The purpose of this dissertation is to deal with the problems and possible solutions of technology transfer in the US petroleum industry. The industry is composed of many key players including oil and gas producers, service companies, suppliers, government, organisations, universities and institutes. It is important for all players as obtaining more advanced technology can bring about higher productivity and cost reduction to the firm. However, the transfer process is not simple because there are many variables involved such as culture, appropriateness of technology and company readiness.
Technology has become one of the main driving forces behind the growth of many industries including the petroleum industry. The growth of industries has stimulated the growth of the nation's wealth.
This dissertation will firstly provide an overview of the structure and the performance of the US petroleum industry. Then the influencing factors in the growth of the industry and the influencing factors in successful technology transfer will be discussed. The trend of mergers and acquisitions (M&A), which is the main strategy used in obtaining access to new technologies in the US petroleum industry, will also be discussed. The dissertation will also analyse 2 case studies, the Petroleum Technology Transfer Council (PTTC) case and the BP-Amoco merger case, to form a clearer picture of the industry in terms of technology transfer. Lastly, the evaluation of technology transfer in the petroleum industry and the future of the industry with respect to theories and analysis such as Knowledge management, SWOT analysis and PESTEL analysis will also be discussed.
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At the end of the dissertation, the readers should be able to have an understanding of the US petroleum industry and the importance and benefits of technology transfer to the players in the industry. In addition to that, the readers will understand the strategies used in obtaining access to new technologies especially in mergers and acquisitions which is the most widely used strategy. The readers should also understand why the US petroleum industry is very strong and is continuously growing and expanding.
Chapter 1. Introduction
This chapter will start by addressing the technological progress and the technology transfer. The aims and objectives of the dissertation and the literature review will then be discussed. The expected conclusions and structure of the dissertation will be addressed last.
Technological progress and technology transfer
Technology is a driving force behind the successful business and has resulted in technology being continuously innovated to keep up with the rise of the world's demand in all sectors including the manufacturing and services sectors. According to Freeman and Soete (1997), the direct source of economic growth is technological innovation and technological knowledge, generating activities such as technology transfer. In order to achieve such advancement in technological innovation, investments in research and development, testing and marketing must be pursued first. These investments in turn will stimulate other vital inputs such as human capital and physical capital (Scherer, 1999). In turn the human capital has become a critical factor in innovation performance and competition for, and mobility of tacit knowledge is of increasing importance (OECD, 2002). According to Encaoua et al (2000) and Baumol (2002), the amount of technological knowledge and innovation depends on two main variables which are, the patents lifetime and the technology spillovers. For the patent lifetime, when the patent protection ceases, anybody can produce the goods and has access to the knowledge and technology. Thus the knowledge and technology are widespread and become accessible for everyone. For the technology spillovers, the rate of technology spillovers indicates the accessibility rate of people to those technologies. The more the spillovers, the more accessibility to the technology increases.
Innovation has always been a major influencing factor of technology advancement and development (McLoughlin, 1999). However, technological innovation is normally rather risky and it is often very costly. These risks and costs create many problems for securing needed financial support for many firms, in order to carry out the work. The difficulties that private enterprises face in terms of risk and cost of innovations leave a place for government to intervene, which can be done through enhancing those firms's incentives or supporting innovation directly through public funds. These incentives and public funds take the form of direct spending and subsidies, tax policy and patent policy (Scherer, 1999).
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International business strategies always involve the transfer of processes and technologies themselves (Grant and Gregory, 1997). Technology transfer can be defined as a set of processes including the flows of know-how, experience and equipment among different stakeholders such as private sector, government and research institutes. Technology transfer also involves the diffusion of technologies and technology cooperation across and within countries, the process of learning to understand, utilise and replicate technology (International Energy Agency, 2001).
In the last 20 years, the US government has encouraged the transfer of technologies developed among different commercial sectors in firms both in the same and different sectors (Harper and Rainer, 2000). This dissertation will examine the importance and the benefits of the technology transfer in the US petroleum sector.
According to the International Energy Agency, petroleum production has outrun petroleum discoveries and the demand will eventually outrun production. In order to meet the increasing demand, it is necessary to explore and extract the petroleum more efficiently (www.planetforlife.com). The advance in technologies available in the market can enable the exploring and extracting processes to be done more efficiently. With the greater need for petroleum in the US economy and the increase in petroleum consumption and import, the players must pay more attention to and must have appropriate and up to date technology to use. This is why technology transfer is so important and beneficial to the players in the petroleum industry. There are many governmental, private and public-private programmes in the US petroleum sector. However, the Petroleum Technology Transfer Council (PTTC) is collaborating with all players into the industry and connecting them together to enable the technology transfer within the US petroleum industry (www.pttc.org).
Furthermore, the transfer process is not easily achieved since there are various conditions and factors influencing the successful application of the transfer such as market size, culture, supply chain, infrastructure, readiness, the ability to smoothen the transfer of both the host and the receiving organisations, globalisation, regional trade agreements, foreign direct investment, increased market demand and cost minimisation.
Before dealing with the theme of technology transfer, it is necessary to understand the term technology transfer first. As mentioned in the introduction, technology transfer is a set of processes including the flows of know-how, experience and equipment among different stakeholders which involves the diffusion of technologies and technology cooperation across and within countries, the process of learning to understand, utilisation and replication of technology (IEA, 2001). According to Zakariya (1982), technology transfer must also help in creating an artificial enclave of technical knowledge and sophistication, in isolation from the rest of the economic and social life of the community. It is also dependent on the interest of the recipient firms to use the best available technologies to reduce their risk in investment and increase their chances of success.
