Following my theme for the year on Risk and Reward, let’s think about how disruptive technologies alter the risk/reward balance. The term “disruptive technology” is usually attributed to the Harvard Business School professor Clayton Christensen in his bestselling 1997 book, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Christensen defined disruptive technology as a new emerging technology that unexpectedly displaces an established one. Disruptive technologies are usually still unrefined, have performance problems, are not widely known, and may not have a proven practical or commercial application. Disruptive technologies can significantly alter the course of our lifestyles, work, businesses, and even the global economy.
In 2013, McKinsey Global Institute published a list of the 12 most potentially economically disruptive technologies. Think about how life was before these advances:
- Mobile Internet
- Automation of knowledge work
- Internet of Things
- Advanced robotics
- Cloud technology
- Autonomous or near-autonomous vehicles (cars, drones, etc.)
- Next-generation genomics
- Next-generation storage, including batteries
- 3D printing
- Advanced materials
- Advanced oil and gas exploration and recovery
- Renewable electricity
We’ve already seen the impact of some of these new technologies in the oil and gas business: cheaper, more robust sensors are multiplying; software is getting smarter, and I believe will mitigate some of the knowledge lost in the Big Crew Change; and advanced materials continue to improve performance and resiliency in oilfield applications. McKinsey’s #11 singles out advanced oil and gas technologies, and most agree that the most disruptive oilfield innovation of the past 30 years has been the application of advanced completion techniques in shales. Private ownership of minerals in the US enabled rapid commercialization of the country’s shale plays through hydraulic fracturing. This unforeseen innovation shook up the oil markets, as we are all living through, but also the global gas and LNG markets. Ten years ago, the US was expected to be a gas importer and companies built LNG import terminals to meet the demand. Now, LNG export terminals are being built to move US gas out to world markets. Huge, unanticipated commercial swings occurred, all due to the application of an existing technology to new formations. And, no one saw it coming.
The oil industry has a history of technology jumps, usually triggered by hard times. When times are good, we concentrate on keeping the rigs busy, staying ahead of the competition, and “making hay while the sun shines.” Then oil price cycles down, as commodities always do. Suddenly, both operators and service companies have urgent new motivations, often of financial survival, to apply different methods to their businesses. We, too, often innovate out of desperation.
I love the colorful stories and entrepreneurial spirit of the early pioneers of the oil industry. Three large service companies were founded by iconic pioneers: the Schlumberger brothers who applied mining technology to the new science of oil exploration; Howard Hughes Sr., who commercialized the revolutionary invention of the cone bit; and my personal favorite, Erle P. Halliburton. I still remember during my first year in the oil business, working in Midland, Texas, when my Halliburton sales representative would take us to lunch and tell us bright-eyed young engineers: “This lunch is on Erle P.” Who is Erle P., I wondered?
Erle P. remains my favorite story of the early oil entrepreneurs. He didn’t invent oil well cementing, but he learned the trade in California and brought it to the oil fields of Oklahoma and Texas. He was a tiny, chain-smoking, driven entrepreneur who didn’t mind getting his hands dirty. He invented and tinkered and visited his cementing crews in the field. He looked for ways to improve tools and processes and improve customer service—classic hands-on entrepreneurship. Eventually Halliburton added the innovation of hydraulic fracturing, and 50 years later it became the “new” disruptive technology.* Like many of you, I’ll bet, I cringe every time I hear a reporter discuss the “new” technology of hydraulic fracturing. I’ll admit I’ve talked back to the TV—we’ve been fracturing wells since the 1940s!
I join most others in attributing the disruption of the hydraulic fracturing in shales to George P. Mitchell. The innovation came during hard times because Mitchell’s company had significant holdings in the Barnett Shale region of north Texas, and oil was lingering in the USD 10/bbl range. Solution: Apply existing technologies, fracturing and horizontal drilling, to zones that were not considered very productive. Next step: A revolution. Entrepreneurship plus private ownership of minerals=innovation. When I speak to students, I end my talk with stories of entrepreneurship. I am amazed at the rich people I know now, and most of them did not get where they are by being employees of a big company. The truly financially successful mostly took risks, started new businesses, and built their own fortunes.
The 21st century version of the oilfield entrepreneurs of 100 years ago are the tech startups, also with fascinating stories. My favorite history of the early inventors of the computer and tech industries is The Innovators: How a Group of Hackers, Geniuses, and Geeks Created the Digital Revolution by Walter Isaacson. He includes chapters on lesser-known pioneers of the computer industry, such as Grace Hopper and Gordon Moore, but also Bill Gates and Steve Jobs. Jacobson is also the author of the definitive biography Steve Jobs.
A well-kept secret of the tech industry is how many startups fail miserably. The most famous motto of Silicon Valley is “fail fast, fail often.” They know that failure leads to learnings or to abandoning bad ideas early and moving on. Most estimate the failure rate for Silicon Valley startups at over 90%, on par with other small businesses. Even an elite tech incubator like Y‑Combinator has a 93% failure rate. But hope lives on. We love the often repeated stories of tech billionaire successes like Facebook, Airbnb, Uber, and Snapchat, and the latest must-have app, but the 90% failures sink unnoted below the waves.
Most discussions of technology innovations deride the oil and gas industry as slow to innovate. And I’d agree, but not because of lack of interest or need, but because of the high cost of failure. Why isn’t the oil and gas industry quick to innovate? I attribute it to three factors:
1. High cost of entry. Unlike tech, most oil and gas innovations can’t start with a few guys and their laptops. We are in a highly regulated capital intensive business and joining the club is hard. Our data are owned by operators or governments and access is impossible, making it hard for outsiders to innovate in our industry.
2. Hard to quantify, especially for outsiders. New oil and gas innovations are hard to quantify. It’s easy to quantify the number of apps that get first round funding, the number of new drugs that enter Phase 3 trial, and how many patents are awarded, but it’s difficult for an outsider to see early technologies within oil and gas companies. Many innovations are joint developments between service companies and operators and hard to attribute to any one company.
3. Most important—the high cost of failure. I think this is the real barrier to most oil and gas innovation. Failures are costly and hard to fix. Some failures are spectacular with both economic and environmental impacts. “Fail fast, fail often” is not an option for us, when the cost can be measured in hundreds of millions of dollars.
It’s hard to plan for disruptive technologies, and I’d argue that it is impossible. Companies create business plans that include predictions and forecasts of technology innovations. We can identify the gaps, but the inventions themselves are often more elusive. The triggering event is usually economic, where low prices force desperate innovation and high prices make known inventions economic.
What’s next for disruptive oilfield technology? My list includes many of the items on McKinsey’s list: learning software, sensors everywhere leading to an oilfield Internet of Things, and, finally, real data mining and management. But the real disruptive technologies are probably still in someone’s mind. What technologies are we missing with the high castle walls of our industry?
*Most histories attribute the first unsuccessful application of hydraulic fracturing to Stanolind Oil in the Hugoton, Kansas, gas field in 1947, and the first successful application to Halliburton near Duncan, Oklahoma, in 1949.
