Oil and gas to tap aerospace, auto industries for innovation lessons
A new coalition between the UK oil and gas industry and research institutes will tap the aerospace and automotive industries for lessons on innovation, key figures in the group have told Upstream Intelligence.
The Oil and Gas Innovation Centre (OGIC), Advanced Forming Research Centre (AFRC) and High Value Manufacturing Catapult announced their partnership last month. The team is based in Aberdeen and is exploring which technologies from other industries can help boost the competitiveness of oil and gas.
Around one-third of operators are still working at negative cash flow at $40 per barrel, even after taking into account industry-wide spending cuts, according to Oil & Gas UK’s 2016 Activity Survey. With conditions showing no signs of improving in the short-term, this new group is hoping to bring change through innovation.
Ian Phillips, Chief Executive at the OGIC, said the two other partners in the coalition were trained to help technologies leap from being theoretical to commercial applications. He added: “They bring to the oil industry a series of capabilities developed across other industries that can be applied quite readily to the oil and gas sector. It’s a dynamic perspective and that’s pretty exciting.”
Paul Cantwell, AFRC knowledge exchange fellow in oil and gas, said the industry had become more inclusive, and “the door is now open for us to come in and have these conversations”.
Others have been there before
The principle behind this new alliance is that other capital-intensive industries can provide examples of successful long-term transformations in the face of economic strain. A 2015 study by the OGIC and PwC used examples from Bombardier, Rolls-Royce and Jaguar Land Rover to show how sector-wide collaboration and deployment of a proactive regulatory environment can secure long-term success for an industry.
Cantwell explained that the aerospace and automotive industries historically endured lengthy manufacturing processes, high costs and low profit margins. These sectors “went through the exact same learning curve and they had to adapt and innovate,” he said, “like the oil and gas industry will have to in order to stay competitive in the global market”.
These industries battled their way through market troughs between the 1950s and 2000s by strengthening the supply chain, collaborating, investing in research and development and pursuing standardized operations. The maturity of the oil and gas supply chain is lagging behind other industries by up to 10 years, PwC concluded in its 2014 Northern Lights paper. The supply chain accounts for more than 50% of the sector’s operating costs, the paper said.
Suppliers have been under strain to satisfy operators requesting customized components in order to provide their perceived design competitiveness, Phillips said. Although bespoke manufacturing creates business opportunities for suppliers, creating several variations of similar products greatly impacts the cost and delivery time, he explained, adding: “It just doesn’t achieve economies of scale.”
Phillips used the term “opinion engineering” to describe how operators perceive bespoke units and design competitiveness. He explained: “Company A says, ‘We do it this way and it works best’, and Company B says, ‘No, we do it this way and this works best’. Which causes lack of standardization.”
Mass-production, standardization and strong supply-chain interaction have successfully driven down unit costs for the aerospace and automotive industries, Cantwell said. He explained that his cross-industry expertise enables him to adopt concepts such as “make once, use many times” and transfer them to oil and gas players to help them cut costs through reducing waste and lead times. By the end of 2016, Oil & Gas UK anticipates that companies will have reduced their operating costs by 22%.
The industry has seen some productive collaborations, for example through the Industry Technology Facilitator (ITF), but collaborations have been modest compared to other industries, Phillips said. Efforts by the Industry Technology Facilitator, an organization formed and owned by a series of oil companies, service companies, funding and support agencies and academia, were a "a positive start,” he said.
Phillips believes the oil and gas industry has yet to take advantage of the digital and automated age, which could provide significant learning opportunities from other industries like aerospace and automotive where IT is an integral part of their production processes.
“If you look at the analytics used in other industries, or simply your Google Search page, the oil industry has barely got out the starting gate,” Phillips said.
Innovation or evolution?
The oil and gas industry has one of the lowest levels of research and development-intensity of any sector, Roland Berger Strategy Consultants reported in a 2014 paper. With less than half of one percent of revenues spent on R&D, efforts to date have focused on seismic-related extractive technologies. However, the appetite for innovation declines sharply moving from exploration to production, leading to incremental developments rather than more “radical” technological advancements, the paper said.
Phillips used the NASA technology-readiness level scale, which measures an industry's technology maturity on a scale of one for the lowest level of technology readiness to nine for proof of a technology through implementation, to demonstrate where the oil and gas industry is falling down. Levels one to three are about proving basic concepts work, and this work is often carried out by universities, he explained. He added that when pursuing innovations, the industry often operates at levels seven to nine, evolving existing technology rather than creating new ones. But at levels four to six “technology dies”, and commercial companies “for one reason or another fail to get technology across that gap”.
For his part, Cantwell believes operators and service companies in the oil and gas industry are becoming more open to lessons from other industries and working with universities. And with many challenges ahead on the exploration, production and decommissioning fronts, this new alliance will be looking to encourage the industry to open up even further.
By Sayo Rotimi