With the search and development of new petroleum resources, the refining, the means of petroleum transport, production and marketing, the advanced and continuously improved technology have been used successfully in the petroleum industry. In doing so, technologies, skills and technical knowledge have been constantly crossing international borders with the prime movers being risk taking and profit seeking private companies of the industrialised developed world (Zakariya, 1982).
Even though the topic of technology transfer is widely discussed, the number of publications on technology transfer in the petroleum industry is rather limited.
The most recent relevant publication on the topic was by Kenneth E. Knight in 1984, Technology transfer in the petroleum industry in the Journal of Technology Transfer 8(2), 1984. According to Knight (1984), the literature on innovation and technology transfer has focussed upon successful cases, therefore, almost nothing has been written about the innovation and technology transfer in the petroleum industry which is considered to be very slow in adopting new technologies. Nevertheless, there are some studies about this industry which concentrate on the successful transfer implementation. US petroleum or oil firms are especially strong and dominating in innovation in the industry, this is due to the know-how in the oil production of the US (Freeman and Soete, 1997) and the strong relationships among the government, universities & institutes and the industry (www.pttc.org). Furthermore, the petroleum equipment and service business represents major exports for the US (Knight, 1984).
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The petroleum industry is a very diverse and non concentrated industry (Knight, 1984). The industry is composed of many businesses and activities, however, most of the major oil companies specialised in only a few activities such as exploration, extraction transportation, refining and marketing. This indicates that this industry is not highly vertically integrated. For example, when we look at large oil companies such as Exxon Mobil and the Chevron Corporations, we can see that even though they have tried to control and carry out every process from petroleum exploration through petroleum production themselves, they collaborate with many institutes and universities in research and development and still hire service providers like Schlumberger and Halliburton to carry out vital operations. These service providers also work with various types of companies, suppliers and institutes to come up with their most advanced technologies (www.slb.com). It could be inferred that, with the increase in mergers and acquisitions (M&A) in the petroleum industry from the 1990s, a certain increase in concentration has taken place (Voola, 2006). According to Bohi (1998), the industry has undergone reconstruction by being more reliant on contract services provided by firms engaged in exploration and development. This outsourcing is motivated by the need to reduce the cost of operation and development and to take advantage of the expertise gained by specialists. It has now been customary in the petroleum industry for large firms to rely on outside companies to perform services related to operation and development (Bohi, 1998).
According to Knight (1984), the lack of innovativeness in the petroleum industry is due to several reasons, which include the close cooperation of the petroleum industry structure which is increasingly interdependent (the Good Old Boy) and unable to successfully introduce most innovation on their own. However, the industry has become better organised, well cooperated and better integrated as can be seen in the establishment of several bodies such as the Petroleum Technology Transfer (PTTC) which was established by producers, state organisations and the US Department of Energy (DOE), is collaborating with all players in the industry and connecting them together to enable technology transfer of the petroleum industry within the US (www.pttc.org).The National Energy Technology Laboratory (NETL), which is a part of DOE' s national laboratory system and the Natural Gas & Oil Technology Partnership (NGOTP), connects the national laboratories with the oil & gas producers and service companies. Technology transfer is at the heart of NETL's mission. It makes the use of federally funded knowledge, facilities and capabilities through technology transfer partnerships with private industry, academia and the state and local governments (www.netl.doe.gov). NGOTP focuses its collaborative research on drilling, completion, and stimulation technology; recovery technology; diagnostic and imaging technology; computational technology; upstream and downstream environmental technology and natural gas technology (www.fe.doe.gov).
In addition to the establishment of such bodies, the US government has also encouraged technology transfer through various channels such as the national system of innovation (NSI) and federal policy. The US government also plays a very vital part in strengthening the relationships between the government, industry and universities as well as research institutes. Furthermore, with the changes in the US law during the 1980s, universities are allowed to seek and retain patents on patentable discoveries made by their faculties and staff (Scherer, 1999). This factor has helped in technology innovation since universities and research institutes are the main sources of innovative thinking and technology development. As a result of the interactions, a triple helix relationship is formed. The triple helix includes the Industry, universities and institutes and the government (Leydesdoff and Meyer, 2006).
In the last 20 years, the US innovation system has changed to cope with many external factors such as globalisation and foreign direct investment. The US federal policy has also changed. The major elements of the changes are increased reliance by US firms on sources of R&D outside their organisational boundaries, expanded R&D offshore by US firms and increased reliance by US universities on US and foreign industries for research funding (Mowery, 1998).
However, this industry is very important to the US because of the rise in demand for petroleum to run the US economy and the vital roles played by the US in exploration, drilling and production of petroleum. After the oil crisis in 1973, the petroleum industry's top priority was to increase production and explore for petroleum (Salameh, 1995). As a result, a multiplication of ideas, innovations and technologies have been developed. The priority of the petroleum industry remains to produce more petroleum by making use of highly efficient technologies in order to explore more efficiently and to lower production costs.
Methodology and research design
The information used in this dissertation will be based on secondary data because only secondary data is allowed in the MSc in Management course. The secondary data on technology transfer in petroleum industry can be accessed through university library and the Athens system and takes the forms of books, articles, journals and information from websites. With sufficient data and information, a clearer understanding of the topic can be formed in the dissertation. An analysis and evaluation can then be carried out in the appropriate direction and be useful to interested parties. However, the literature on the petroleum technology transfer is very limited and not up to date. Several research methods will be used in data finding, data collection and analysis. Furthermore, management theories and analytical tools such as knowledge management, SWOT analysis and PESTEL analysis will be used to form a clearer picture and better understanding of the industry. Moreover, case studies will also be discussed to provide the readers with an insight into technology transfer activities and objectives.
