Showing posts with label Offshore. Show all posts
Showing posts with label Offshore. Show all posts

Wednesday, May 12, 2010

Langlois, Innovation and Processs Part IV

Today our review of Professor Langlois' paper "Innovation Process & Industrial Districts" will look at part 4., the negative effects of embeddedness. Embeddedness is defined as "the degree to which individuals or firms are enmeshed in a social network". Langlois "investigates the effects of social embeddedness on innovation". Noting that;
Furthermore, there may be a relationship between the degree of embeddedness in the industrial district and innovation. It has been suggested that innovation increases as embeddedness increases, up to a point, and that beyond that point further embeddedness results in reduced innovation performance at the firm level (Uzzi, 1997; Boschma, 2005).3 Thus, depending on circumstances, participation in an industrial district can either encourage or impede innovation.
Therefore certain levels of embeddedness in each community of practice is necessary. These communities of practice would consist of local, regional, national and international communities. With access and participation in each by those that work within oil and gas and the service industries. What Professor Langlois explores in this section of the paper is the extent that embeddedness can be under / overdone.
4. Negative Effects of Embeddedness
Oil and gas' difficulty is the escalating earth science and engineering effort contained within each barrel of oil. With finite human resources, the Preliminary Research Report suggested that the industry turn away from its "banking" mentality of providing fixed returns on investments, and focus on its scientific attributes to generate value. These scientific difficulties are understood through out the industry. Much is being learned by everyone by BP's actions in the Gulf of Mexico. It is this learning and sharing of information in each of the communities of practice that Langlois refers to as embeddedness.
Much of impetus behind innovation may nevertheless derive from events outside a district - as a result of innovations developed elsewhere and of shifts in consumer demand. The survival of firms, and of entire IDs, therefore depends largely on their ability to adjust to external development. Indeed, Piore and Sabel's (1984) championing of industrial districts was based largely on their contention that small firms with generic equipment are more flexible in responding to shifts in demand than large, capital intensive firms with substantial investments in dedicated equipment. p. 14
BP's current failures will benefit the industry as a whole. Many will ask why the Gulf has to be exposed to such environmental risk? Here I think that Langlois intimates at where some of the problem may lay.
Nevertheless, the factors underlying successful innovation in some industrial districts may turn out to be weaknesses depending on the broader innovation environment within a trade or industry. Firms in an ID may simply be slow to notice changes arising outside their district because they do not have good external channel of communication. As Marshall (Loasby, 1990) recognized, close relationships among firms and their workers could reduce their access to knowledge developed outside the district and their willingness to consider ideas from unfamiliar or distant sources. p. 15
and
Paradoxically this failure of firms is possible after their IDs have had a period of market leadership. they become over-confident and suffer from what Alberti (2006) calls "success myopia". The result is that trends in innovation (and not just innovation per se) in an ID tend to suffer from inertia - that once tendencies develop, they are harder to stop or to reverse than might be the case if knowledge were generally collected far and wide and if new knowledge were not generated to accommodate implicitly standardized local interfaces. this can lead to severe, perhaps fatal difficulties when the district is not at the leading edge or when consumer tastes have changed. p.15
Definitely sounds like the Gulf of Mexico. Those that are not familiar with the oil and gas industry are frustrated by the efforts of BP. Why not just turn the well off? Why didn't someone think of these problems and have them solved in case of this type of event? Why are actions being taken at such a slow pace? It seems so elementary and yet the industry never considered the possibility of a blow out preventer failing in 5,000 feet of water.

