Talkin’ Revolution

Alberta Oil January 2010

In a modern building on Research Road, the northern edge of the University of Calgary campus, the groves of academia meet the outside world. It’s a fitting location for Gushor Inc.

The firm is young, entrepreneurial and designed to make commercial items out of advanced and groundbreaking research done by teams of university professors and graduate students. The target market is the oil and gas industry. The chief executive officer unites business and scholarship. Steve Larter is also a U of C professor and scientific director of Carbon Management Canada, a new national “center of excellence” endowed with a $25-million federal government grant. IBM is far older and bigger but its immaculate downtown Calgary building, with its new age decor of rich symbols highlighted by Spartan brightness, gives visitors a feeling of entering a laboratory. Both IBM and Gushor work on technology aimed at improving efficiency, productivity and cleanliness.

“In our starting phase, Gushor is sort of an incubator of the university,” says Larter. “We get use of this facility, office and some lab space. The idea is that if it succeeds, we will be out in a proper commercial center.” He won 2009 kudos like the trophy for outstanding commercial achievement at the Alberta Science and Technology Awards and election as a fellow of Britain’s Royal Society. But Larter feels a little frustrated by slow market acceptance for some of his programs on the cutting edge of the emerging next generation in oil sands production, steam-assisted gravity drainage, or SAGD for short. It seems no one wants to be the first adopter.

“Our take on it is we need a revolution,” he says. “And it’s not just a technical revolution. It’s almost a social revolution in how we deploy technology, probably 50 per cent technical and 50 per cent structural.” He says this need is not necessarily restricted to Alberta’s economic mainstay. “But it’s most crucial in the energy industry. Carbon is on everyone’s mind and it looks like a pretty big problem. Even if we had technologies that could solve that problem today, if you look historically at the rate new technology replaces old, it won’t happen fast enough. If you want to meet our targets made today, you’ve got to replace technologies in 40 years. If you look in the past – coal replacing wood, oil replacing coal – to achieve 80 per cent adoption, you’re looking at the end of the 21st century.”

Larter’s ideas are advanced even for oil sands professionals, who take pride in calling their field the industry’s technical frontier. His research interests lie in the production of heavy oil, petroleum biodegradation and the deep biosphere. The recent focus of his research is in novel uses of petroleum reservoirs as in-situ or underground refineries, where native microorganisms can be harnessed to speed up natural processes of oil and gas formation to recover as methane or hydrogen rather than heavy oil. The ultimate goal of such visionary work is emission-free energy production from bitumen deposits.

“We’ve got these complex reservoirs that to get anything out of is an achievement,” he says. “And, basically, SAGD today doesn’t look that different from 1981 [when the concept took form]. Why isn’t it different? Why don’t we have 20, 30 or 50 technologies competing for the one that’s going to give us zero emissions? In that sense, you have to say there has probably been a market failure of innovation in the energy industry.”

Larter blames some of the lack of progress on the competitive intellectual property (IP) environment of oil patch research. “The patent system tends to force everybody into kind of a monopoly position, yet they all face the same problems,” he says. “They’ve all got complex reservoirs and know it is a difficult thing to do. And yet they’re all trying to do it by themselves.” He contrasts the prevailing regime to other industries like pharmaceuticals, which use patent pools to seek common objectives. “And with software there are no patents really – and people still make a lot of money. I think the IP model in the energy industry is particularly destructive. Everybody’s got their secret and no one’s sharing.”

He reckons the oil sands are ideal for a new IP regime because there are no exploration results to hide. The field is all about production and technology. He credits the surviving streak of secrecy to the industry’s roots as a hotly competitive hunt for the buried treasure of naturally flowing oil and gas reservoirs.

Larter likes the software industry model. “There’s a famous quote from Bill Gates to the effect that if in the early stages of the software industry we’d had to deal with patents, the industry would be at a complete standstill. They just used copyright and went to the do-it-faster-than-anybody else model. So you’ve had this explosion of technology, this explosion of competition that I don’t see in the energy industry.”

