Notes Abstract Introduction The value of research Production as a metric for research value Oil Natural gas Meeting future U.S. energy demand Production Import Energy Summary References
VALUE OF APPLIED RESEARCH AND FUTURE OF NATURAL GAS SUPPLY: HOW THE U.S. NATURAL GAS PRODUCTION CURVE WAS BUILT AND HOW IT WILL BE SUSTAINED IN THE FUTURE
This paper represents a combination of two talks given over the past year by the author:
Natural gas is the energy of choice for the next 15 to 20 years. Data show that Federal and private investment in research, and the creative application of technology helped build the historical natural gas production curve in the United States. Research and the creative application of technology will likewise grow natural gas production and slow oil production decline in the future. The private energy sector has decreased fossil energy research funding significantly over the past decade. The American public must get behind Federal support of fossil energy research if we are to avoid dependence on foreign sources of natural gas. The private sector can also be proactive by creating a Private Energy Research Foundation (PERF) to help fund vital fossil energy research.
Technology is a word that has become so overused that it actually means very little without some context. A geologist might think of 3-D models, a petrophysicist, logging tools, a geophysicist, waves, a reservoir engineer, numerical simulation, an operations engineer, drilling and completions, and a manager might consider the leverage that technology provides on Wall Street. The word means many things to many people. In fact, all of these definitions are important, all are correct, and all are useful within a known context. One thing is certain: technology does not equal wisdom, and technology alone does not add value.
A company needs both profit and value to survive over the long run. I consider value to be a longer-term attribute than profit, which carries a fiscal quarter connotation. In the descriptive, interpretive, research-oriented upstream-upstream world of the geologist, geophysicist, and petrophysicist, it is considerably more difficult to quantify value than in the quantified, blueprint, application-oriented downstream-upstream world of the operations engineer (Figure 1 below). Value is difficult to quantify in the upstream-upstream, and it is therefore difficult to assign, because it is far removed from the point where oil fills the tank and gas fills the pipeline. The resulting mistake that is commonly made is to consider the upstream-upstream a cost. I call this the value trap.
Many major oil companies fell into the value trap over the past decade when they asked their Research Centers to become Technology Centers, which in the end meant 100% technical service and very little innovative research. Technology Centers were asked to justify their existence using a quarterly profit metric. In fact, scientists at Technology Centers were asked to "bill out" to customers within the company at some hourly or daily rate. Lawyers and accountants perform a service and quantify value by billable hours; research scientists should not. One is service, the other is science. To those of us who were in the science trenches at major Technology Centers, the result was predictable. Based upon the billable-hour metric, Centers were shown to be unprofitable, and a vast majority were closed. There were, of course, other business justifications for closing Technology Centers. For example, "does not fit the strategic objectives of the company," "technology should be borrowed not invented in house," and "we should contract the technology as needed." Time will tell the wisdom of these decisions.
In actuality, true research is represented by long periods of normalcy with no apparent progress or results, which are punctuated by moments of brilliance and significant breakthrough. As such, research does not lend itself to quarterly profit evaluation. In fact, todays research often becomes tomorrows technology application. An oil company could certainly not be profitable with research alone, but can it be valuable without it?