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Home / Issue Archive / 2006 / October #10 / Forces Driving the Pace of Innovation in Russian Oil&Gas

№ 10 (October 2006)

Forces Driving the Pace of Innovation in Russian Oil&Gas

The current situation with implementing innovations in the oil and gas sector is most properly classified as ambiguous.

By Belyugin S.V., IFTI

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On one hand, the drastic increase in research financing by oil and gas companies in the last few years has had a positive economic effect on these companies. The charts in Fig. 1-8 illustrate this trend for several significant oil-and-gas market players.

On the other hand, it so happens that the oil and gas complex and “university” science in Russia have historically been largely separated from each other for the following reasons:
• Oil and gas companies generally rely on R&D centers of their own;
• The companies have historically been oriented towards foreign suppliers of high-technology equipment;
• It was rather difficult for companies to implement new technologies since that often required altering their development strategies; and a strategy that’s dependant upon R&D success presents too high of a risk;
• There is a difference between the “top-managerial” and the “scientific” mindsets: for the former, the result is of paramount importance (the goal is to get the technology working), for the latter the actual process plays a greater part (the goal is to get financing and enjoy the job). Retraining top-managers appears inefficient.

The result is the following “labor division” in the oil and gas sector: Russian company R&D centers develop relatively simple equipment and do superficial technology optimization (since this does not require altering the production basis), while all high-tech equipment and radically new technology is purchased from abroad. Certainly, as the above charts demonstrate, Russian engineers manage to save billions of rubles by pure rationalization activity even in these circumstances, but these savings are still incomparable with expenses for equipment imports.

The negative aspects of the status quo are the following:
• The Russian oil and gas sector is forced to purchase expensive equipment and technology from abroad, paying additional fees for assembly services (usually super expensive), start-up, tuning, and warranty and post-warranty equipment maintenance;
• Company R&D centers are not set upon monitoring innovations and trends in adjacent industries –new ideas pass by and vanish (as overlooked profit) or move abroad and return as expensive foreign products, forcing Russian companies to lag behind and catch up;
• Russian science is not strategically oriented specifically towards the oil and gas sector issue resolution and does not aim to develop the relevant applied technology.

As a result, the Russian oil and gas sector constantly overpays for technology and instead of selling scientific products along with raw materials, pays for the former with profits from the latter. This policy is obviously inefficient and should be rethought.

The absence of infrastructure that would help oil and gas companies to cooperate with the science sector hinders effective policy modification.

There are few organizations that could assume the role of coordinating and organizing relations between oil and gas companies and academic institutions. But such organizations do exist. Moreover, the current situation is somewhat paradoxical -- foreign companies that deal with oil extraction or processing, or use oil products in their business, actively use this infrastructure to their advantage, whereas Russian oil and gas companies do not.

A good case in point is the International Foundation of Technology and Investment (IFTI). For five years, IFTI has successfully monitored the latest Russian scientific accomplishments (both theoretical and applied), as well as organized projects and resolved associated issues. On demand from their partners, IFTI organizes closed bidding on its own behalf, without disclosing their customer's name, to find subcontractors to resolve the customer’s technical problems. Such tenders usually result in a number of applications from various research groups that act as potential contractors. Due to the existence of a wide network of experts (various IFTI project participants), the tenders are often accompanied by IFTI recommendations on selecting this or that specific group. After the customer selects one or several contractors, IFTI undertakes the entire project organization and, where necessary, its fulfillment and quality assurance. The project is then divided into stages with obligatory reports at the end of every stage, while financing is divided into tranches. The next tranche is paid out to the subcontractor solely upon the financing party’s (customer’s) approval of the relevant report. Thus, a customer’s problem gets resolved “in full.” Another advantage of working with an organizing infrastructure is that a large number of entirely diverse tasks can be combined with a single control center.

Experience also shows that for a large company, selecting a different way of obtaining new project ideas can be more efficient, such as when there is no certainty that a specific technology can be practically implemented and a company doesn’t want to make a risky investment. This often occurs when a potentially promising development is just at the laboratory testing stage, or when a company has no information on the obtained results within the sphere of its interest. In such cases using the venture project mechanism is more advisable. Then a company announces its willingness to acquire a certain end product (technology or a device through purchasing a patent, a license, or a consignment of goods) with clearly formulated parameters, and the coordinating organization bears all the risks associated with the product.


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