Tough times and risk can foster real innovation

The word "innovation" can sometimes fall into that category of buzzword that starts with good intentions but loses all meaning through overuse.
There is hardly a government in the world that doesn't at least pay lip service to the need to innovate, to "create the next Silicon Valley", to be a world-beater in some emerging renewable energy technology, or more modestly to just capture a slice of traditional manufacturing.
Yet, it is notoriously difficult to foster real innovation. The British, for example, have often lamented the fact that theirs is a nation of inventors but not innovators - the development, commercialisation and incremental improvements of a technology.
The UAE is no exception to this desire to make innovation a key part of its development. That has been evident in numerous initiatives, including this month's Khalifa Fund-backed Innovation Conference aimed at young businesses.
The need to innovate in oil and gas also has gained urgency after the crash in oil prices, and the topic was a key plank at this year's big Adipec oil gathering in the capital this week. There were reminders from many of the government and industry leaders, as well as dozens of briefings from technocrats, of the importance of innovation to the country's - and the region's - most vital industry.
But the unavoidable context for the national oil companies (NOCs) of the region is a chronic lack of the investment in the research and development required to foster real innovation.
They are not alone. Their private sector counterparts, the big international oil companies (IOCs), also have been chronic underspenders on R&D over the years, relying on the oilfield service companies, by and large, to bring innovations to the industry.
As Louis Besland, a partner at consultancy Alix Partners in Abu Dhabi, points out, the big IOCs have spent only between 0.2 and 0.5 per cent of their revenues on R&D in recent years, instead outsourcing innovation effectively to the oil service companies.
What has been the result?
Even before last year's oil price crash there was a long period of transfer of profitability to the service companies.
As Amer Al Shaikh Ali, a Total executive and chief executive of the Abu Al Bukhoosh offshore project in Abu Dhabi, points out, the major oil companies which had enjoyed profitability levels (as measured by return on average capital employed, ROACE) of 25 per cent in previous years, had seen their profitability dwindling for years, even while oil prices averaged about US$100 a barrel.
Now ROACE is averaging about 5 per cent for the majors and it can be assumed too that NOCs have also seen a transfer of wealth to the innovative companies through cost inflation.
There was an explicit recognition this year by Abu Dhabi National Oil Company that it had not managed to capture the industry's technological know-how and needed to develop its own innovators when it opened a $200m research centre at the Petroleum Institute. The centre's new head, a former Total R&D man, acknowledged that Adnoc recognised its lack of in-house technical ability even to sufficiently evaluate new technologies. Even so, the $200m centre "is just a drop in the ocean", says one seasoned industry executive.
The NOCs of the region have followed an extremely conservative philosophy, often for good reason. They are guardians of their countries' national wealth and any disruption could have grave consequences.
To truly be part of the innovation process requires fully embracing "the knowledge economy" but that has its dangers for the oil companies.
It was not just the risks of cyberattack, for example the Shamoon virus three years ago that disrupted Saudi Aramco's computer networks, that has NOCs worried.
There is also the risk of cyber espionage in an industry that guards its secrets closely, especially when it comes to the characteristics of its major oilfields.
The oil companies must, nonetheless, find ways to deal with their fears because there is no avoiding the technology that is needed now to improve operating efficiency and bring down costs.
The bigger question for innovation is the need to foster a culture of risk-taking more generally in a population that hitherto has shied away from it.
There isn't one model for releasing risk takers and innovators - the US has led innovation in many fields through its laissez faire approach, but Asian countries from Japan to South Korea and China have followed other paths.
But tough times such as the current downturn can help foster a climate of initiative.
As Atif Kureishy of consultant Booz Allen Hamilton in Abu Dhabi puts it: "You really have to go through adversity to innovate and if you don't innovate you're out of business."
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