From exploring the topic of US petroleum technology transfer, we should be able to understand the importance and benefits of the transfer and also the future of transfer in this industry. We should be aware of the constraints of the transfer, solutions to them and how to implement them. Furthermore, we should acknowledge strategies used to obtain technology and to compete in the market such as mergers and acquisitions (M&A). We should also understand how knowledge management (KM) can be used as a tool in technology transfer. In addition to the KM, successful transfer can be achieved through non profit organisations such as the PTTC which acts as an important link between players in the industry. We should understand its role and how they manage their technology transfer activities.
Chapter 1 will address the question as to why technology transfer is important & beneficial and describe the aims and objectives of the dissertation. In addition, it will present the literature review, the research design & methodology and the expected conclusions.
Chapter 2 will give an overview of the US petroleum industry. It will identify the arguments raised against issues. The term petroleum will be firstly clarified and follow by the background and structure of the industry. Lastly, the factors influencing the growth of technology transfer in the US petroleum industry will be discussed.
Chapter 3 will show the research findings and examine the findings from the dissertation. The channels of transfer and the petroleum technology transfer will be firstly discussed. Then, an evaluation of technology transfer in the petroleum industry will be conducted. Lastly the performance of US petroleum industry will be evaluated.
Chapter 4 will examine 2 case studies, the Petroleum Technology Transfer Council (PTTC) and the BP-Amoco M&A
Chapter 5 will present the conclusions of the dissertation and summarise all of the main issues.
Chapter 2. The US petroleum industry
This chapter will primarily look at the US petroleum industry and its background and structure. The factors influencing the growth of the industry such as the rise in demand, the national system of innovation (NSI) and the triple helix relationship will also be discussed. This will give the readers a better understanding of the petroleum industry.
What is petroleum?
Petroleum is a naturally occurring mixture of predominantly hydrocarbons in a gaseous, liquid or solid state by which crude oil exists in the liquid phase, natural gas exists in the gaseous phase and natural bitumen exists in the semi solid or solid phase (www.world-petroleum.org). It occurs naturally in the ground and was formed millions of years ago. The easier term for petroleum is the oil that is found underground or fossil fuel as it was made from plants and animals. Normally crude oil and natural gas are extracted from the ground, on land or under the ocean, by sinking an oil well and are then transported by pipeline and/or ship to refineries where their components are processed into refined products. At the oil refinery, the physical and chemical properties of the crude oil are changed to convert it into everyday products like petrol, diesel and lubricating oil. Generally, the petroleum industry involves the processes of exploration, extraction, refining, transportation and marketing petroleum products. Petroleum is the world's main source of energy and is a vital factor in economical development of the world's economies (www.world-petroleum.org). Thus, the government's and the industry's future plans are very vital as the availability of the petroleum is of vital concern for future economic growth. In order to maximize the availability of petroleum, many technological developments and advancements in the fields of exploration, drilling and production are essential.
2.2 The background of the US petroleum industry
The US petroleum industry has a very long history. However, the modern market structure in the US petroleum industry emerged in the first two decades of the 20th century, as new competitors rose to challenge the monopoly position by Standard Oil in the late 20th century (Pratt, 1980). The change is more visible after the dissolution of the Standard Oil Company to smaller companies, by the US Supreme Court in 1911. Standard Oil was established and founded by John D. Rockefeller in 1870. The company was the biggest petroleum company in the US at the time. The major petroleum companies in the US nowadays such as Exxon Mobil, Chevron Corporation and Conoco Phillips are the result of the breaking up of Standard Oil. These three companies have become members of a so called six oil super-majors which are the six largest non-state owned energy companies in the world along with Royal Dutch Shell, BP (previously known as British Petroleum) and Total S.A. which are European companies.
Apart from representing 50% of the super-majors, the US firms also dominate the world petroleum industry in all other areas such as, technology development and innovation and service and supply. According to Knight (1984), the centre of today's petroleum industry remains in the US and most of the major firms involved are US based companies. This dominance was clarified in the mid 1990s after a tremendous wave of mergers, acquisitions, and joint ventures in the US petroleum industry. For example, Exxon, the biggest U.S. oil company, acquired Mobil, the second biggest, forming ExxonMobil, thus removing competition between.them.
2.3 The structure of the US petroleum industry
The structure of the U.S. oil industry has changed considerably over the last few decades. According to the Government Accountability Office (GAO), there have been over 2,600 mergers in the U.S. petroleum industry from the 1990s often among firms involved in exploration and production. This has changed the structure of the industry to be more concentrated (Voola, 2006). There are various reasons for the mergers, in particular to increase efficiency through technology acquisitions, lower costs and enhanced ability to control prices. Market concentration has increased substantially in the industry, partly because of these mergers. Though, concentrated markets can enable firms to raise prices above competitive levels, but can also lead to cost savings and lower prices. Evidence suggests mergers also have changed other factors that affect competition, such as the ability of new firms to enter the market. (www.gao.gov).
With the US being the first mover in technology advancement and innovation, it has become the world leader of the petroleum industry. With the introduction of seismic methods, horizontal drilling and deep water production activities, the US has become even more competitive as these technologies have increased the profit margins of the nation in this industry (Bohi, 1998).
