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Research on Australian oil and gas innovation

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Jerad Ford

on 28 August 2014

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Transcript of Research on Australian oil and gas innovation

We think yes
What is behind these failures and cost over overruns?
On the whole, countries continue to invest in poorly conceived projects, take a long time to approve them, [and]
miss opportunities to innovate in how to deliver them...
-Mckinsey & Co. (2013)
Is productivity really an innovation problem?
Friday, July 25, 2014
Vol XCIII, No. 311
Money wasted?
Big projects, big blowouts
Relationships between firms matter
We have met the enemy, and he is us
Globally, $40 trillion in energy infrastructure by 2035
(IEA 2014)

$5 trillion in cost overruns expected
(Accenture 2012)

Chevron, Woodside, BG, Santos and Exxon Mobil saw $25 billion in overruns in 2012
(Ker, 2012).

Chevron Gorgon project saw 40% cost increase to $52 billion

$150 billion new gas investment in Australia hangs in the balance
(Ford et al., 2014)
Book chapter:
Confronting the productivity challenge in the high cost economy: Evidence from the Australian oil and gas industry

overwhelming explain productivity increases and commonly cited
constraints* do not explain decreases

But, project-related constraints
do detract from productivity:
Inequitable risk sharing in contractual relationships, Ability to meet incentive targets, Increasing competition
Energy Projects Galore!
Openness: an unappreciated perspective?

But what supports innovation?
Firms involved in executing large projects must regularly interact beyond their boundaries
Intensely inter-organisational
(Davies et al., 2009)

Many interdependencies between firms
(Miller & Lessard, 2000)
Innovation is a collective endeavor
(Gann & Salter, 2000)
Collapsed innovation and diffusion
(Hobday, 1998)
Inter-organisational problem solving is crucial
(Stinchcombe & Heimer, 1985)
Innovation most explains firm-level productivity improvements

above avg.
Adaptive capabilities*
Labour 8x (more likely); Capital 16x
Innovations: Supply chain / logistics 11x, Product or process 3x

Firms conducting $1b+ projects rate themselves below average in adaptive capabilities
Delivering a step change in organisational productivity
Adapt to Win: How Australian Oil and Gas firms improve productivity in challenging times
*innovative problem solving in projects, adapting to changing and unexpected circumstances in projects, transferring lessons across projects, tight attention to risks, achieving timely outcomes
Environmental regulatory uncertainty, environmental compliance, government regulations and compliance, lengthy project approval processes, social license to operation, future infrastructure uncertainty, current infrastructure bottlenecks, high cost of doing business in Australia
Skilled Labour, managment skills, poor labour productivity

Ford, J. A., Steen, J., Verreynne, M.-L., Marion, G., Farrel, B., & Naicker, S. (2014). Confronting the productivity challenge in the high cost economy: Evidence from the Australian oil and gas industry. In G. Roos & N. Kennedy (Eds.), Global Perspectives on Achieving Success in High and Low Cost Operating Environments. London: IGI Global.
Conventional wisdom
Contrarian perspective
Productivity! Red-Tape!
...make our regulatory environment more attractive to investors and operators by
streamlining visa requirements...
regulatory and approval frameworks
setting firm policies on taxation, climate change and carbon trading.

-Deloitte (2013)

What about innovation?
Stinchcombe (1985) argues
all aspects of a complex projects should be treated as innovative responses
to an uncertain events
Open Sesame!
LNG trains 1 and 2 Curtis Island. Source: APLNG investor site visit presentation May 2010
Special report
: INs and OUTs of innovation in a project based industry by Ford,J., Verreynne, M-L., Steen, J.
London Heathrow Terminal 5 expansion project required
“80 first-, 500 second-, 2,000 third-, 5,000 fourth-, and 15,000 fifth-tier suppliers”
(Davies et al., 2009).
Open innovation is:
"London Heathrow Terminal 5 Panorama" by JamesZ_Flickr used under creative common license 2.0. https://creativecommons.org/licenses/by/2.0/
Photo at https://www.flickr.com/photos/jamesz_flickr/9734178199

