Innovation From First Principles

How innovative is the oil and gas industry and those within it? The prevailing view is that the sector is not innovative; the track record of successful exploitation is poor, with a pace bordering on glacial. Yet one can look at deepwater developments to see how much technology has been deployed in a sector that is working successfully to harness difficult-to-reach resources that the world needs. How can there be such a dichotomy?

The explanation might lie in the motivating factors within companies and projects. When the price of oil was high, big, complex or technically challenging projects made sense and money. If new technologies were needed, they were used (e.g., Total’s Pazflor project) and, if they weren’t, then projects relied on minimal-risk standard solutions geared toward schedule and price certainty. One approach prompted creativity toward a very specific end goal; the other avoided innovation and creativity in the interests of predictability.

Both approaches led to some success, yet as Bill Gates has said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” Clearly, the industry learned how to deliver projects when the price was high, but it did nothing to prepare it for when it fell. Indeed, the current downturn has brutally exposed the sector’s limitations and vulnerabilities. The approaches that worked before are cumbersome and outdated. The usual cost-cutting to make projects and activities viable will only take the sector so far; the people within it need to work and think differently. Is that even possible after the conditioning of a high oil price world and the demand for minimal risk and predictability?

There are positive signs. For example, the new Oil and Gas Technology Centre in the U.K. is stimulating a new approach. However, the challenges lie with the operators and their major contractors. These organizations hold the key to adoption of innovative practices and technologies. How can a change in approach be achieved, and what can the industry learn from other sectors that will help it evolve?

Adaptive principles

Former Space Shuttle commander Jim Wetherbee spent time working within the oil and gas sector and is author of “Controlling Risk in a Dangerous World: Thirty Techniques for Operating Excellence.” The lessons he learned from planning and leading space missions with lives at stake are powerful and entirely applicable to innovation in the oil and gas industry. His main observation is that most companies try to control (technology) risk through rigid rules and procedures that may not be applicable in all cases. A better way might be to supplement the closed nonadaptive rules with a set of underlying principles that will help operators deal with unknown risks and challenges while allowing innovation with acceptable failure.

“Operational excellence is achieved when an organization operates to a set of adaptive principles, not just mandatory rules and procedures. The key is to a) develop the right principles, b) develop techniques of operating excellence that follow those principles and c) not violate the principles once they are established. Once the principles are established and never violated, operators can be fairly aggressive in operations and even pursue innovation,” Wetherbee said.

What might the principles be to underpin successful innovation in the oil and gas industry? To understand the situation, it is probably easier to look at what doesn’t work. For example, one well-known operator had principles and made decisions based on “safe and reliable performance” for its existing operations and “start up and stay up” for its new assets. Given the inherent risk with innovation, employees in a company with such principles are unlikely to pursue or promote innovative solutions or activities to improve performance.

Josh Valman is the CEO of RPD International, a company that specializes in delivering innovation for bluechip companies across a variety of sectors, including aerospace, automotive and pharmaceuticals. Having looked at innovation in oil and gas, he concurred with the value and power of principles and the differences with other industries.

“There are some things that people hide behind such as regulations or scale or safety, and then there are the real problems within the sector that get in the way of innovation in that people have siloed skills, and nothing really happens without a large project and many people in alignment. Unlike other sectors, it looks like there are very few opportunities that allow two or three people to experiment and simply try things out.”

RPD has worked with companies in those other sectors that want to improve their ability to innovate and build for the future, often working with the CEOs and staff to help build a culture that understands why innovation is important and what will lead to success but also how to listen and successfully communicate in relation to innovation. As many of these organizations are large and can be slow to evolve, let alone innovate, a holistic approach that develops the right principles but also seeds the organization with the right roles, personnel and working characteristics is key.

“Mature industries find it difficult to adopt different ways of working,” Valman said, “but the idea of innovating in small groups works just as well in a large sector with heavy equipment. After all, a large asset is just made up of multiple smaller units and activities; it just needs the right approach underpinned by the right principles.”

In testing the idea of establishing principles to encourage, foster and implement innovation, it was interesting to hear the view last October of one oil and gas industry technology officer whose global services company employs more than 4,000 personnel. “No one has the freedom to fail in the sector anymore; the stakes are too high,” he said, noting those stakes not only concern financial or safety aspects but are public relations-related as well. Bad news about failed equipment or operations travels fast, and perhaps herein lies the biggest problem of all: Any sort of failure remains a deeply uncomfortable and potentially damaging experience in the sector.

Considering the risk

How much of the sector’s fear of failure is real and properly quantified, though? How often do companies assess the risks associated with innovation and find a way of managing or reducing those risks rather than avoiding them altogether? Wetherbee suggested a wise principle might be, “Never take a risk you can’t afford to lose,” and before the managers and operators walk away from an innovation that will be beneficial to the company, they should consider the risks associated with innovation and address the following questions:

• What is the worst consequence of the innovation risk (i.e., financial-, safety- and PR-related)?

• What is the criticality of the innovation or activity (i.e., is it critical to the business’s future)?

• Do I have sufficient control (i.e., if the criticality of the innovation is high, can I control the outcome and reduce the worst consequence to an acceptable level)?

Following this approach of assessing consequence, criticality and control will likely reveal that most financial and safety risks related to innovation can be managed and that the biggest challenge is in relation to the perceived lack of control and the associated fear of failure.

Imagine the release of intellectual and innovative capacity in the sector if, once the risks and potential losses from its failure are better structured, articulated and understood, this last barrier was removed. Imagine the transformation that could happen if the sector adopted just one principle related to innovation while keeping consequences small through operational excellence and control of risk: the freedom to fail.