According to the Government Accountability Office (GAO), the US petroleum industry can be divided into 3 sectors, namely upstream, midstream and downstream. The upstream segment consists of exploration for and production of, crude oil and natural gas. The midstream consists of pipelines and other infrastructure used to transport these products. The downstream segment consists of refining crude oil and marketing petroleum products. The petroleum industry structure can be seen in figure 1 next page.
Figure1. The US petroleum industry structure Source: GAO
The smaller companies have been continuously gaining a larger role in development within the industry. They are able to drill smaller fields and have faster depletion rates than the big companies. However, with wider access to advanced technologies, these small companies have also been able to cut down on their finding costs, to equal the levels in the bigger companies (www.eia.doe.gov). These small companies continue to grow because it is rather normal for big companies to subcontract the small specialist companies to conduct work such as exploration and drilling (www.slb.com). According to Bohi (1998), this is because the bigger companies can benefit from cost reduction through subcontracting their work. This has therefore become an important solution to reducing costs and remaining profitable in the high price petroleum market. It can be concluded that even though this industry is dominated by big companies, there is also room for the smaller companies to grow.
There are many governmental, private and public-private programmes in the petroleum sector. However, the Petroleum Technology Transfer Council (PTTC) is the main organisation in collaborating with all players into the industry and connecting them together to enable the technology transfer of the petroleum industry within the US (www.pttc.org). Although with the PTTC, there is also Natural Gas & Oil Technology Partnership (NGOTP) which connects the national laboratories with the oil & gas producers and service companies (www.fe.doe.gov).
The factors influencing the growth of technology transfer
According to Baumol (2002), it is often most profitable for the owner of an innovation to sell its innovation to others. As a result, there is widespread technology trading and marketing of licenses of firm's proprietary technologies in the US. Many companies do not keep the technologies to themselves, they in fact promote them as a profitable business. This dissemination of technology as a profit seeking business practice helps to spread the use of the latest techniques and production of latest goods and services. It speeds the elimination of obsolete economic activities, and the financial rewards of technology dissemination help to internalise the externalities of the innovation process (Baumol, 2002, p.12). In the petroleum industry, it is very clear that in order for players to survive and remain profitable they must have advanced technologies to carry out their work. This in turn has created a demand for new technological innovations. When there is high demand for new technologies, many companies then regard technology innovations as a profit seeking business to enhance their profitability. This has helped in the spreading, diffusing and eliminating of technologies in the market through various channels such as technology transfer and mergers & acquisitions. As long as there is a need for more advanced technologies and there are markets for technology licenses and patents, technology transfer will continue to grow.
Petroleum is important to many industries and nations, accounting for a large percentage of the world's energy consumption especially for the US, which consumes almost one quarter of the world's energy consumption (www.eia.doe.gov). The importance of petroleum in the US arises from the increasing need for petroleum energy to feed the US economy and the vital roles play by the country (Knight, 1984). There are many factors influencing the growth of technology transfer in the US petroleum industry such as the economic growth of the country, the rise in petroleum demand, the increase in price of oil, the effect of the national system of innovation (NSI) and the effect of the triple helix relationship.
2.4.1 The rise in petroleum demand
The demand for petroleum in the US has been continuously rising. Demand in 2005 for was 20.8 million barrels per day, 12.5 million barrels of which was from imports. These figures put the US as the top petroleum consuming nation in the world. (www.eia.doe.gov). In order to run the US economy, the tremendous demand for oil must be met, so the US has to turn to the world oil market to satisfy its needs (Salameh, 1995). This has resulted in continuously increasing oil imports to the US. An overview of the US petroleum and its petroleum imports can be found in the appendix 1.
The rise in demand of petroleum has made many important contributions to the US economy by providing an energy source for transportation and production of other goods. According to Price Waterhouse Coopers (2007), the growth of the US petroleum industry has a large impact on the national economy through its employment, labour income and purchase of goods and services.
Moreover, with the increase in the oil prices, the players in the industry must find ways to explore, extract and produce petroleum more efficiently than before. The solution that these players turn to is advancement in technology. This is why innovation and technology transfer are vitally important to the growth of the industry and the nation's economy especially from the US government's viewpoint. Technology transfer has been an aim of government policy since the 1980s (www.netl.doe.gov).They have established many governmental divisions and launched many national and regional programmes to deal with technology transfer in many industries to enhance the growing economy.
2.4.2 The national system of innovation (NSI)
The transformation of the US economy has emphasised that innovations based on scientific and technological advances have become a major contributor to the national wealth and growth. The innovation concept has shifted focus from products to processes and from individual output to the mechanisms for producing those outputs. During this transition, a dense and complex network that interconnects parts is formed (Popper and Wagner, 2002). This interconnected network is called the national system of innovation (NSI). That is, the flow of interaction of information and technology among actors involved in the innovative process in the diffusion of existing technology (OECD, 1997). These actors include private enterprises, universities and public research institutes. The networking between them can take many forms such as joint research, cross-patenting and purchasing of technology (OECD, 1997). It can therefore help in managing available resources, existing technology, new technology and R&D (Freeman, 1968). To ensure a strong national system of innovation, the supporting policy must be very good and many factors must be taken into account. Firstly, adequate inputs including, good education and training and resource enhancement must be ensured. Secondly, favourable environments including intellectual property protection and good infrastructure must be maintained. Thirdly, communication and coordination within the public sector, industry and government must be improved. Lastly, the dynamism, including better understanding of the NSI and measured performance in R&D must be maintained (Popper and Wagner, 2002).
