies within the countries possessing vast gas reserves on their territories. The analysis of the Brazilian oil and gas industry by Alves and Zawislak (2014) established a negative relationship between technology development levels and transaction costs and expenses. While this country has rich natural deposits, the effectiveness of its oil and gas industry is limited in terms of exploration and extraction by technological limitations as well as the lack of specific innovative instruments such as drilling platforms, sea vessels and processing facilities (Alves and Zawislak, 2014).

The modern environment also provides various cooperation options in the oil and gas industry (Dubarle and Woyessa, 2016). Companies operating in this field can work with recognised research universities to achieve financial benefits in several ways. Firstly, these organisations can purchase the innovative solutions developed by educational establishments (Baaziz and Quoniam, 2015). Secondly, they can develop courses or programmes for students or prospective employees to create a talent pool for themselves. Finally, oil and gas companies can outsource material testing, analyses and engineering works to research university specialists to use them as a support mechanism of their core competences (Zendehboudi and Bahadori, 2016).

 

3. Financial Benefits of Technological Innovation in the Oil and Gas Industry

Another important aspect of innovation in the studied industry is associated with technological learning or the capability of individuals and companies to accept new technologies and integrate them into their practical operations (Mirimoghadam and Ghazinoory, 2015). This mechanism is underutilised in many countries such as Iran as it requires the support of educational institutions and occurs at the learning level, the strategic level and the tactical level. That said, the inability to maintain a high degree of technological learning in the oil and gas industry inevitably results in the need to invest into purchasing foreign technologies, to hire international specialists and to incur higher costs as a result (Golden and Wiseman, 2014). This whole situation is largely caused by the fact that the studied environment is technology-intensive and research and development (R&D) is associated with substantial investments (Perrons, 2014). Therefore, even major companies often have to use external solutions. Nevertheless, the capability to clearly see how the sphere of operations can be improved, what applicable technologies exist in the market and how they can be utilised to maximise return-on-investment is critical to avoid excessive and ineffective expenses.

Financial benefits from technological innovation are also realised due to the global adoption of decarbonisation technologies (Fuchs, 2014). As regulations in the sphere of CO2 emissions and environmental pollution are becoming progressively more severe on a global scale, the companies that use the most environmentally friendly equipment gain a substantial competitive advantage. These innovative organisations are protected from fines and penalties associated with governmental inspections and can be certain that their machinery would not be prohibited by new legislative regulations (Mirimoghadam and Ghazinoory, 2015). It is expected that the ‘price’ of carbon emissions is going to grow in the future, which makes investments into innovative technologies reducing emissions a substantial source of cost saving (Anadon et al., 2016). However, such solutions may have high up-front expenses associated with their development and implementation. Hence, oil and gas industry enterprises should take into account potential return-on-investment figures to make their technological innovations profitable.

The application of innovative technologies can also benefit oil and gas companies by increasing their international expansion potential (Tinsley, 2014). Modern environmentally friendly or financially efficient solutions are usually developed in western countries. Hence, the organisations having the experience of the implementation of these solutions may have better chances of succeeding in foreign markets than local companies. This knowledge can also serve as an advantage in negotiating a market entry (Ford et al., 2014). One more direction of innovation in the oil and gas industry is the use of big data technologies (Baaziz and Quoniam, 2015). Companies in the studied industry have to monitor the extraction of natural deposits, their delivery to processing plants and further distribution along the supply chain. Four primary big data elements, including volume, velocity, variety and veracity can be used to produce reliable data related to exploration, development, engineering and production operations (Anadon et al., 2016).

The problem of technological innovativeness is especially acute in some Central Asian countries as well as former Soviet countries (Hu, 2014). These states often have substantial oil and gas deposits but lack the technologies necessary for their extraction and processing. Therefore, they have to purchase these instruments from foreign countries, hire international specialists and sell crude oil and gas instead of finished products, which limits their financial results (Dubarle and Woyessa, 2016). The capability to internalise these activities can substantially increase their incomes and make them independent from international organisations.