Heathrow Terminal 5
(Dahlander and Gann, 2010)
A typology and approach

Openness mostly studied in high-technology industries
(Chesbrough and Crowther, 2006)
Almost no treatment of both inbound and outbound types
(Laursen and Salter, 2014; West et al., 2014)
Scant research on project based firms
Purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for the external use of innovation
(Chesbrough, 2012 p.20).
Quote from recent report on Australia's ability compete as a global gas provider
Note: a total of 173 Australian oil and gas firms were surveyed over two years
The problem
How does openness relate to innovation in project oriented firms?
The research question
Is there method to this madness?
Funded provided by the centre for coal seam gas
"Leading research and education for an emerging sector"

Binary indicator if either is present

Innovations (a) Mainly adopted after development by other firms or intuitions (b) Adopted from parent firms (in the case of JVs)

In-licensed patents or other intellectually property from another entity

Binary indicator if either is present

Filed for patents, trademarks or service marks


Licensed patents or technical information directly to another party for a fee, or royalty payments, or other type of compensation (this includes any arms-length relationships like JVs or subsidiaries)

Binary indicator of search breadth above the mean (m=6.79, α = .823, 12 items)
Based on Laursen and Salter, (2006) which counts the number of sources of information sources used for innovation purposes

Binary indicator if either is present

Shared technical details openly to the industry to spur subsequent innovation or adoption of technology
(e.g., any way real technical detail is shared externally but with no immediate direct monetary benefit)


Shared technical information via confidentiality agreements in order to explore potential larger partnerships or licensing opportunities
Variables for logistic regression
Show me the money!
Dependent variables

(binary outcomes)

Any type* of innovation introduced in the last three years that is new to the firm, and industry

Novel Product
Novel Process
Or I'll just give it to you
Not the end of the road
Limitations and future work
Accenture, 2012. Capital Project Delays and Budget Overruns Could Cost Oil and Gas and Utility Industries Trillions of Dollars, Accenture Research Shows [WWW Document]. Accenture News Room, news releases. URL http://newsroom.accenture.com/news/capital-project-delays-and-budget-overruns-could-cost-oil-and-gas-and-utility-industries-trillions-of-dollars-accenture-research-shows.htm (accessed 7.18.13).
Ahola, T., Davies, A., 2012. Insights to the governance of large projects: Analysis of Organization Theory and Project Management: Administering Uncertainty in Norwegian Offshore Oil by Stinchcombe and Heimer. International Journal of Managing Projects in Business 5, 661–679.
BCA, 2012. Pipeline or Pipe Dream? Securing Australia’s Investment Future. Melbourne.
Brusoni, S., 2005. The Limits to Specialization: Problem Solving and Coordination in “Modular Networks”. Organization Studies 26, 1885–1907.
Chesbrough, H., Crowther, A.K., 2006. Beyond high tech: early adopters of open innovation in other industries. R&D Management 36, 229–236.
Cohen, W.M., Levinthal, D.A., 1990. Absorptive Capacity : A New Perspective on and Innovation Learning. Administrative Science Quarterly 35, 128–152.
Dahlander, L., Gann, D.M., 2010. How open is innovation? Research Policy 39, 699–709.
Davies, A., Brady, T., Prencipe, A., Hobday, M., 2011. Innovation in Complex Products and Systems: Implications for Project-Based Organizing, in: Gino Cattani, Simone Ferriani, Lars Frederiksen, F.T. (Ed.), Project-Based Organizing and Strategic Management (Advances in Strategic Management, Volume 28). Emerald Group Publishing Limited, pp. 3–26.
Davies, A., Gann, D.M., Douglas, T., 2009. Innovation in Megaprojects: Systems Integration at London Hethrow Terminal 5. California Management Review 51, 101–126.
Deloitte, 2013. Positioning for prosperity? Catching the next wave [WWW Document]. URL http://www.deloitte.com/view/en_AU/au/news-research/luckycountry/prosperity-next-wave/gas/index.htm (accessed 10.8.13).
Ford, J.A., Steen, J., Verreynne, M.-L., Marion, G., Farrel, B., Naicker, S., 2014. Confronting the productivity challenge in the high cost economy: Evidence from the Australian oil and gas industry, in: Roos, G., Kennedy, N. (Eds.), Global Perspectives on Achieving Success in High and Low Cost Operating Environments. IGI Global, London.
Why do inbound forms (
) not relate to innovation?
Does outbound sharing create an information rich environment that diminishes the need for search?
(Garriga et. al. 2013)
Testing for moderation:
‘absorptive capacity’ in order to translate technology into subsequent innovations
(Cohen and Levinthal, 1990; Laursen et al., 2010; Loene and Reichstein, 2012)