In the past 20 years, the US innovation system has changed to keep up with many external factors such as globalisation and growing foreign direct investment (FDI). Moreover, the federal policy of the US has also changed. The major changes are increased reliance by US firms on R&D outside their organisational boundaries, expanded R&D offshore by US firms and increased reliance by US universities on US and foreign industries for research funding (Mowery, 1998). Universities throughout the OECD have been affected by the extremely tight constraints on public funding. As a result, federal research funding in the US has been declining over the years. These universities have to be more aggressive and entrepreneurial in finding new sources of funding (Mowery and Sampat, 2002). The universities have established very strong links with key players in the petroleum industry and support in terms of research funding indicates the dominance and influence of the industry. With the recent cut in federal funding, PTTC has also been seeking funding from the industry which in turn has strengthened its connection with the industry (Francis, 2006). The industry has thus played an important and dominating role in giving financial support to both PTTC and universities indicating its power. However, without governmental support, the industry cannot intervene much due to regulations. As can be seen in that they have been promoting technology transfer through many channels including establishment of many divisions & organisations and launching of many programmes to deal with technology transfer in many industries. They have also changed numerous regulations and set up many activities endorsing technology transfer (www.netl.doe.gov).
Innovation and development of technology is the result of a complex set of relationships among government, universities and institutes and industry. Thus the triple helix relationship is formed.
2.4.3 The triple helix relationship
The triple helix includes the Industry, universities & institutes and government (Leydesdoff and Meyer, 2006). In the US, there is evidence indicating that many research institutes and universities engage in energy related research and cooperate with many organisations in this field, such as the Rice Alliance, with its main goal in providing assistance and supporting the creation of technology based companies and the commercialisation of new technologies through education, and collaboration in research. The Rice Alliance and the PTTC aim to bring great ideas into commercial production and new technology into the hands of customers to give success and benefits to the businesses key players (Rychel, 2005). Moreover, many of the players in the industry collaborate directly with others in the petroleum supply chain without collaborating through those organisations. They can be in the form of service company to service company, service company to supplier, service company to government, service company to producers and lastly, service company to university. It is therefore clear that without organisations like the PTTC, transfer of technology and cooperation between players would be even more complex.
The PTTC connects the industry with the government and universities and acts as a main channel of communication between producers and technology providers, consultants and producers and the DOE with research laboratories and universities (www.pttc.org). It has built a very wide and close network with many universities & research institutes and is working on many projects and workshops with producers and service companies. Its main focus is to spread the proven new technologies to the producers, to improve efficiency in exploring, drilling and production (Rychel, 2005) and also collaboration with all regions of the country to transfer the technology to the players within the industry (www.pttc.org). This in turn helps improve the efficiency of the technology in maximising petroleum output and minimising waste during exploration, extraction and production. The industry, government and universities & institutes seem to be closely connected to one another because of organisations like PTTC.
The US petroleum industry will continue to grow as well as the technology transfer due to the need for more advanced technologies for cost reduction, performance enhancement, technology trading and for the competitive industry environment that forces firms to be creative and innovative. Without cooperation from all players in industry, universities and government, the industry would not be as strong as it is today. Without the government's support and initiatives, technology transfer will not be as wide spread as it is now. Moreover, the US petroleum industry is in a cluster formation which is a network of interdependent firms, knowledge-producing institutions, bridging institutions, customer and government linked in a value-added creating production chain (Roelandt and den Hertog, 1999) and shows the strong network amongst players in the industry.
Chapter 3. Research findings
This chapter will look at the channels of transfer, technology transfer within the petroleum industry and evaluation of transfer. The evaluation will cover the factors influencing the successful transfer, possible theories which can be adopted to increase the chance of success and the future of the petroleum industry. Lastly, this chapter will address the performance of the US petroleum industry.
The channels of technology transfer
Technology transfer can be treated as a strategy used in acquiring technological knowledge of a firm. However, there are various practices needed to be performed before deciding on an acquisition strategy of technology. According to Falkenberg et al (2002), these practices are defined as the coordinated activities of individuals and groups in doing the actual work which can be divided into three types; information gathering, assessment and information distribution practices. Information gathering practices include meetings with vendors, attending seminars & conferences, reviewing journals and supporting research consortia for the required technology. Assessment practices include the review of the required technology in terms of its potential to solve problems, improve decision making or overall effectiveness, training requirements needed and compatibility of the technology with existing technologies in the firm. Information distribution practices vary depending upon the structure of the firm and the level of cooperation within the firm. These will include formal presentations and internal meetings.
Technology can be transferred through many channels depending on the level and type of technology involved. The modes of the transfer have to be adapted according to the technology and economic conditions change (Enos et.al, 1995). Some of the commonly recognised channels of technology transfer are direct investment, joint ventures, mergers and acquisitions (M&A), subcontracting (OEM manufacture), technological alliances and international agencies (Enos et.al, 1995). As can be seen there are many channels of transfer, however, the most important and widely used are direct investment, joint ventures and mergers and acquisitions. In the petroleum industry, joint ventures and M&A are the most common channels by which technology transfer takes place. In the transfer, there are always a lot of licensing and patent issues. However, with M&A companies can acquire those licenses and patents, thus avoiding the complicated processes involved. Therefore, the players in the industry see M&A as the easiest, fastest and most appropriate way to obtain access to new technologies and gain new capabilities needed to maintain or enhance competitiveness. According to Ranft and Lord (2002), the main objective of M&A is in knowledge transfer, the acquisition and utilisation of new sets of knowledge-based resources. According to the GAO, there are more than 2600 M&A in the US petroleum industry. Around 20% of the M&A were cooperate mergers, which involved the acquisition of a company's total assets by another such as Exxon-Mobil, BP-Amoco, Chevron-Texaco and Valero-UDS. However, the remaining 80% were asset mergers, which involved one company's purchase of only a segment or asset of another company (www.gao.gov). Examples of these mergers can be seen in the appendix 2. This shows the importance of M&A strategy to the players in the petroleum industry. However, during the process of M&A, the mergers and acquirers must take control and integrate theirs acquisitions to avoid post-merger drift which is a decline in organisational and individual productivity during the M&A period (Bower, 2001).