Overall, it can be summarised that technological innovation is used by oil and gas companies for two primary reasons (Ford et al., 2014). Firstly, they implement modern technologies to achieve compliance with applicable environmental regulations in terms of emissions and energy consumption levels. This compliance is highly beneficial since these firms’ failure to satisfy local and international regulations frequently results in the need to purchase new equipment and experience substantial standstill periods (Baaziz and Quoniam, 2015). Secondly, innovative instruments are utilised to improve performance and decrease costs. This gives oil and gas companies a competitive advantage against their rivals.

 

4. Conclusion

It is relevant to conclude that technological innovation can generate financial benefits through greater compliance with environmental regulations (Fuchs, 2014), a higher degree of technological learning (Mirimoghadam and Ghazinoory, 2015), better internationalisation potential (Tinsley, 2014) and lower dependence on external providers of innovative know-hows (Hu, 2014). That said, it is not clear if these advantages are substantial in all cases as the need to accommodate new extraction techniques and minefield types is largely dictated by negative factors such as the pollution of the environment or the depletion of conventional oil fields (Golden and Wiseman, 2014). Therefore, technological innovation should be viewed as an inevitable prerequisite for ensuring oil and gas firms’ sustainable development in the modern environment.

 

References

Alves, C. and Zawislak, A. (2014) “Technological interfaces of the Brazilian naval and offshore industry”, Journal of Technology Management & Innovation, 9 (2), pp. 187-198.

Anadon, L., Chan, G., Harley, A., Matus, K., Moon, S., Murthy, S. and Clark, W. (2016) “Making technological innovation work for sustainable development”, Proceedings of the National Academy of Sciences, 113 (35), pp. 9682-9690.

Baaziz, A. and Quoniam, L. (2015) “How to use Big Data technologies to optimize operations in Upstream Petroleum Industry”, International Journal of Innovation, 1 (1), pp. 30-42.

Dubarle, P. and Woyessa, Y. (2016) Regional Innovation: Government Policies and the Role of Higher Education Institutions, Stellenbosch: Sun Media.

Ford, J., Steen, J. and Verreynne, M. (2014) “How environmental regulations affect innovation in the Australian oil and gas industry: Going beyond the Porter Hypothesis”, Journal of Cleaner Production, 84 (1), pp. 204-213.

Fuchs, G. (2014) “The Governance of Innovations in the Energy Sector: Between Adaptation and Exploration”, Science & Technology Studies, 27 (1), pp. 34-53.

Golden, J. and Wiseman, H. (2014) “The fracking revolution: Shale gas as a case study in innovation policy”, Emory Law Journal, 64 (1), pp. 955-1040.

Hu, B. (2014) “Oil and gas cooperation between China and Central Asia in an environment of political and resource competition”, Petroleum Science, 11 (4), pp. 596-605.

Mirimoghadam, M. and Ghazinoory, S. (2015) “An institutional analysis of technological learning in Iran’s oil and gas industry: Case study of South Pars gas field development”, Technological Forecasting and Social Change, 1 (1), pp. 1-13.

Nilsen, T. (2017) “Firm-driven path creation in arctic peripheries”, Local Economy, 32 (2), pp. 77-94.

OECD (2017) OECD Reviews of Innovation Policy: Norway 2017, Paris: OECD Publishing.

Perrons, R. (2014) “How innovation and R&D happen in the upstream oil & gas industry: Insights from a global survey”, Journal of Petroleum Science and Engineering, 124 (1), pp. 301-312.

Tebepah, E. (2015) “Emerging Innovations in the Oil Industry: An Analysis of the Development of the Monodiameter Technology”, International Journal of Innovative Research and Development, 4 (6), pp. 135-146.

Tinsley, S. (2014) Environmental Management in a Low Carbon Economy, London: Routledge.

Zendehboudi, S. and Bahadori, A. (2016) Shale Oil and Gas Handbook: Theory, Technologies, and Challenges, Boston: Gulf Professional Publishing.

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