operationalised as R&D (0,1) does not work*
Likert scale questions assess openness, i.e. broader, more robust constructs
What you talkin' 'bout Willis?

Why is "free" sharing is beneficial?
Dull answer
to spur interest from customers and potential licensees

More exciting theoretical contribution:

for project firms novelty
requires openness

System and firm interdependencies
(Brusoni, 2005; Henkel et al., 2013; Keegan and Turner, 2002)
Requires concerted network adoption
(Taylor et al., 2006)
Considerable communication to convince project owners of value of novel innovation
(Gil et al., 2012)
IP sharing in order to win new work
(Davies et al., 2011)
*not shown here
Garriga, H., von Krogh, G., Spaeth, S., 2013. Research notes and commentaries: how constraints and knowledge impact open innovation. Strateg. Manag. J. 34, 1134–1144.
Gil, N., Miozzo, M., Massini, S., 2012. The innovation potential of new infrastructure development: An empirical study of Heathrow airport’s T5 project. Research Policy 41, 452–466.
Henkel, J., Schöberl, S., Alexy, O., 2013. The emergence of openness: How and why firms adopt selective revealing in open innovation. Research Policy.
Hobday, M., 1998. Product complexity, innovation and industrial organisation. Research Policy 26, 689–710.
IEA, 2014. World energy investment outlook. IEA, Paris.
Keegan, A., Turner, J.R., 2002. The Management of Innovation in Project-Based Firms. Long Range Planning 35, 367–388.
Ker, P., 2012. Billions in cost blowouts wreak havoc with export gas projects [WWW Document]. URL http://www.smh.com.au/business/billions-in-cost-blowouts-wreak-havoc-with-export-gas-projects-20121206-2ay8l.html (accessed 6.20.13).
Laursen, K., Leone, M.I., Torrisi, S., 2010. Technological exploration through licensing: new insights from the licensee’s point of view. Industrial and Corporate Change 19, 871–897.
Laursen, K., Salter, A.J., 2006. Open for innovation: the role of openness in explaining innovation performance among U.K. manufacturing firms. Strategic Management Journal 27, 131–150.
Laursen, K., Salter, A.J., 2014. The Paradox of Openness: Appropriability, External Search and Collaboration. Research Policy.
Loene, M.I., Reichstein, T., 2012. Licensing-in fosters rapid invention! the effect of the grant-back clause and technological unfamiliarity. Strategic Management Journal 33, 965–985.
McKinsey, 2013. Infrastructure productivity: How to save $ 1 trillion a year.
Miller, R., Lessard, D., 2000. Strategic Management of Large Engineering Projects - Shaping Institutions, Risks, and Governance. MIT Press.
Stinchcombe, A.L., Heimer, C.A., 1985. Organization theory and project management: administering uncertainty in Norwegian offshore oil. Norwegian University Press.
Taylor, J.E., Levitt, R.E., Fellow, L.G., 2006. Understanding and managing systemic innovation in project-based industries, in: Cleland, D.I., Slevin, D.P., Pinto, J.K. (Eds.), Innovations: Project Management Research 2004. Project Management Institute, p. 17.
West, J., Salter, A.J., Vanhaverbeke, W., Chesbrough, H., 2014. Open innovation: The next decade. Research Policy.
Ernst and Young and UQBS joint industry reports
*Product, Process, Supply chain, Service, Service delivery, Managerial / marketing
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