Industry R&D in a Depression

Booms-Busts Strangle Funding

Scott W. Tinker could be the industry's leading forward-thinker on oil and gas research.

Unfortunately, his vision is disturbing.

Why? Because Tinker sees petroleum research and development getting too little attention, too little funding.

Spending on R&D has been slashed almost everywhere. And when research isn't developed to come on-line, sooner or later the innovation pipeline runs dry.

Still, he remains optimistic about the outlook for new developments.

"Research and technology have played a fundamental role in the oil and gas business for well over a century, and will continue to do so well into the 21st century," Tinker said.

"The exciting challenge we face in the U.S. today is developing a business model to fund energy research for the long haul."

He should know. Research is his life.

Tinker is director of the Bureau of Economic Geology at the University of Texas at Austin. A major oil and gas research center, the BEG pursues multi-year projects funded by industry consortia groups, the U.S. Departments of Energy and the Interior, the Minerals Management Service and the state of Texas.

Earlier, he served as an advanced senior geologist at Marathon Oil's Petroleum Technology Center in Littleton, Colo.

A former AAPG Distinguished Lecturer and recipient of the association's J.C. Sproule Memorial Award, Tinker has been a member of numerous national and international professional committees, including the DOE's Strategic Initiatives Task Force.

He earned a bachelor's degree magna cum laude in geology and business administration at Trinity University in San Antonio, his master's degree at the University of Michigan-Ann Arbor and his doctorate in geological sciences at the University of Colorado, Boulder.

Because of his background, he's had a close-up view of upstream research and its long slide. Funding for R&D has dropped from $5 billion to $2 billion over the past decade, Tinker said, "and is on a strongly decreasing trend."

'Moments of Brilliance'

The DOE allocates only 4 percent of its $19 billion budget to energy research, and only 7 percent of that 4 percent goes to oil and gas research, he noted. Nuclear, coal and renewable energy share equal claim to the other 93 percent of the research funding.

Federal spending has remained close to $100 million per year for true oil and gas research, Tinker said, but the initial 2002 budget proposal from President George W. Bush would cut that amount in half.

Money has dried up, or is drying up, for other research as well. Tinker said the Gas Research Institute (GRI) at one time funded close to $200 million per year in gas-related research. GRI's support came from a Federal Energy Regulatory Commission-mandated surcharge on interstate gas sales. The surcharge will be phased out, however, producing an estimated $70 million this year, $60 million in 2002-2004, and nothing after that.

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Scott W. Tinker could be the industry's leading forward-thinker on oil and gas research.

Unfortunately, his vision is disturbing.

Why? Because Tinker sees petroleum research and development getting too little attention, too little funding.

Spending on R&D has been slashed almost everywhere. And when research isn't developed to come on-line, sooner or later the innovation pipeline runs dry.

Still, he remains optimistic about the outlook for new developments.

"Research and technology have played a fundamental role in the oil and gas business for well over a century, and will continue to do so well into the 21st century," Tinker said.

"The exciting challenge we face in the U.S. today is developing a business model to fund energy research for the long haul."

He should know. Research is his life.

Tinker is director of the Bureau of Economic Geology at the University of Texas at Austin. A major oil and gas research center, the BEG pursues multi-year projects funded by industry consortia groups, the U.S. Departments of Energy and the Interior, the Minerals Management Service and the state of Texas.

Earlier, he served as an advanced senior geologist at Marathon Oil's Petroleum Technology Center in Littleton, Colo.

A former AAPG Distinguished Lecturer and recipient of the association's J.C. Sproule Memorial Award, Tinker has been a member of numerous national and international professional committees, including the DOE's Strategic Initiatives Task Force.

He earned a bachelor's degree magna cum laude in geology and business administration at Trinity University in San Antonio, his master's degree at the University of Michigan-Ann Arbor and his doctorate in geological sciences at the University of Colorado, Boulder.

