Making Money in Oilfield Innovation Requires a Good Idea, Execution, Timing, and an Exit Strategy

In a deep downturn, interest in performance enhancing innovation rises as competition for work increases. Vantage Drilling’s Platinum Explorer, an ultradeepwater drillship in one of the toughest markets, will soon start as 3-year contract for ONGC offshore India. Source: Vantage Drilling

Tom Bates and Andrew Bruce are playing different roles in the same challenging game—trying to make money by selling new oilfield technology.

After a long career in the industry, Bates is an investor who remains constantly in motion at an age in which a lot of people have retired because, he says, he is “attuned to turning technology into money and that is what is interesting to me.”

At this early point in Bruce’s career, he has developed a useful technology—converting streams of incompatible drilling data into a secure database that can be used to do things better—but he has not turned that into money. “At end of day, it comes down to having customers,” he said.

The two will appear together on a panel discussing the challenges of creating companies to sell disruptive new drilling technology at a session put on by the SPE Drilling Systems Automation Technical Section (DSATS) on 8 October before the start SPE’s Annual Technical Conference and Exhibition in San Antonio.

Those in DSATS believe digital drilling technology has reached a level of development where it is ready to be commercialize, and entrepreneurs are needed to take on the challenge.

“There are a growing number of innovations nearing the stage where they can be commercialized at a time when drilling automation drilling efficiency is becoming a requirement for drillers,” said John Clegg, who is organizing the session. The discussion is targeting small companies because they “are typically better than big ones at identifying promising new ideas and getting them to market. But the capital they need is really hard to find.”

Entrance Strategies

In the year-and-a-half since Bruce started his company, Data Gumbo, he has established the foundation for growth: finding backers, developing the software, and persuading a company to field test his product and let him report results.

Current industry conditions do open some doors. “It is a really interesting position because everybody is desperate,” Bruce said. Companies needing to slash costs to make money are willing to consider new ideas.

Data Gumbo was started to facilitate digital innovations by converting multiple streams of incompatible drilling data that “do not play well together” into a form where they can be used increase drilling efficiency or predict breakdowns.

But closing sales is hard for a little known company because “desperation ironically makes them risk adverse.” They are the decision makers that Bruce said worried that buying something new from a startup could make them more likely to be “chopped in next round” of layoffs.

On the plus side, after years of deep job cuts the industry focus is now on operational efficiencies, and those doing drilling need to figure out if any of the data analytics experts promising big savings can actually deliver.

As a result Data Gumbo is highlighting how its system can be used to help figure out whether companies actually deliver on their promises. It recently announced a contract with a large oil company to use the drilling data to provide precise measures of pipe connection times by an offshore driller.

It will be serving the role of an “honest broker” by providing the measures used to determine if the driller qualifies for payments on an incentive contract, Bruce said. The oil company has reason to offer an incentive. He said it estimates that saving one minute on 21 million pipe connections in a year could save $250 million. But incentive contracts often end in disputes over whether the service company earned a bonus.

 “We started out as an integrator. We are rapidly going to benchmarking as well,” Bruce said. This can allow comparisons of systems that, for example, predict equipment failures, so “users can rate applications,” Bruce said.

Exit Strategy

While Bruce is struggling in the tricky currents of the current business cycle, where things are better than they were but far from great, Bates sees a positive in these changeable cycles.

“One thing really augers favorably for technology investment is it looks like cycles are getting shorter and shorter,” he said.

The upside in that is it shortens the time it takes to get to the next up cycle, which can be a prime opportunity to sell something new. “When the rig count goes from 400 to 1,000 in a year it is a lot easier to deploy new technology because (the industry) is short of everything.”

That comment referred to the rally in the US onshore rig count—which had been a rare bright spot in the global drilling business. It has since gone flat while other sectors, such as deepwater exploration, have remained down. In this economic environment, the pure play seismic companies “are all barely alive and I do not know if they will all make it.”

Based on his experience, success in oilfield technology is often fleeting. Bates’ career dates back to the advent of 3D-seismic imaging, which explorers embraced because it revealed large reservoirs leading to major discoveries. But the paper profits from those days evaporated during the 1990s as a downturn lingered.

“The best technology in the industry generated 1-2% on return on capital at a time when the weighted average cost of capital was 9%. The best technology on the planet destroyed capital at a rate of 7-8% a year,” Bates said.

The moral of that story for entrepreneurs is: avoid building and holding a company.

“For every startup that I work with, at every board meeting I ask ‘What is your exit strategy?’” he said, adding, “The sizzle won’t last forever. You won’t get rich keeping IP (intellectual property) on the shelf.”

Making Money in Oilfield Innovation Requires a Good Idea, Execution, Timing, and an Exit Strategy

Stephen Rassenfoss, JPT Emerging Technology Senior Editor

26 September 2017

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