Experimentation and new technologies have arguably been a godsend for oil and gas companies, alongside oilfield service companies’ deep discounts, during a period of lower commodity prices.
Improved technology has played a role in reducing breakeven costs, causing surging oil and gas production in the U.S. Efficiency gains have also lowered costs for solar and wind energy.
Yet energy companies aren’t pouring more cash into energy R&D in hopes of even bigger payouts, according to a report released July 11 by the International Energy Agency (IEA).
Spending on energy R&D fell, on the whole, by 3% in 2015 with data indicating a further drop in corporate spending in 2016, according to the IEA report. However, companies in different sectors are reaping the benefits of technology differently. Renewable energy companies are still perfecting their power sources while fossil fuel companies’ research is unlikely to move the industry. One of the industry’s most observable achievements in the past couple of years, for instance, was packing more sand into fracking jobs.
“Publicly reported R&D spending by energy companies worldwide, including [state-owned enterprises], has been falling, largely because of less oil industry spending. Spending fell by 4% in real terms in 2015 and 1% in 2016,” the IEA said. “The 15% decline in R&D spending by oil and gas companies—including oil service companies—in 2015 and a further 5% fall in 2016 has not been fully offset by increased spending on clean energy R&D.”
Dollars flowing to R&D efforts can be “vulnerable to sharp changes in the total capital budgets of companies, especially in markets with highly volatile prices like oil,” the IEA said, noting firms typically try to smooth such spending over time.
Warning that R&D investment data are scarce, the IEA analyzed public and available private data. In all R&D spending totaled about $65 billion in 2015, the latest year for which complete data were available. The amount equated to just 4% of total energy investment.
“Despite growing recognition of the importance of energy innovation, spending on neither energy technology generally nor clean energy specifically has risen in the past four years,” the IEA said. For the most part, clean energy R&D investment has been flat at about $27 billion since 2012.
Citing a 2017 report by UNESCO, the IEA said energy made up only 5% of the $1.3 trillion spent on all types of R&D.
But the single-digit number shouldn’t necessarily cause concern, particularly for the fossil fuels sector.
“For most fossil fuels, production technology is mature and the potential profitability of innovation may be more limited than for other consumer products,” the IEA said.
The report pointed out that oil and gas companies make up a large part of corporate energy R&D, but spending relative to total corporate revenue is low—about 0.4%, compared to about 3.5% for clean-energy companies. The difference reflects a need for more innovation in less mature markets, the IEA said.
Still, the drive for greater efficiency is at full throttle for some oil and gas companies, although focus remains on finances.
“Upstream companies generally claim to have lowered costs mainly through improved efficiency in drilling, logging and completion activities, as well as by redesigning supply-chain strategies,” the IEA said. “Faster penetration of technology, such as advanced services like intelligent completions, logging while drilling, 3-D and 4-D seismic acquisition and processing or advanced rotary steerable systems for directional drilling, has helped improve well designs. Real-time data collection for reservoir management and analytics has increased the efficiency of drilling.
The U.S., where technology is partly credited for steering production growth and Europe are the top spenders when it comes to energy investment. Of all energy sector R&D, Europe accounted for 28% of the investments, trailed closely by the U.S. at 25% and China, rounding out the top three, at 20%.
In the clean energy sector, U.S. and Europe each have a 31% piece of the global R&D spend, while China has 17%.
The report also shed light on who picks up the R&D tab.
Corporate spend remained the highest with private sector funding making up 44% of the total spend in 2015. This was followed by government funding, which is slowly increasing, led by the U.S., Japan, China, France, Germany and Korea.
But venture capital (VC) funding is quickly rising, though it is still far below the $20 billion-plus that corporate and government sources contributed.
VC funds invested a record $2 billion in energy, mostly clean-energy technologies, taking aim at early-stage firms looking to commercialize an idea having completed basic research and testing.
Velda Addison can be reached at email@example.com.
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