Because of his background, he's had a close-up view of upstream research and its long slide. Funding for R&D has dropped from $5 billion to $2 billion over the past decade, Tinker said, "and is on a strongly decreasing trend."

'Moments of Brilliance'

The DOE allocates only 4 percent of its $19 billion budget to energy research, and only 7 percent of that 4 percent goes to oil and gas research, he noted. Nuclear, coal and renewable energy share equal claim to the other 93 percent of the research funding.

Federal spending has remained close to $100 million per year for true oil and gas research, Tinker said, but the initial 2002 budget proposal from President George W. Bush would cut that amount in half.

Money has dried up, or is drying up, for other research as well. Tinker said the Gas Research Institute (GRI) at one time funded close to $200 million per year in gas-related research. GRI's support came from a Federal Energy Regulatory Commission-mandated surcharge on interstate gas sales. The surcharge will be phased out, however, producing an estimated $70 million this year, $60 million in 2002-2004, and nothing after that.

To regroup, GRI combined with another organization and now operates as the Gas Technology Institute.

Other research centers affiliated with universities or state geological surveys fight their own rounds to cope with reduced industry R&D spending, according to Tinker.

"There are still several centers that do oil and gas research," he said. "The problem they're facing is a very significant decrease in funding from the private sector."

At one time, Tinker noted, the largest U.S. oil companies supported their own, independent research operations.

"They weren't asked to justify themselves on an hourly or daily or even a weekly basis," he said. "Their return on investment and that sort of quarterly profit picture wasn't part of the equation.

"That's what research is. It has a long payout time -- sometimes -- if ever," he said. "It's a creative process with a lot of dead-ends and some things that are home runs."

As those companies struggled to justify their internal expenditures, research labs came under more scrutiny. A profit-center model evolved with non-operating departments required to bill back their services, but Tinker said "that's not the way research works.

"Research is long periods of normalcy punctuated by moments of brilliance. I think it was the wrong business model. It wasn't a failure on the part of the research labs."

At the same time, beginning in the early 1970s, the industry began to see dramatic product price swings, he said.

Now oil and gas both are subject to three-to-four-year major price cycles.

"It's kind of unpalatable for a company to say, we're going to go through two or three of these price cycles before we see a payout on this research investment. They can't afford to do that," Tinker explained.

Competition for capital investment during the 1990s also reduced companies' ability to support long-payout R&D, he said.

As a result, private industry in the United States shuttered almost all of its large, self-funded research labs.

While that was going on, about 80 percent of all energy produced in the United States came from fossil fuels -- oil, natural gas and coal, Tinker said. About 85 percent of Btu consumption relied on those sources.

"Over the past 50 years those percentages have not changed dramatically," he said. "The U.S. production of oil has decreased, but I think it's more important to look at consumption."

Today the United States imports about 57 percent of its oil consumption and about 15 percent of its natural gas consumption, with oil imports certain to rise, Tinker said.

"Natural gas is a little different story," he said. "We can certainly increase natural gas production. That's going to require a commitment to infrastructure and a huge commitment to exploration."

He'd PREFER This

With more than half of U.S. Lower 48 oil production and almost two-thirds of gas production coming from independents, Tinker sees a real need for both continuing research and technology transfer. That's why he thinks the slowdown in R&D is such a mistake.

"I don't think we've solved it all," he said. "If we decrease the funding and go toward pure application of technology, we certainly have a good 10-year or 15-year future ahead of us."

But in the years after that, the industry will suffer from a lack of new technologies and new concepts, Tinker predicted.

The long payoffs from long-term research simply won't come.

Exploration companies expect the service-and-supply sector to gallop into battle in technology and equipment research, he said. But that won't happen, because the same economic pressures that affect producers also hit service firms.

"In fact, quite often it's more dramatic," he observed. "Services tend to be cut heavily by the private sector oil and gas companies in low product-price times."

Tinker believes the need for upstream R&D funding has grown so acute that the industry needs to undertake a consolidated research effort.

