R&D Investment Trends and the Rise of NOCs

Abstract

Management The global energy industry has been facing a variety of challenges in recent years: high price volatility, the decline of “easy oil” and a shift of production to emerging markets, shortage of talent, pressure to reduce the carbon footprint, and a surge in petronationalism. These challenges have shifted power toward national oil companies (NOCs) and have raised questions about the current business model of the international oil companies (IOCs). In dealing with increasingly complex oil fields, some have argued that the IOCs can maintain a competitive advantage by leveraging their internal technology competence and their experience in leading and coordinating technology-driven project skills to transform pioneering E&P approaches into commercially viable approaches. Much of this rests on the IOCs’ technology leadership based on their strengths in R&D and technology. However, recent trends in R&D spending (Fig. 1) suggest that the IOCs’ dominance in R&D is being challenged both by a leading group of NOCs and by the international service companies. NOCs Now Lead in R&D Spending The top five IOCs by revenue increased R&D with an average year-on-year growth of 9.8% in the period 2003–2009. Total has shown the smallest R&D growth since 2003, but it had a high starting point compared to the other IOCs, especially when adjusting for size of operations (Fig. 2). Chevron has increased its spending on R&D 18% year on year since 2003 but remains behind the leaders. Starting in 2006, Shell has pushed to develop technologies for more difficult assets. In doing so, it has become the top spending IOC in terms of absolute R&D expenditure. BP appears to spend relatively little on R&D but this masks the fact that a lot of its technical efforts are centered on piloting and field trials. In contrast to the IOCs’ moderate growth, a small group of leading NOCs has been investing heavily in R&D. Petrobras’ R&D spending has increased at a rate of 23% a year since 2003 and is now on par with Total and ExxonMobil. But the most impressive growth in R&D has been for CNPC/PetroChina, which saw an annual increase of 31% during the same period. In 2009, PetroChina overtook Petrobras and Shell as the leading spender both in absolute levels of R&D spending and on a per-BOE basis.