In defense of the industry, the science has become pre-eminent. The Gulf of Mexico shows exactly the extent of these difficulties and tomorrow will not be any easier. Looking at the logarithmic decline curve of a reserve report focuses the mind and in my opinion limits the risks of the possibility of overconfidence. However, the scope of the overall sciences is too great for the means of organizational structures being currently employed. The scientists are working as hard as they can, it's the organizational constraints of the bureaucracy that are causing these problems. Then I could be biased towards building systems to identify and support the Joint Operating Committee in a fashion as described in the Draft Specification. Langlois would suggest that the level of embeddedness is "not enough" for the situation in the Gulf of Mexico.
Boschma (2005) argues that "too much and too little proximity are both detrimental to learning and innovation. that is, to function properly, proximity requires" just the right amount of distance between actors or organizations. geographic proximity, for example, may enhance inter-organizational learning and innovation though in the absence of geographic proximity other forms of proximity may substitute for it. On the other hand, too intense proximity, geographic and otherwise, can result in lock-in. Proximity / embeddedness can evolve over time too, from not enough, to just enough, to too much, suggesting a link between the issues of embeddednesss and life cycle considerations. p. 15
I am not suggesting that a free-for-all of ideas being thrown at BP would have helped. Ideas developed without structure and governance are useless to any of the firms residing in any community of practice. This is an area where the Draft Specifications Military Command & Control Metaphor (MCCM) would enable the right type of ideas to percolate to the top. For example, if, the MCCM was in play in the situation in the Gulf of Mexico. Having everyone in the global oil and gas and service industries designated with a "name, rank and serial number" (etc.) would allow those ideas from participants who work in offshore oil and gas, who are senior engineers, who are intimate with sub-sea operations, be found instantly. In addition if there was a community of practice that existed with the MCCM implying some structure, would the social embeddedness of these individuals have thought of and possibly thought through some of the issues that would have arisen? I think so, but then again I am biased.
For instance, decentralized systems of innovation ( including industrial districts may be at a disadvantage in generating genuinely systemic innovations (Teece 1986), that is, innovations that require the development of new components as well as new ways of integrating components In such a case, the location of much of the relevant knowledge within a tightly coupled systems is likely to facilitate innovation. This need not mean a single vertically integrated firm, but it does mean that lead or coordinating firms - in modern terminology, systemic integrators - must possess a wise range of knowledge or capability and must indeed "know more than they do' (Bruisoni, Prencipe, and Pavitt, 2001). They also need to be powerful enough to force other firms to follow their lead. p. 16
Seeing who has been designated as the "Red Adair" in offshore blowouts would have helped before and after a situation like this. And maybe this individual foresaw the difficulties in offshore blow out preventer's. And allocated a small budget of his engineering firm to research the idea that these could fail. And maybe they would have been well on their way to solving the problem when the incident happened. The alternative today is that the engineering firm would have had to fully developed the solution and marketed it throughout the industry for the oil and gas firm to turn their thumbs down on the idea. As we see in the Gulf today, we can't work this way anymore. Langlois notes;
In addition, their reliance on local standards can impede efforts by firms in an ID to indigenize innovation form outside, again raising the costs of adjustment and the time required. Finally, firms with a mature ID that do develop innovations may not only find it difficult to generate interest within their ID but are poorly placed to market their innovations externally. p. 16
Without these communities of practice in place, where is BP today? The costs of this disaster may seriously impede the firm. BP could face costs in the range of $10 billion with additional damage to the wells reserves. All because management didn't foresee that the innovations of offshore drilling moved ahead of the science. In the scenario that I provided before, where the engineer proposed a solution to what he saw as faulty offshore blow out preventer's. In today's marketplace management will thumb its nose at these ideas. In the future it may solve the problem and eliminate these costs.

People, Ideas & Objects asserts in the Draft Specification that the oil and gas producer is concerned with their asset base and application of the scientific and innovation capabilities of the marketplace. This is represented in the Resource Marketplace, Knowledge & Leaning, Research & Capabilities, and Accounting Voucher modules and the Military Command & Control Metaphor being extended to the communities of practice. If BP adopted this strategy of focusing on their assets and capabilities, where would they be today?

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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Thursday, September 25, 2008

Offshore drilling ban, banned!

If the political climate remains constant in the states, we can assume offshore drilling to survive the next administration. The American people want offshore drilling for oil and gas to fuel their economy. Add the necessary technical leap that is required to fully exploit the resource potential of the Pacific and Atlantic offshore. On top of the operating environment of the Gulf of Mexico, the Arctic, heavy oil, unconventional gas. Makes North America the most demanding operating environment. Add to it the retirement of the brain trust of the industry, politics and environmental concerns and you have a sizable task ahead.