"I'd like to see the private sector become proactive and create a foundation," he said. "In fact, I've proposed this in a couple of talks over the past year. I call it PREFER, the Private Research Energy Foundation."

Companies would set aside a small percentage of revenues from U.S. oil and gas production, in Tinker's plan, taking on a voluntary tax to fund a national foundation for E&P research.

Contributing just two-tenths of 1 percent of half of U.S. production revenues would provide $150 million per year in research funding, he reckoned.

"I really believe government matching of that proactive step would follow," Tinker said. "We could leverage that investment and get a good, significant match."

An added benefit would be sending a signal to students that the industry had made a 20- or 30-year commitment to ongoing research activities, an investment in its own future.

"You'd see students return to the earth sciences, because it's a fun discipline," he said. "Kids enjoy it, they really do, but they have to see some future in it."

For the Record

To emphasize the importance of continued R&D, Tinker mentioned a few areas with what he calls research roots:

  • Reservoir characterization.
  • Visualization techniques.
  • Geostatistics.
  • Geocellular modeling.
  • Unconventional-gas play concepts in tight gas, shale gas and coalbed methane.
  • New research in basin-center gas and gas hydrates.

"If you look at the production curves of unconventional gas types, they've all had an infusion of research investment from the federal level and private industry. There's a 5- to 10-year lag, and then the production curve was built," he said. "Concepts mattered."

Also, there's:

  • 3-D and 4-D seismic.
  • Four-component and nine-component seismic.
  • Acoustic and elastic impedence.
  • AVO.
  • High-frequency seismic.
  • Attribute analysis.
  • Cross-well tomography.
  • Geochemical fingerprinting.
  • Maturity modeling.
  • Migration timing.
  • Petrophysical analysis.
  • NMR.
  • Image logs.
  • MWD.
  • Forward and inverse modeling.
  • Fracture prediction.
  • Salt tectonics.
  • Seal analysis.

"And the list goes on," Tinker said, "You can make plots of oil-producing reservoirs that have these technologies applied to them and you can plot the increase in incremental oil production, almost without fail."

Hey, This Is Fun

Benefits will continue to accrue from research results, as innovations like new reservoir-characterization technology spread throughout the industry, he said.

"The independent producers do not have that technology in their shops. I'm talking about hardware, software and even to some extent the expertise. An infusion of research dollars that could transfer that technology to the independents would show a remarkable return," he predicted.

If upstream research continues, Tinker expects big payoffs to come from the following areas:

  • Multicomponent seismic.
  • Live wells.
  • New visualization technology.
  • Technology transfer.

"In natural gas, there are tremendous opportunities in the unconventionals, the deep water and subsalt," he said. "Those are going to have to become half of U.S. production in less than 15 years."

Future research could help the industry identify, drill and produce gas hydrates in a world-altering shift of energy resources, according to Tinker.

"There's a resource base there that could potentially change the whole balance of the global economy," he said, "and would make us a methane economy for many years."

Environmental research is also important, Tinker emphasized, and wouldn't be seen as conflicting with E&P interests.

"I strongly believe that energy and environmental research can go hand in hand," he said. "There's no reason that those have to be mutually exclusive and competing topics."

In both environment and safety, the industry needs to celebrate its current successes and communicate its efforts to the public, in addition to developing new technologies, Tinker said.

"When you think about what goes on with a deep-water offshore platform and the technology there to target, drill for and produce safely through water, it's like a Mars landing every time," he said.

Tinker presented a paper on "The Value of Upstream Technology and the Future of Energy Research" at the recent AAPG annual meeting in Denver. He knows that winning renewed support for upstream R&D will take speeches, articles, presentations, Congressional testimony and more.

"Solving some of the technological challenges the energy industry will face in the next 50 years will require great minds and the highest-end software and hardware, all poring over massive amounts of data," he said.

"Scientists will have the opportunity to tackle energy and environmental issues head-on. Nothing could be more important -- or more fun."

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