Global underinvestment in energy R&D presents opportunities for the region

The banner of innovation in the petroleum industry has passed to service companies, such as Schlumberger and Halliburton, which spend between 2 and 3 per cent of sales.

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‘We are underinvesting in energy research and development by a factor of three,” the US energy secretary Ernest Moniz told the Senate in 2013. Of US$60 billion of federal research and development (R&D) spending, just $5bn went to energy. This is despite the imperatives to make the energy system clean and sustainable, bring modern energy to 1.3 billion people worldwide who lack access to electricity, and create the technologies that will drive this century’s economic growth.

Perhaps the industry itself is making up the difference? From the 1950s through to the '70s, oil and gas company research drove some fundamental breakthroughs. For instance, Exxon geoscientists demonstrated how long-term rises and falls in sea-level predictably control the accumulation of sediments, while Shell engineers built the first floating vessel for offshore oil production.

But oil and gas producers now invest a tiny fraction, about a quarter of 1 per cent of sales, on research. The banner of innovation in the petroleum industry has passed to service companies, such as Schlumberger and Halliburton, which spend between 2 and 3 per cent of sales.

But telecoms, electronics and software companies dedicate on average 4 to 6 per cent of revenues to R&D; pharmaceuticals, 15 per cent.

Energy R&D is particularly weak in three phases. The first is in the “moon-shot” programmes that might transform our energy future.

This includes technologies such as advanced batteries to store renewable energy, drilling using lasers, breakthrough solar panels with much higher efficiency, nuclear fusion to bring the sun’s limitless clean power source to Earth, and advanced nuclear fission that would be safer, cheaper and burn up waste.

Such programmes require large-scale, long-term finance not subject to bureaucratic whims: the International Thermonuclear Experimental Reactor (Iter) collaboration on fusion between the European Union, the United States, Russia, Japan, China, India, South Korea and Switzerland is set to cost $20bn.

The second is in the “Valley of Death”. Promising technologies make it past the laboratory stage but lack the funding to build a working pilot plant.

The expense, perhaps a few million dollars, is too much for academic institutions to fund, but the risks and uncertain commercial pay-off deter profit-minded investors.

Examples are small modular nuclear reactors synthetic fuels production, and innovative carbon capture systems.

The third is in the deployment of proven but unfamiliar technologies. Unlike solar and wind, the oil and gas industry has been notoriously unwilling to innovate. Long-lived assets that may produce for 20 or 30 years do not offer much scope for experimentation.

Project managers are concerned about disruptions to production, the risk that new devices may not work as intended, and the short-term pressure to cut costs.

Three research trends are more positive: realisation, commercialisation and globalisation.

Some oil companies are realising that they have surrendered their technical edge, and are trying to repair matters. Statoil requires that each new field development contains at least one innovative technology. Petroleum Geo-Services, Eni, Saudi Aramco and Total have supercomputers ranked in the world’s top 50.

Several major oil companies – including Shell, Statoil and Kuwait Petroleum Corporation – have set up venture capital funds to seed and grow new technology innovations to the commercial stage.

And research is globalising beyond North America and western Europe. China is building a fusion reactor which may be ready before Iter.

Saudi Aramco has research centres not only in Dhahran but also in Houston, Detroit and Massachusetts in the US, Paris, Beijing, the Netherlands and Aberdeen. Abu Dhabi's Masdar is developing solar-powered desalination, bio-energy, and carbon capture.

Given its natural endowment of hydrocarbons and solar rays, energy should be at the heart of the Middle East economy.

That demands research centred on this region’s challenges, not just passively buying in tested systems from elsewhere. If international oil companies and western governments are neglecting energy R&D, that means all the more opportunity for this region.

Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis.

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