New Ideas and Their Diffusion: A Model for Exploration and Production Companies in the 21st Century

Arthur E. Berman
Sugar Land, TX

Most petroleum exploration and production (E&P) companies have embraced risk evaluation and portfolio management practices, but are not replacing reserves except by acquisitions and mergers. The chief tangible cause for failure to discover large, new reserves is that about 80% of the world is controlled by state oil companies and is, therefore, unavailable for competitive investment and drilling. It is reasonable, in other words, that if companies must continue to prospect in the same 20% of the world's basins that the size of new discoveries should decline as it has.

There are, however, more fundamental and systemic reasons why petroleum E&P companies are in trouble. First, the Risk process discourages discovery of large reserves. The Risk evaluation model does not take diffusion theory into account adequately. By the time most companies decide to enter a new E&P play or trend, little opportunity remains and most remaining opportunity is in relatively small fields. Gulf of Mexico shelf and deepwater drilling and discovery patterns clearly show this.

Petroleum companies reward their management largely without regard or accountability for reserve additions through exploration and production. Poor company performance has led to repeated technical staff reductions over the past 30 years which, in turn, have discouraged young people from entering petroleum-related fields. The result is a depleted work force that has little replacement potential, but remains unappreciated and inadequately rewarded by their employers.

At the same time, technical staff have not adequately embraced inventive application of new technology and have, therefore, not developed new ideas for exploration and production. Seismic attribute analysis and deepwater facies models are believe by most to be the cutting edge of E&P but diffusion theory shows that, since everyone is using these approaches, they will yield limited future opportunities.