In addition, M&As are a means of maintaining their relative standing in the industry, to achieve synergies, to diversify assets, to reduce costs, to enhance stock values and to maximise profits (www.gao.gov). According to Voola (2006), the mergers and acquisitions taking place in this period were a result of a cooperative move to address detrimental outcomes from competitive behaviour between major players, in particular for scarce oil reserves. Such competition reduces industry outcomes in terms of profit and players prefer to merge rather than go through a competitive shake out that weakens their relative industry standing (Voola, 2006). The M&A activities in the US petroleum industry will be discussed in the next chapter using the BP-Amoco merger case as an example.
Technology transfer in the petroleum industry
According to Farhang (1997), for technology transfer to be successful, a lot of processes and stages must be involved in managing the transfer. Firstly, there must be an effective pre negotiation process between the host and recipient detailing what is expected from the transfer, which may be directly between the companies or indirectly through a medium such as the PTTC. Secondly, the negotiation process, which includes capabilities, resources and pricing, will be discussed. The negotiation process is normally influenced by the cultural, political and technological diversity of the parties. Thirdly, the technology transfer and starting up process, which will involve the dissemination of documentation, transfer of hardware and training of the receiving party's employees. At this stage, many difficulties will arise including the language barrier, the standard difference and the cultural difference. Lastly, the long term development process will then be planned. In this stage, there will be discussion on the new technology impact and benefit to the firm and on the future development of the technology.
It can be seen that the technology transfer processes are lengthy and will draw a lot of resources from both the host and recipient and problems will appear at different stages. Moreover, the difference in technology level and the firm level will also impact the success of the transfer. Thus, it is better if the companies carrying out technology transfer are of a similar size and similar level of technology and competence.
The evaluation of technology transfer in the petroleum industry
According to Badruzzaman (2003), the key factors for a successful technology transfer include good education and training, good management, availability of resources, the cultural value system and strong links to players in the industry. The transfer works best under the condition that all stakeholders communicate and participate actively (McDerment, 1990). The success of the transfer depends to a very large extent on the training policies and practices of the recipient company. The higher the ability and readiness level of the recipient company are, the higher the chance of the successful transfer will be. According to the International Energy Agency, IEA, (2001), government must be well positioned to promote technological development and diffusion and the private sector will be responsible for most of the innovation, development, diffusion of technology and provide most of the capital through direct investment and research funding The success of the transfer especially in the petroleum sector, depends on the collaboration level of stakeholders in this sector. Industry has a dominant position over universities, organisations and sometimes the government in terms of funding. However, without governmental support, the chances of failing are higher. The government can speed up many processes such as building local skills by giving knowledge and training, creating a healthy business environment, enhancing its role, improving collaboration and pooling resources and sharing risks (IEA, 2001).
The transfer of technology is not easy because it involves high levels of collaboration in all areas. There is also high concern about the culture of the host and the recipient companies in technology transfer since it is unlikely for key players to have the same culture even if they are doing the same business, as culture varies among companies (Hofstede, 2001).For example, collaboration problems between company scientists and from those of universities, because they have differences in culture and values. However, most of the objectives of the two are the same, so it is beneficial to manage the overlap carefully. The economy will benefit from a strong relationship between industry and universities in the overlapping areas, but the goals of the industry should not displace the goals of the universities (Lambert review, 2003). Although, there are many issues and problems, undoubtedly there also are many benefits from transferring technology, such as improved US economy, maximised production, minimised costs and waste and improved R&D in the US. A case of transferring technology within the country is easier than transferring technology from one country to another because of the differences in the level of culture, language and the readiness level of the company.
3.3.1 Technology transfer: the theoretical background
A management theory that will be discussed is knowledge management (KM). Knowledge management can be applied in technology transfer to increase the efficiency of the transfer and its chance of success. According to Doherty et al (2005), the management of knowledge contributes greatly to successful transfer. The techniques and tools for knowledge management, moreover, can be exploited to improve the technology transfer process. Knowledge management (KM) is a framework for applying structures and processes at the individual, group, team, and organisational levels so that the organisation can learn from what it has and knows (and acquire new knowledge if required) to create value. This knowledge management framework integrates people, processes and technology to ensure performance and learning for sustainable growth (Gorelick and Tantawy-Monsou, 2005). Effective knowledge management especially in international technology transfer can improve the transfer process efficiency and effectiveness and with the application of information technology the difficulties in technology transfer can be greatly reduced (Nahar et al, 2001).
