[Editor's note: A version of this story appears in the June 2020 edition of E&P. Subscribe to the magazine here.]  

This is the first of a three-part series outlining why oil and gas industry companies should look externally for technology solutions. Part 1 discusses the merits of this approach, Part 2 will review numerous relevant external technologies and Part 3 will address how to initiate a technology scouting program.

The recent downturn in oil prices will inevitably prompt cuts to petroleum industry R&D budgets and staff reductions among R&D personnel. This is very unfortunate because ongoing technological development is essential to provide the future technologies that the petroleum industry needs. Management teams in this industry are in an unenviable position, forced to choose between cutting near-term capital budgets and providing enough funding to support the most important R&D.

Fortunately, there is another viable option that preserves R&D capital and still provides a gateway to innovation and technology. This option involves looking broadly outside of this industry for external technologies having crossover applicability. Many of the leading oil and gas producers and oil service companies already do some technology scouting. Still, there are compelling financial and business reasons why a much broader cross-section of operators and service companies should also be actively sourcing external technologies.

FIGURE 1 E&P Industry Pulse June 2020
FIGURE 1. This listing reflects 2018 R&D expenditures for some of the leading companies in other industries. (Source: HowMuch.net)

Petroleum industry R&D compared to other industries

R&D and new product development are expensive and very time-intensive, requiring millions of dollars and the commitment of significant personnel resources. According to their financial filings, the largest of the oil service companies invested between $400 million and $800 million in R&D-related activities in 2018. Given the challenging operating conditions of the last few years, these were substantial investments.

Figure 1 details how much the leading companies in several other key industries spent on R&D in 2018. There may be accounting differences regarding how R&D dollars are classified, but the comparisons are nonetheless stark. R&D expenditures by the leaders in each of these other industries dramatically exceeded those of even the largest oil service companies. In fact, the next tier of companies in these industries materially outspent the oil service leaders. One possible explanation is the inherent cyclicality of the petroleum industry. It is challenging to maintain R&D funding when the profitability and cash flow of a business fluctuates dramatically every year. This is also a compelling reason why the petroleum industry should devote more time and effort to external technology scouting.

The petroleum industry should focus far more attention on accessing relevant external technologies.

Figure 1 does not address another critical consideration: the proliferation of startups. In each of the listed industries—automotive, pharmaceuticals, retailing or semiconductors—there are vibrant and growing startup communities having thousands of early-stage companies involved in R&D and new product development. In many instances, the latest technologies arising from these startups are far more compelling than even the R&D efforts of the large companies listed in Figure 1.

Certainly, much of this external technology has no obvious applicability in the petroleum industry, and it requires time and personnel resources to review large numbers of external technologies. Even so, the potential benefits far outweigh the costs. The global entrepreneurial community is larger than the petroleum industry and the entrepreneurial ranks are steadily growing. To yield the best possible results, a technology scouting program should, therefore, attempt to access both the technologies residing in large companies outside of this industry as well as the solutions developed by startups.

Change is pervasive in other industries

Today’s low oil prices, much like similar price downturns, will change the petroleum industry in unpredictable ways. Other major industries are also undergoing transformations driven by economic forces and new technologies. The automotive industry is a good example. Several years ago, Mary Barra, the CEO of GM, gave a speech in which she indicated that her industry would likely change more in the next five to 10 years than it has in the last 50 years. The changes she was alluding to have a substantial technology component—the advent of autonomous vehicles, ride-sharing, vehicle-to-vehicle communications and, even more fundamentally, how consumers will utilize automobiles in the future.

FIGURE 2 E&P Industry Pulse June 2020
FIGURE 2. A few of the early-stage companies are driving the autonomous vehicle revolution are listed. (Source: Oil & Gas Innovation Center)

Figure 2 lists a few of the hundreds of early-stage companies involved in developing autonomous vehicle technologies such as light detection and ranging (LiDAR) sensors, compact radar, lane change detection sensors, pedestrian tracking software and tire monitoring solutions. With very few exceptions, the funding for these technologies is coming from angel investors and venture capital firms outside the automotive industry. Absent these new technologies, vehicle autonomy would still be a distant concept. The development of these technologies and their adoption by just a few automobile companies are prompting every other vehicle company to pursue autonomous solutions. Similar dynamics are taking place in the pharmaceutical industry where external companies are developing and commercializing artificial intelligence and machine learning software capable of dramatically decreasing the time and cost associated with developing new pharmaceuticals.

Even the construction industry, which is not considered to be an early adopter of new technologies, is being transformed by the implementation of robotic systems developed by early-stage companies outside of that industry. These robotic solutions convert industry-standard construction equipment, such as loaders or bulldozers, into systems that are either operated remotely by a human or completely unmanned. Deploying this technology on industry standard rather than customized equipment dramatically lowers the implementation cost and accelerates the adoption rate of the technology. The resulting equipment is less expensive to operate and as effective as traditional manned, heavy equipment.

Funding internal R&D does not foster economies of scale

The petroleum industry is among the largest industries in the world. However, the various segments of this industry often require different types of products, from bulk commodities to very specialized items. Unless there is a compelling technical reason to develop customized hardware or software, accessing external technologies will likely be more cost-effective. As recently as a few years ago, the advanced LiDAR sensors developed for the automobile industry cost more than $50,000 apiece, more than the actual vehicle. However, the sheer size of the automotive LiDAR market attracted many startups, and some of the latter developed LiDAR systems having comparable technical capabilities at 1/100th the cost.


Compared to several other major industries, recent petroleum industry R&D expenditures have been modest and will likely decrease materially during this downturn. Rather than attempting to increase R&D expenditures, the petroleum industry should focus far more attention on accessing relevant external technologies. Importantly, this is a strategy that oil and gas producers and oil service companies of all sizes can readily pursue.