Peter Tertzakian occupies many roles: economist, energy futurist, investment strategist, Financial Post columnist and author (He’s written two best-selling books on the changing world of energy, including A Thousand Barrels A Second.). This is all in addition to his day job as executive director of the ARC Energy Research Institute, where he provides thought-provoking analysis on energy trends for different companies and decision makers.
Ever since starting as a geophysicist in the early 1980s, his career has given him an unparalleled knowledge of the oil patch, from seismic oil and gas exploration to technology to financing and economic research. Today he’s a sought-after speaker on energy matters at conferences around the world. Context recently spoke to Tertzakian to get his insights into how innovation is shaping the world of oil and gas.
Q: Innovation isn’t something we always intuitively associate with oil and gas. Do you think Canadians would be surprised about the extent of innovation in the industry?
A: For sure. They’d be surprised that a business that is associated with dinosaurs and rocks is such a high-tech business.
Q: So, what should Canadians understand about our own industry and innovation?
A: We have a long history of oil and gas in this country. In fact, Canada is credited with being the first to commercialize the first oil well in the late 1850s. This has been a major resource business for 160 years. To be able to stay in business that long in what is a very competitive industry is a testament to the sector’s innovation. It was among the first to embrace digital technologies back in 1970s. More lately, big data and machine learning have been rejuvenating the industry. It’s always been associated with lots of ingenuity and creativity in solving difficult problems below the earth.
Q: How does innovation apply to a business like oil and gas production?
A: When I think about innovation, I’m really thinking about two dimensions that are important to any business. And that’s process innovation and product innovation.
In the oil and gas business, process innovation is about getting more barrels and cubic feet of resource out of the ground through better processes and equipment. Today we’re seeing all kinds of process innovations in rig productivity—drilling faster and more accurately, operating from multi-well pads, using mobile rigs that “walk” from one site to another, and high grading of prospects.
Product innovation involves making a better product. It’s a bit more difficult to wrap our minds around. Natural gas is natural gas, and oil is oil. But in today’s context a big differentiator of a better product is having lower carbon content. Minimizing water usage and other emissions are other important product differentiators. These make for a better oil and gas, a better product relative to another barrel produced elsewhere in the world. These are desirable attributes we’re all looking for.
Q: What is driving process and product innovation in Canadian oil and gas?
A: The drivers of the two are different. The drive for process innovation has largely been a consequence of the drop in commodity prices over the last three years. The emergence of the U.S. as a major tight oil producer and competitor has meant that, to stay in the game, Canadian companies have had to improve processes and drive their price down. On the product innovation side, the drivers to produce lower carbon per barrel have been environmental pressures and concerns, climate change being the dominant one.
Q: It’s clear that two themes in the industry seem to be innovating on cost and the environment. How do they interrelate?
A: In this industry if you reduce your costs, which are predominantly energy inputs, by definition you’re reducing emissions in your operations and lowering your footprint. So, the two themes are quite aligned—certainly more aligned than the average Canadian thinks and more aligned than environmentalists would give the industry credit for.
Q: So, what are some innovation trends you’re seeing in the industry?
A: A top trend has been process innovation. This obviously has been a necessity in an era of low commodity prices. Many Canadian oil and gas companies have become creative and innovative awfully fast. Many a management team has learned the virtues of cost discipline, efficiency and operational excellence in the field. I hope this trend continues, even now that oil prices have risen back up. We don’t want to lose momentum on this front.
Next, there’s been the introduction of a new generation of data science. We’ve seen a long list of technologies—for instance, robots, machine learning, artificial intelligence, new sensors—that are assisting the transition to greater digitization in the oil and gas business. The result has been a step change with increased computing power, connectivity and logistics. These applications are driving greater efficiencies that reduce costs and environmental impacts.
Q: Do you see any changes from a larger global perspective?
A: In terms of the big picture, there’s an acknowledgement setting in that society is going to be using oil quite a bit long longer than people originally thought. Peak demand is going to be at the end of the next decade at the earliest. The world is still going to be consuming over 100 million barrels a day of oil for some time. So, the question has to be reframed: It’s not, are we going to need oil in the future? But, who is going to supply that oil? That’s the bigger question. And it’s only going to be those companies that understand process and product innovation who will be able to do that for the long haul.
Q: Where do you think innovation in the oil and natural gas industry is headed?
A: Innovation has always been a continuum. But over the next few years I think we’re going to see innovations in our industry happen more in a step change fashion. The disruptive changes from within our industry are staggering: for example, the migration to hydraulic fracturing drilling, the innovations to improve process and product, and the trends we just talked about. We’re also seeing disruptions and change from outside the industry such as the growth in electric cars and decreased prices for renewables. And we’re going to see collateral disruption—changes in the financial market and computing that are peripheral but will affect the business dramatically.
All of this change is rather daunting. And it’s no surprise, that as this unfolds, the industry is going to be separated into those are able to adapt to change through innovation, and those who cannot. And for those that do, the prize will be big.