In KM, information is converted into knowledge that can be used to achieve the aims of organisations (Hovland, 2003). In achieving the aims of organisations, we need to identify, acquire, develop, distribute, utilise and store knowledge which is meaningful to the firms (Buchel and Probst, 2000). These stages of knowledge management are as follows:
Firstly, identifying knowledge means analysing the firms' internal knowledge which will indicate the readiness level of firms involved in technology transfer. Sufficient transparency is required at this stage of KM. Secondly, knowledge acquisition means transferring technological knowledge from the host firm to recipient firm. The firm will learn if the technological know-how is acquired outside its boundaries and integrate it with its existing knowledge base. Thirdly, knowledge development means focusing on the new technology, know-how and more efficient processes of the technology after acquiring the new technology. This will in turn stimulate higher capabilities in the firm.
Fourthly, knowledge distribution means adapting the new transfer technology into the firm's assets for the whole firm to use. It is the process of sharing and spreading new technology knowledge inside the firm. Fifthly, knowledge utilisation means applying the technology productively into the firm's activities. However, before the technology can be fully utilised, the firm has to overcome barriers such as patents and licensing, cooperation and awareness within the firm and organisational culture (Carrillo, 2004).
Lastly, knowledge storing will be done when the firm can fully adapt and apply the new technology into the firm's activities productively.
3.3.2 The analysis of the future of the petroleum technology transfer
With the rise in the oil prices, the players in the industry now focus more on how to reduce the cost of getting oil, improve production rate and increase efficiency. The main focuses in this sector are drilling technology and the methods of oil exploration (www.fe.doe.gov). Despite the strong links between the players, issues and problems in petroleum technology transfer still exist.
According to Knight (1984), in the petroleum industry no firm approaches being totally integrated and to bring oil into the market, involves high cooperation from the key players. However, with the increase in mergers and acquisitions (M&A) in the industry since the 1990s, this brings about a more concentrated industry (Voola, 2006). Evidently, the industry is relying more on outsourcing operations and development services to reduce costs (Bohi, 1998). In the oil drilling area, it is very expensive to drill a hole especially when the hole drilled could be dry. This means that money spent on drilling is can be lost producing no revenue return (Knight, 1984). There are also environmental impact concerns, oil and gas spillages over the land or in the water are very costly to clean up. Even with the new technologies developed over the years, there are still many problems with drilling, well completion and oil finding. This forces new technologies to be continuously developed and transferred to the players.
First, let us look at the external factors of the petroleum industry by conducting a PESTEL analysis which includes the political future, economic future, socio-cultural future, technological future, environmental future and legal future. See table 1 below.
1. Political scandal will cause tougher regulation
2. Relations between government and the industry
3. Government's attitude to technology transfer
4. The coming US presidential election
1. Declined funding from government on innovation and technology transfer
2. US recession
3. Higher petroleum price
1. Lifestyle adjustment to the high oil price, less oil usage
2. More concentrated petroleum industry
3. Increased trend in M&A
1. Increased technology trading
2. New licenses and patents
3. Speed of elimination of obsolete technology
1. Increased awareness on technology
2. Environmental friendly technologies are in high demand
3. Increased environmental friendly technology transfer
1. Tougher safety law due to several explosions
2. Government policy on technology transfer
3. Tougher regulations on technology transfer
Table1. PESTEL analysis of the US petroleum industry Source: Lynch, 2006
From the PESTEL analysis, it can be seen that even with the possibility of tougher laws and regulations (to avoid corruption and support the environment) and tighter funding from the government (due to the current US recession), there is still room for technology transfer growth especially in environmental friendly technology. Therefore, as long as technology can be rented or sold, technology transfer will be treated as a channel for profit seeking.
Now, let us look at the strengths and weaknesses present internally in the industry and the opportunities and threats that the industry faces externally by using a tool called SWOT analysis. See table 2 below.
Strong global domination in technology
Declining oil and gas reserves in the US
Wide network and close relationship in the industry
Higher petroleum price due to M&A
Free market economy---economic growth
Always involves in many scandals
World leader in petroleum industryhigh profit
Rising oil and gas price---higher profit
Slowdown in the US economy
Increasing demand for petroleum
Environmental and government regulations
Petroleum reserves in China and Russia
Saturation of resources
Increased technology trading
Instability in the Middle East and Africa
Highly competitive market
Table2. SWOT analysis of the US petroleum industry Source: Lynch, 2006
From the SWOT analysis, it can be seen that the US petroleum industry as the world leader will be able to generate high profits from technology transfer and trading. This is firstly because the demand for petroleum is continuously rising so there is very high demand for new and better technologies from all players in the industry. Secondly, a lot of petroleum reserves have been found recently in China and Russia, so there will be a lot of technology transfer to those countries. Thirdly, with the role of PTTC, players will have easier access to technology which will create a more competitive petroleum market. Lastly, the industry must be more environmental friendly, so environmental technology innovations are in high demand in the industry. However, the industry needs to be more transparent
Furthermore, technology transfer has then been greatly promoted in the industry through the PTTC acting as a medium dealing with activities in the transfer. This highlights that the process of the transfer can be done in an easier, faster and more efficient manner through a medium. The PTTC will be analysed in the next chapter, so that more can be understood on how it manages the transfer.
The performance of the US petroleum industry
The performance of the US petroleum industry can be measured in many ways such as in terms of productivity, revenues and profits. According to Pirog (2005), the continuous increase in crude oil prices has been the major contributing factor to a big jump in the profits of the industry. Nevertheless, other factors such as the high capacity utilisation in the refining sector, companies' ability to expand output, the advancement of technology and the effects of mergers, acquisitions and other asset transactions also contribute to the rise in profitability of the US petroleum industry. The table3 below is the financial performance of the major oil companies.