One of the key developments in the Preliminary Research Report was that systems define and support the organization. What's SAP's plan for the oil and gas industry? Whats their approach for the high energy cost era? Or do they see the industry as unchanged from the $25 / barrel era?

Its at this point where the first reaction will be to spend more money. I think that will be a mistake. Its a systems first world we live in. If we approach this opportunity with the same old bureaucracies, we're not going to get there. (Increased production volumes). Offshore drilling is expensive and I don't expect any increase in drilling for a number of years. The time lines for new offshore production is long, and we have the opportunity to build the systems that will enable a more innovative, science and engineering focused producer. An appropriate competitive advantage for a producer in this new era of oil and gas.

I propose we build this system to ensure the innovation that is possible gets implemented into the industry. As I have stated here before I believe this system could attain an exponential increase in the performance of the producer. Innovation and performance increases are what have been solved through this five year research project. Now its time to build. Please, join me here.

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Tuesday, May 22, 2007

The peaking of Offshore Oil and Gas:

Is the party over?
Or just Beginning to get exciting?

April 30, 2007

Matthew R. Simmons

Although the majority of this information is sourced from this Simmons presentation, little specifically is referenced. I felt that most of the information was factual and therefore not subject to Mr. Simmons copyright. (You can't copyright a fact.) I highlighted only what I thought was Mr. Simmons opinions in the noted references below.

Simmons noted the significance of the earlier period of the years 1859 to the 1930's where "no one had any idea what to do with so much oil"! The 148th year of the oil era is marked this year. 70 Years ago drilling teams began hunting for oil in the Middle East. Scouting for oil in Kuwait, Iraq, Iran and Saudi Arabia. Many of the large commercial fields that still produce in that region where found. Ghawar, the biggest was discovered in 1948, Safaniyah in 1951, up to 1967 with the last great super giant onshore Middle East find being Shaybah.

During 1947 Kerr-McGee moved offshore beyond piers and brings in the era of offshore oil and gas. These initial wells reached as deep as 150' feet of water. 150 feet being the limit of human endurance and safety due to the "bends". 1967 saw the Siberian Samoltar region develop, ARCO discovered the North Slopes Prudhoe Bay in 1968, Phillips found Ekofisk in 1969 and in 1975 Pemex found Cantarell. These regions and discoveries were the last 3 great oil frontiers.

With the development of mixed gas for diving, hyperbaric chambers, and the "Jim Suit" c/w GE's robotic arm. Led to testing and drilling into 1,000 feet of water in the early 1970's. Commensurate with this deeper diving capability Drill-ships and Semi-Submersible were able to conduct drilling into 150 to 400 - 450 feet of water. Further development of sub-sea production systems led to offshore satellite fields. During the 1980's the offshore drilling industry was faced with declining returns due to the costs of these technologies and the relative decline in demand for offshore drilling due to the delcine in the price of oil. As I recall it went to $10 / barrel in 1985 or 86. The pricing problem led to what was believed as the overbuilding of the offshore drilling fleet. This lack of offshre drilling demand dropped the capacity utilization rates to 43% overall. However when 1993 saw new offshore drilling technologies being introduced, the associated declines in costs and the producers earning reasonable returns on moderate oil prices of around $18 - 21 / barrel. This led to the real deep-water / ultra deep-water opportunities. This lead to a rebound or recovery of offshore drilling when in May 1997 Sonat Offshore announced the building of a deep-water rig with a 5 year contract at $200,000 / day day-rates.

"After 1980: all growth in oil output came from offshore oil". In his presentation Matthew Simmons shows the volume of oil production increases since 1980 are attributable to the offshore drilling discoveries. 120% of the 1980 to 2007 increase in the global oil production has come from offshore exploration and production. This is significant in showing the way in which the industry should turn. If the industry was able to make these discoveries with immature technologies and imploding commodity prices, I think the answer as to where the oil and gas industry needs to turn is evident.

