DOE Aid to R&D a Boon to Independents
Abstract: Like it or not, without federal funds contributions, small producers probably couldn't develop new technology as fast--or as far--as they do today.
Analysis: If domestic oil and gas producers didn't have access to U.S. taxpayer dollars with which to share the cost of a vital portion of their exploration and production (E&P) research and development (R&D) efforts, they might not be doing much of it at all.
Major producing companies, once the wellspring of new oil and gas extraction technology, are too few in number these days to effect the high degree of E&P research they once did, eventually passing it on to their smaller counterparts. The mega-mergers of the 1980s and 1990s, combined with the need to search for more expensive reserve additions outside the contiguous U.S., have left the brunt of new technology development to independent companies, who make up the core of today's domestic industry.
There was a time–-and not so long ago, either–-when any mention of federal government involvement in the industry was met with outright hostility, particularly from independents, who've always characterized themselves as extremely self-reliant when it comes to finding and producing oil and gas. But, of course, times have changed. Today, money's scarce, and R&D money's even scarcer.
The U.S. Department of Energy (DOE), created in 1977 by President Jimmy Carter–-only 25 ago this past October, in fact-–was born partially in the aftermath of the 1973 oil embargo and the first realization by Americans that dependence on foreign oil sources had not been the amiable trade quid pro quo most had imagined. Oil's always been a political commodity. Meanwhile, in the ensuing years, untrammeled economic growth, coupled with particularly harsh climatic changes, taxed the industry's ability to meet the burgeoning demand for oil and natural gas, particularly from domestic sources--even with the addition of Alaska's huge North Slope reserves.
Nevertheless, at the time, many in the industry thought the creation of the DOE would lead eventually to what they found to be totally abhorrent: a national oil company.
As it happened, no federal oil company turned up. Of course, a huge new bureaucracy developed with the creation of a new cabinet-level department, but that was to be expected, particularly since existing federal bureaus were cobbled together to form the DOE in the first place.
While a significant portion of the new department's budget was reserved for oversight of the nation's nuclear power and atomic weapons stockpiling programs, a less ominous portion went towards "keeping an eye" on fossil energy supply and demand.
But one of the DOE's most important "inherited" duties was managing federal fossil energy R&D, which had been assigned initially to a group of energy laboratories established around the country. Also included were a couple of technology hubs–-one in West Virginia and another in Oklahoma–-whose duties included assisting both the coal and petroleum industries in developing new technology. Whereas the national labs conducted mainly pure research, these other facilities addressed development of more practical, "on the ground" exploration and production tools and techniques. To further that assistance, the DOE adopted a grants-in-aid program to foster grassroots R&D.
While the coal industry had embraced federal R&D assistance from its start, the petroleum industry, always leery of government "intrusion" into private enterprise, was suspicious of federal help for anything. Later, however, major company research dollars began to find other applications with more direct influence on the bottom line, and subsequent success in the coal industry of government R&D cost sharing finally caught the attention of the petroleum industry.
From those beginnings ultimately sprung a DOE/private sector shared-funding program for the petroleum industry that today concentrates much of its focus on the challenges faced by independent producers. In general, companies--along with educational institutions and state government agencies--are asked to propose R&D technology development or demonstration projects. After vetting the proposals, the DOE chooses a number for partial funding.
The program, in its various forms, has suffered fits and starts, and its priorities have changed a bit with each new presidential administration. However, it since has managed to rack up a high degree of overall success among the typical short-term (one to five years) projects usually chosen by the DOE for support. And even failed projects have proved beneficial, since they've often resulted in redirection of effort toward more practical E&P solutions.
Ideally, DOE and private sector participants share the program's R&D funding on a 50-50 basis, with the government contributing actual dollars. The participants can make their contributions in dollars and/or "in kind" products and services, making it even more economical for them. In the past, there has been a lot of associated paperwork, but the DOE says today much of the loathsome red tape has been snipped. Many project participants concur.
In return, however, to justify using public funds in the effort, new technology developed from such projects usually must be made available generally to the industry, though proprietary products or services developed from the research can be retained or licensed by individual participants.
Basically, the National Energy Technology Laboratory (NETL) directs DOE's practical petroleum research efforts, with campuses at Pittsburgh, PA, and Morgantown, WV. Most of the NETL shared-funding projects are focused on coal and natural gas E&P. A third campus, in Tulsa, OK, is headquarters for the National Petroleum Technology Office, which oversees projects directed toward crude oil E&P.
And DOE aid for technology development sometimes changes with the times. A recently established initiative, Public Resources Invested in Management and Extraction (PRIME), was created last year to focus on longer-term (five to 10 years), higher-risk research on new concepts and approaches for E&P technology. The goal of PRIME, says the DOE, is to reduce costs and lower risks and environmental impacts associated with finding and producing oil and gas.
This past week, the DOE selected 10 projects from 58 proposals made under the PRIME program aegis. The projects will share $8.7 million in federal funding, with private sector and university participants contributing only $3.1 million in hard dollars or "in kind" services. That means the DOE is bearing 74 percent of the cost, with participants contributing only 26 percent--quite a variance from the original 50-50 benchmark, eh?
According to the DOE, in the current market, where prices have become increasingly volatile, U.S. oil producers have continued to narrow their focus to projects that return a positive cash flow in a few months, rather than years. Because industry research labs have closed and private sector support for research and long-range technology development has dwindled, the DOE says it has again reoriented its R&D efforts, this time to cover areas not currently being addressed by the industry.
It's significant that across the 10 projects is a common goal of developing new approaches that could lead to enhancing oil production on public lands.
Located in Alabama, California, Mississippi, Oklahoma, Texas, Utah, and Wyoming, the projects span a range of exploratory research efforts--from "smart wells" that use the latest in downhole sensor technology to "smart polymers" that adjust within the reservoir to overcome multiple problems than can impede oil recovery.
Four of the projects, all to be conducted under the auspices of universities, involve new technologies for oil and gas recovery. Three more, involving universities and private companies, will address innovative drilling technology, particularly new materials and downhole fluids for use while drilling. The three remaining projects, all to be handled by universities, will address revolutionary approaches for finding and developing new U.S. oil and gas fields. The projects range in duration from two to five years, undercutting even the DOE's own definition of "longer-term."
There's not enough room here to detail each project; however, for those interested in how the DOE seeks to help independent producers develop E&P technologies necessary to lower both cost and risk in producing U.S. oil and gas, the information can be found on the DOE's website for fossil energy R&D (www.fe.doe.gov). There's a front-page story on the most recent projects, and a little searching will provide the gen necessary to find out how companies can make R&D project proposals of their own.