But the IP regime is not the only stumbling block. Part of the reason that radical production innovations have long acceptance times is the need for demonstration that they work safely, reliably and economically on a large scale with field pilot projects. Trials are especially long in the oil sands. Innovations in other industry branches – like multiple horizontal wells drilled from single surface pads, multiple injections of high-pressure fluids to fracture flow channels into dense rock, and associated micro-seismic detection of natural cracks – have been tested and refined at much lower costs, often at old industry sites. Oil sands trials often include establishing entirely new production fields.

Research and development funding is another barrier, says Larter. “The R&D in the energy industry is the same as in the logging industry,” he says. “Unlike the pharmaceutical and chemical industries who are spending 20 or 30 per cent of their turnover on R&D, the biggest oil companies spend two or three.”

He figures an “incremental” approach of advancing one step at a time is best. “We are trying to be at the cutting edge while at the same time realizing that industry needs incremental solutions to where it is now. When the Starship Enterprise comes along and says ‘Hey, we’ve got warp drive,’ what are you going to do with it?”

Gushor would love to deploy a lot of new tech. JAGD is a prime example that needs a field pilot. The term is short for j-well and gravity-assisted steam stimulation. The method takes advantage of vertical and horizontal changes in oil viscosity or stickiness to enhance production.

“We’ve been trying to get some of these technologies piloted and it’s very hard,” says Larter. “You’ve got to persuade a big company to run a pilot and big companies are not even running pilots of their own technology.”

But if professional innovators have strong scientific evidence that a new method promises vast efficiency gains, don’t industry managers take note? “It’s this business model,” says Larter. “They’re watching shareholder perceptions. They figure that to sink $80 or $100 million into a pilot, which is a minute amount in the grand scheme, is too big a risk to take for investor confidence. They don’t seem to have the ‘Let’s go for it.’ Some, like Shell, have, but the bulk of the industry doesn’t seem to.”

Larter adds, “It’s the smaller companies that have the most complex resource plays and they seem to have the higher interest.” Still, there are promising developments. “One of the key changes is that we are starting to see more integration of engineers and geoscientists in companies,” says Larter. “And also more of the young let’s-go-for-it people and less of the old conservatives who say that’s the way it’s always done. Those 20- to 30-year-olds want to change the world. So change is coming, and it’s going to be in the small and medium size companies.”

Gushor has had some commercial advances. “The best success has been our plunger which allows us to recover very clean bitumen samples to get good viscosity data,” says Larter. “Last winter we piloted that in the field so we are now making viscosity logs of wells and this year people will be using it.” He says they’ve also had much success with new ways of tweaking thermal bitumen production systems.

Some help has come from the university. As well as providing office and labs, the U of C has University Technologies International for assistance with transfer and commercialization of research products. The agency offers two options: they find a suitable commercial partner and license the invention; or, where they feel the tech can stand on its own, create a new venture capital company like Gushor that pays royalties to the university.

Larter wrestles with the habitually slow rate of adopting new methods in the oil industry. “We’ve got to deploy them at more than double the rate at which technologies have been deployed historically,” he says.

Change has no chance of happening on the cost-no-object scale of the Manhattan Project or the Apollo Project, but “I think the challenge is not just a replacement for SAGD. The big challenge for the oil industry is the rate at which new technologies have been deployed. If you look at new SAGD pilots, we can count them on the fingers of one hand. Most people are banging on with varying degrees with SAGD and CSS [cyclic steam stimulation]. And think about it: SAGD appears about the same time as the IBM personal computer. Compare 1980 or 1981 to today. What you see now is multi-core processors and hundreds of gigabytes of hard drive.”

The rate of IBM’s product evolution has been many times the pace of SAGD development. IBM doesn’t seem to face the same challenges as Gushor. In a plush corner boardroom at IBM’s Calgary operation, Andy MacRae describes an entirely different trajectory for oil industry innovation involving his field. He is a business consulting services partner with the household-name company that’s been around for over 70 years and boasts over 500,000 employees worldwide.