Today after 38 years, the contractors for offshore drilling are financially healthy and prosperous. Only the number of rigs has not changed in the last 20 years. And the vintage of that fleet is quickly realizing its useful life. Recall that rust never sleeps and the useful life issue becomes more focused. Only 15% of the total fleet is new, with the majority being 25 years or more in age. It is unknown how quickly the fleet can be refurbished and how fast the fleet could be rebuilt. Simmons asks what does 500 offshore rigs cost. With 126 rigs on order, the delivery dates being from 2008 to 2011 it would seem the drilling platforms are very limited in their opportunities for the energy industries redevelopment capabilities. Time seems to be the greater cost in rebuilding the fleet. One must recall the effort of the United States during WWII, mixed in with some modern day innovation and science in seeing how the number of platforms could be built in time. With all of the oil found from offshore wells since the early 1980's, what is the prospect of the industries productive capacity and uptake?

One of the reasons that I follow Simmons is his analysis is usually unimpeachable. He is / has been a lightning rod for the wrath of the industry soothsayers that state all is well. Dr. Daniel Yergin seems to have sampled some magic cool-aid when it comes to predicting the supply possibilities, and hence his popularity. Simmons on the other hand has consistently put quality analysis that has proven correct over time. I have been following him since 1997 and his comments are stark, to the point and not something that Yergin appears to want to wake up to. For example, in this article Simmons notes the following prospective changes with respect to the supply that Yergin thinks is going to explode in the next 10 years.

  • USA's onshore oil totals approximately 4.5 MB/D with an associated produced water of 128 MB/D. A 96.6% overall average water cut.
  • Middle Easts giant oilfield now in decline. (Based on reserve analysis and decline in production from the region.)
  • Mexico's Cantarell complex is beginning its steep decline.
  • Lake Maracaibo is a "mess".
  • Niger Delta is a rust belt of decay.
  • The North Sea is in steep decline.

In light of this and the fact that 120% of the increase in oil and gas production in the past 27 years is from offshore oil exploration and production. How is it that Yergin believes the onshore oil and gas industry can respond to today's demand challenge. If it didn't contribute in the past 27 years to the global capacity of production, what is it that Yergin believes will solve this problem? More and more each day I think that Yergin is actively attempting to impeach his history and contribution to the oil and gas industry. As time passes he will become known for getting it all wrong.

Simmons falls definitively in the category of Peak Oil Theorists. He asks if the January 2007 production profile is 1 MB/D lower then May 2005's 74,151,000 B/D. This decline may show that May 2005 was the point of no return from a Peak Oil theory point of view. Unless the number of wells that can be drilled increases size-ably, then Peak Oil starts it's otherwise impossible decline. With the associated growth in the global fleet of offshore drilling capability, production decline will accelerate.

Its at this time that Simmons puts across one of the other phenomenon he has asserted many times before. The ability to accelerate the decline by aggressive exploitation is the only thing that the industry has really done in all of the onshore and offshore fields. This has raised the deliver-ability of oil and gas from known reserves to its absolute optimum, and cleaned out what was producible form the formations quicker then what has been found to replace it. In some companies in Canada this replacement rate is consistently 15% of the production! If you see a hamster in the wheel running at full speed your correct, however, this last point demands a doubling in the speed from the hamster. Our current consumption of energy is enabled by the aggressive and highly technical exploitation of known reserves over the past 25 years. This deliver-ability rate is therefore not sustainable. And if the peak oil theory is proven right, since May 2005 a very large clock has been ticking for the energy consumer who is unawares and unprepared. Thank you Dr. Yergin.

The dire nature of Simmons facts are captured in his 27th slide. Asking "Can the industry survive post peak oil?

  • Will the global economy survive post-peak oil world?
  • How high could oil prices go?
  • When demand outstrips supply are shortages inevitable?
  • Will the Offshore Technology Conference (OTC) survive Post Peak Oil? (The OTC is the group Simmons made this presentation too.)

How this gets done, and I cannot imagine anyone arguing for the bureaucracy to lead this charge. We need to organize our efforts to scale to this level. The industry is significantly bound by constraints and needs to reorganize around this proposed software development. How much longer will we face an angry consumer regarding the alleged gouging at the pump? How much longer will the bureaucracy feel complacent and wealthy in their deliberate inaction? How much longer will Yergin continue to belittle the Peak Oil theories and Simmons, and tell his customers, the consumers and bureaucracies, things are not as rosy as he has stated?

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