Why low oil prices spur innovation

One of my key learnings after 20+ years working with technology and service providers is this: we are nothing if not adaptable. This ability to innovate and change as needed arose in different ways throughout my career, but in almost every instance, the incentive came from the need to react to chaotic changes predicated by price crashes in the industry.

In the mid 1980’s, in response to historically low oil prices, producers decided to structurally change their companies. One way they did this was to eliminate or drastically reduce their massive internal research and development (R&D) departments. In the process, companies effectively outsourced R&D to the service sector because oil companies realized they didn’t need to design and build their own technology. Any competitive advantage that was achieved by proprietary technology was overwhelmed by the high cost of creating and maintaining those innovations. Departments were cut and smart people found a place to continue their work building commercial systems and selling them back to the oil companies at a reduced cost.

The change in how oil companies approached innovation transformed the relationship between service companies and oil and gas producers. On one hand, what the oil companies needed but no longer funded themselves were provided by a competitive commercial ecosystem that existed to create and supply innovations. These included innovations in software, drilling and completions technology, seismic acquisition and information technology. On the other hand, an innovative service company enjoys great success if they bring the needed innovation to market. Although there are flaws, as a whole, this relationship has worked very well.

Subsequent downturns saw oil companies reduce or remove internal people development programs such as centres of excellence, internal multi-year training programs, and large summer student programs. A growing service sector needed the graduates that the producers didn’t. While the training that you get with a service company is not anywhere near as organized as one you’d get with producers in the “good ol’ days,” nobody could argue that you don’t learn a lot about the science and about the business. When times were good again, this meant the producing companies had access to a great group of battle-hardened geoscientists to rebuild their technical staff.

So why does this work so well? When the price of their product declines, oil companies need to look at every method of reducing costs and preserving shareholder value. As a result, they often find themselves short of critical expertise or technology that’s needed for continued growth. At the same time, as traditional revenue lines decline, service companies need to find every angle and innovation to provide a leg-up on the competition. This dynamic creates a strong environment for innovation.

In the last year, Sigma has seen our customers respond to the price crash by cutting all types of spending. These cuts significantly impact exploration activity which causes some of our revenue lines to decline. Moreover, massive layoffs have left many of our customers with a reduced capacity to perform tasks that recently would have been handled by multiple people.

What does Sigma have? Decades of experience in all things related to seismic. What do our customers now lack? The same. From this comes the opportunity to provide innovative new services that help our customers understand, organize, control and most importantly, monetize their seismic asset. We’ve seen strong interest and growth in our services group providing the needed expertise to our customers who either can’t sustain, or don’t need full-time staff performing these tasks.

Once again, the cycle of necessity leading to innovation is playing itself out to the benefit of our customers and ourselves. It’s nice to see innovation in a time when much else seems bleak. If you have questions, we can help.