IBM brands its current product line for the fossil fuels industry Smart Oil. It’s all about management of information and data and builds upon older systems already used by clients. There is little need to convince energy companies to invest in costly pilot projects.

Instead, the service focuses on the vast amounts of data generated by a process or system such as SAGD. There is nothing new about collecting information. Smart Oil is an advanced way of analyzing the data. IBM has derived pattern recognition algorithms which are processes or sets of mathematical rules used for problem-solving.

“You can look at it in a cross-disciplinary fashion. For example, reservoir management in a SAGD environment – you’ve got your geologists, your geophysicists, your reservoir engineers, your production engineers, and they all look at it with their own view. How do you bring all those disciplines together and actually map the reservoir performance? And then have some predictive capability that asks, What happens if I change my steam injection ratio or I drill more wells to try and produce more?”

The sheer number of data points is boggling. “If you look at a standard oilfield nowadays, you’re looking at two gigabytes of data. Think about it – you’ve got a thermocouple, for instance, that’s sampling every second or every 10 seconds. You collect that over a day every day and it’s a massive amount of data. You can’t do much with that unless you’ve got some algorithm that actually says here’s a trend. Now I can look at a graph over a period of time. And then go to the next level where it can send a flag off to the operator where something needs to be investigated. That’s the process in its simplest sense. But if you do that over a whole field, and you’ve got a hundred of those monitors and then you look at the overlay of all the pressure readings as well, and then all the volume readings, and then all the reservoir information – it all gets way beyond the human factor.” In the end, says MacRae, the smart computer system allows, for instance, a bitumen upgrader plant to plan for the varieties of materials arriving from the production site.

“The last piece is to overlay some intelligent tools over top of that automation where you can actually look at some more predictive capacity related to your operation,” says MacRae. “You could put some simple logic like, ‘I need my daily reports first’ or you could say, ‘I have a monthly meeting where we need to do some predictive flow analysis on the reservoir’ or put a different view on ‘I’m having a problem with my energy efficiency’ or ‘How do I look at this from an environmental footprint?’” And there’s no end to the number of sensitivity analyses that can then be run – for example, how will changing some given parameter like steam input affect reservoir outputs over time?

“It allows you to run much more complex scenarios in much shorter periods of time,” says MacRae. “Some scenarios that used to take weeks, we can now do in four hours.” He provides an example. “With natural gas prices really low now, over my field I can look at my expensive wells to operate and my low-cost wells to operate. If I’m running at prices of $3 per thousand cubic feet, I should be shutting in my extremely expensive wells and producing out of my low-cost wells so I can maximize my margin,” he says. “It’s that sort of structure that changes the overall business behavior – not just one discipline that owns the info, runs the schedules and plans the work. It now has an integrated view to it.”

Run nine multiple scenarios is particularly helpful in the combination of a bitumen extraction site and an upgrader, says MacRae. In that case, a company can ask, “How do I actually look at the combination of 10 or 15 variables to optimize my extraction process? Variability in the ore body – like sand content, bitumen quality, and alkaline or acidic water – has a massive impact on extracting the oil. There are other factors like heavy metals or contaminants in the water.”

Like Larter, MacRae makes comparisons to other economic sectors. “If you go back 10 to 15 years, the aerospace industry was in the exact same position that the oil industry is going through now,” the IBM partner recalls. “Very stressed and under huge economic pressures. It was taking three to five years to produce a new plane and once it was produced their ability to replicate it was a challenge. And now they and the auto industry are the most advanced.”

IBM’s energy specialists took cues from computer service relationships with aerospace firms Boeing and Bombardier as well as automotive companies like Honda and Toyota. “We’ve taken that intelligence and applied it to the oil and gas industry,” says MacRae. “Building an airplane is of course different than running an asset with a 50-year lifespan so we’ve had to evolve those tools for intelligence. They are comparable from a project perspective, but when you integrate the capital project with operations, I would say we’re still behind the auto and aerospace industry.”

How long will it take the energy sector to catch up with its customers? For the experts trying to nurse progress along, the only certainty is that change is coming, albeit more slowly than they’d like.

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