From the financial performance table, it can be seen that the profits in the industry are very high. This is why players in the industry want to hold the competitive edge in technology to be the leader in the market. The profits from oil have been used in many areas including the expansion of refinery capacity, mergers and acquisitions, paying higher dividends and share purchases and investment in technological innovations (Pirog, 2005). The expansion of the industry has stimulated the US economy through employment, income and technology transfer which in turn drives economic growth.
There are also many benefits from promoting technology transfer. Firstly, advanced technology can improve the industry efficiency in terms of productivity and cost reduction. This means that advanced technology must be accessible to all players which indicates room for technology transfer growth. Secondly, the transfer is the main channel for technology trading either via licenses or patents. It is another way for players to make money and be profitable. Thirdly, the transfer will stimulate further innovations. Lastly, with the aggressive environment the players will compete with one another which results in the growth of the economy of the country.
It is clear that there are many processes, strategies and channels, factors and barriers to successful technology transfer. The most commonly used strategy for the transfer in the US petroleum industry is mergers and acquisitions. It has not only enabled the companies to gain access to new technologies through transfer between companies, but also has enabled economies of scale, cost reduction and accessibility to capital, technology and skilled labour which in turn increases the productivity and growth of companies. The trend of M&A in the petroleum industry will continue as companies are always seeking strategic growth and cost reductions and this results in higher profits which will in turn be used for industry expansion through investments back into the industry. However, there are several solutions which can increase the chance of success such as knowledge management
Chapter 4. The cases of the PTTC and the BP-Amoco
This chapter will discuss the role of the Petroleum Technology Transfer Council (PTTC) and the Merger of BP and Amoco. The PTTC case will explain how the petroleum technology transfer has been encouraged within the US, why it was established and why it has been highly regarded as a very important player. On the other hand, the merger of BP-Amoco will explain the reasons behind M&A, why it is an important channel in obtaining new technology, how they managed the transfer and why it was so successful.
The PTTC case study
As already mentioned the Petroleum Technology Transfer Council (PTTC) is collaborating with all players in the industry and connecting them together to facilitate technology transfer in the petroleum industry within the US (www.pttc.org).
4.1.1 The background of PTTC
As the domestic petroleum industry has become more competitive, technology has been one of the answers to maintaining the stability of the petroleum markets and reducing operating costs. In order to exploit the remaining reserves in the US, petroleum operators must have access to new technologies that help in operating costs reduction. However, the new technologies are normally beyond the reach of both large and small domestic producers. This is because even though the industry has become more concentrated due to M&A, but it is still not concentrated enough in terms of technology sharing among competing firms. Following a series of studies, the industry and government energy experts recognised the need for improved technology transfer processes for the US upstream petroleum industry (www.pttc.org). As a result, the Petroleum Technology Transfer Council (PTTC) was established in 1994. It is a national non profit organisation established by producers, state organisations and the Department of Energy (DOE).
The key players in the petroleum industry including oil and gas producers, consultants, service and supply companies, suppliers and all others involved in this industry benefit from the PTTC's activities through the PTTC's programmes and workshops on new knowledge and technologies.
4.1.2 The structure of PTTC
In order to ensure accessibility to technologies, knowledge and workshops in a timeliness manner, the PTTC' s programmes are run by the local Producer Advisory Groups (PAG) which is composed of domestic oil and natural gas operators, producers and other industry players. The PTTC has also been divided into 6 regions covering all of the US. These 6 regions are the central and eastern gulf region, the eastern region, the Mid-content region, the Rocky mountain region, the Texas and SE New Mexico region and the West coast region. The Central and eastern gulf region covers the Alabama, Louisiana, Mississippi and Florida areas. The Eastern region covers the Appalachian, Illinois and Michigan basins including the states of Indiana, Illinois, western Kentucky and Michigan areas. The Mid-content region covers the Arkansas, Kansas, Missouri, Nebraska and Oklahoma areas. The Rocky mountain region covers Arizona, Colorado, Idaho, Montana, Nebraska, Nevada, northern New Mexico, north Dakota, south Dakota, Wyoming and Utah areas. The Texas and SE New Mexico covers all of Texas and southeast New Mexico areas. The west coast covers the California, Alaska, Oregon and Washington areas (www.pttc.org). From these regions, there are 10 regional offices or regional lead organisations (RLO) connecting all the independents.
The PTTC is funded primarily by the DOE with matching funds from the states and oil and gas industry. However, with the recent cuts in federal funding since 2006, it has also been seeking funding from the industry (Francis, 2006). It has been slowly transformed to a primarily industry-funded organisation.
4.1.3 The activities of PTTC in technology transfer
The PTTC acts as a medium in connecting players of the industry in all areas of the US through their regional and national programmes. All parties can benefit from dealing through them. Being a non profit organisation, the PTTC takes its professionalism and ethics very seriously. This results in the reliance of producers upon the PTTC's network for fair and useful technical information. The technology providers can also communicate developing or under applied technologies to producers. Consultants can better equip themselves for serving producers which in turn can broaden application. Furthermore, the DOE can use the network to disseminate its R&D results and gather insights into domestic concerns and issues more efficiently (www.pttc.org). For example, the PTTC has launched a website to publicise the microhole technology (MHT) which is under development by the DOE and private industry. MHT has the potential to reduce cost of drilling for exploration, field development, subsurface monitoring and production because of its ability in drilling smaller holes (www.pttc.org).
PTTC's main works involve identifying and clarifying producer's needs, educating producers about technology options and connecting producers to solutions. The costs of transferring technology information can be greatly r