Grupo de Economia da Energia

Exploration and production of oil and gas in deep waters: evolution and trends – Part III

In natural gas, oil on 02/01/2012 at 00:30

By Thales Viegas

The first two articles about E&P in deep waters (*) characterized this activity at the global and domestic levels. Aspects such as the importance and attractiveness of this business can be identified as factors that contributed to increase investments, offshore discoveries and production in deep waters.

This article will discuss the process of technological learning and investments in research and development (R&D) made by oil companies. The goal is to encourage attention about the emergence and consolidation of new technologies. It is also demonstrates that increased innovative efforts by oil companies indicates an increasing search for technological ability, in order to counterbalance rising costs.

However, the maturity of a set of technologies and their domain by agents is a process that requires practice and time. In this context, we have to analyze some limits and technological opportunities arose during the development of skills for operating in deep waters, especially in the case of Pre-salt.

No doubt the boundary of the Pre-salt included additional obstacles due to the length of the wells drilled. The costs are directly related to the depth of the wells.  They increase further when horizontal drilling is employed, for example. On the one hand, this technique tends to facilitate appropriate access to the reservoir rock and contribute to increase the oil recovery factor in the deposit. On the other hand, horizontal drilling requires a larger number of meters drilled in relation to the vertical drilling, and thus more expensive. We have to remember that drilling is one of the most expensive costs in exploration and production of oil.

Moreover, drilling the salt layer is complex due to the fluidity and instability of such geological strata, including bad environmental conditions of temperature and pressure. Because it is considered as new challenge, exploring in Pre-salt layer in very deep waters is regarded as emerging and developing technological frontier. The industry indicates that there are still evolutionary stages to be followed so that the knowledge is consolidated and technologies are ideal.

However, this is not a peculiarity of the global oil industry (GOI). The technical evolution process evolves a learning curve that even faster it may take a long time, years or even decades in some cases. To illustrate, for decades some oil companies have been studying the geological formations related to the salt layers and that one is below the salt, or pre-salt (sub-salt). Scientific publications investigated in advance these formations more than half a century ago.

In the 1980s some pre-salt wells were drilled in the Gulf of Mexico, although some of them reached this layer unintentionally. However, technologies and available data led to the conclusion that exploration was impracticable in that context, although there was a latent potential. From then, seismic, information and drilling systems developed significantly, and some of them allow a more precise study of the pre-salt formations.

Currently, Petrobras ensures that holds main critical knowledge to carry out exploration in the pre-salt. We have to mention some relevant items related to the extraction, such as: i) how will the oil accumulations react when peak production is reached? ii) which is appropriate gas and water injection mix? iii) what is the appropriate volume of re-injection to achieve the optimal level of production? However, these are issues related to all new fields coming into production. Additionally, in the case of the discoveries already made, it is still necessary to identify the best alternative to transport and monetize the hydrocarbons to be produced.

In Brazil occurred an acceleration of learning about these formations from the set of findings. Elements indicate that the accumulation of specific operational knowledge has been crucial as well. It has enabling the continuous advances in the development of new materials, supplies, equipment and procedures required. It has allowed overcoming the challenges faced in deep waters and very deep waters, particularly in the pre-salt layer.

There are several methods of learning. The mechanism of learning by doing probably corresponds to one of the most important means for achieving significant technological advances. Under these conditions, of course, companies must operate by using the information they already have, increasing it until reaches the full knowledge of technology.

We have to mention that the maturation of a technology package does not guarantee successful operations, since the risk is related to this activity. Moreover, other uncertainties, such as climate source or malpractice, can distort the expected trajectory of a procedure at a time. Undoubtedly, the risk of surprises and accidents will never be null. The appropriate knowledge and technology are to reduce the likelihood of occurrence.

Other types of learning are also possible. Three of them have to be mentioned: i) learning by researching, ii) learning by interacting, and iii) learning by relating. Apparently, the first two models are often used by GOI. The third model has also been disseminating.

The first of them can be directly evaluated from R&D indicators. Table 1 shows the high growth of expenditures on research conducted by the oil and gas producer sector. This occurs as its processes and equipment cover complex technological content to require deep and fast progress. This phenomenon can be seen particularly in the offshore segment to which relevant portion of the technology investments have been directed to in recent decades.

Table 1 – Ranking of growth in R&D investments made by companies in the United States, Europe and Japan in 2011 (% / sector)


* European banks already report R&D according to International Financial Reporting Standard (IFRS), but the Americans and Japanese still implement this standard.

Source: EU Industrial R&D Investment Scoreboard 2011. European Commission, JRC/DG RTD

The second way to advance the learning curve is associated with technological cooperation. A question often raised is what is the importance of the association, formation of consortia and cooperation between oil companies? For those unfamiliar with the logic of the business strategies made by oil companies, the process of association and formation of consortia seems to be contradictory. This is because companies involved are aggressive competitors. However, in addition to the purely economic reasons, from capital necessary to investment and risk diversification in different projects, there are other technological justifications related to cognitive aspects. Let’s see.

Cooperation allows the learning occurred in the deepest part of a particular company to be shared among others. This broadens the potential scope of technological advances and allows mitigation of research costs on the subject shared. And it is apt to take more advantage of tacit knowledge of workers in different companies. In practice, companies have more incentives to cooperate on product innovations to be disseminated in the industry. Generally, it is about incremental innovations to technologies of existing equipment.

Thus, companies can originate joint solutions to common problems. To illustrate, a pool of companies invested in developing a device to contain major leakages, after the oil spillage in the Gulf of Mexico.

In fact, GOI is increasingly investing in research centers and strengthening links with other research institutions. Petrobras, in particular, employs over 1600 people at its research center and maintains relations with several universities. Table 2 confirms these facts and shows that Petrobras is well ranked among the oil companies investing in R&D, especially regarding percentage of revenue invested in R&D. Most of these investments are associated with the new challenges in deep waters and subsalt.

Table 2 – Ranking of oil companies as R&D investment, EUR million


Source: EU Industrial R&D Investment Scoreboard 2011. European Commission, JRC/DG RTD

As about one quarter of world production occurs in Brazilian deep waters, and the most important recent discoveries were here, other companies are also forming major research centers in Brazil. Although the oil sector is classified as low-tech due to investments below 1% of its revenues in R&D, the deep waters segment has been outstanding according to more complex and technological researches.

However, more innovative efforts do not guarantee overcoming all obstacles. They increase the likelihood of success. Uncertainties relate to possibilities, costs and future accidents are not likely to be fully eliminated. Regardless of company or technical team involved in the activity.

Under these conditions, companies have to invest in different forms of training to increase their scope efficiency. This tends to be reflected in the following aspects: i) increasing the exploration opportunities, ii) increasing the oil recovery factor, iii) improving the ability to produce and transport the hydrocarbons in adverse conditions, iv) reducing costs without increasing risks of accidents; v) increasing the reliability and safety of procedures and operations.

In summary, the processes of learning and technological developments tend to result from a variety of efforts involving various agents including the public level. It is advantageous that these processes are continually encouraged by governments and regulatory bodies, increasing their effects and extent across the industry. It seems to be the best way for taking advantages of hydrocarbon resources located in Brazil. Thus, the benefits of this production may be much greater than the costs involved.


Exploration and production of oil and gas in deep waters: evolution and trends – Part II

Exploration and production of oil and gas in deep waters: evolution and trends – Part I

Click here to access other texts on this blog in English

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