Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
Marc ISABELLE
IMRI (Université Paris-Dauphine) & CEA
<[email protected]>
11th International Schumpeter Society Conference
Sophia-Antipolis
June 22, 2006
© Marc Isabelle 2006
1
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Outline of the presentation

Motivation & research question

The technological acceleration in the upstream oil & gas industry

© Marc Isabelle 2006
The changing industrial organisation in the upstream oil & gas industry
—
in theory
—
in practice

Conclusions and perspectives

References
2
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Motivation


Two essentially different kinds of economic decision (Mashallian scissors)
– allocation of existing resources
– creation of new resources (innovation)
A set of economic organisations that help take and implement these decisions
– markets
– contracts
– hierarchies
– co-operations
 What kind of organisation is best suited for what kind of decision?
 Could the organisation change when a shift occurs in the relative weight
of each kind of decision?
© Marc Isabelle 2006
3
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Research question

Upstream oil & gas industry has experienced two different technological
regimes
—
before  1970: technological tranquillity
—
after  1970: technological revolution
 Assumption
– oil & gas companies took decisions of the resource allocation type
before 1970  industrial organisation #1
– ... but essentially decisions of the resource creation type after 1970 
industrial organisation #2

© Marc Isabelle 2006
Research question =
Did the technological acceleration in the upstream oil & gas industry
come along with organisational transformations between companies?
4
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 The technological acceleration: Incentives to innovate

Two classes of incentives to innovate
technical-based
(diminishing returns)
competition-based
(prices ~ costs)
© Marc Isabelle 2006
5
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Technical incentives to innovate: Fight against the nature?

Two classes of incentives to innovate
technical-based
(diminishing returns)
before  1970
after  1970
NO
YES
competition-based
(prices ~ costs)
© Marc Isabelle 2006
6
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
Technical difficulties to explore,
develop & produce oil & gas
 Technical incentives to innovate: Fight against the nature?
Nationalisation of oil & gas resources…
1971 1972 1973 1974 1975
… Algeria, Libya
Internationalisation of oil & gas industry
Venezuela, Iran…
… Venezuela
… Iraq, Oman
… Saudi Arabia,
Koweït, Qatar,
… Iran
Abu Dhabi
… Iraq
… Saudi Arabia
… Kowaït
… Algeria, Libya, Abu Dhabi
x
North Sea,
Alaska, …
Strong technical
difficulties
??? no more great discoveries
1920
© Marc Isabelle 2006
1930
1940
1950
1960
1970
Qty
7
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Competitive incentives to innovate: Fight against competitors?

Two classes of incentives to innovate
technical-based
(diminishing returns)
before  1970
after  1970
NO
YES
competition-based
(prices ~ costs)
© Marc Isabelle 2006
8
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Competitive incentives to innovate: Fight against competitors?

© Marc Isabelle 2006
Two classes of incentives to innovate
before  1970
after  1970
after  1986
technical-based
(diminishing returns)
NO
YES
YES
competition-based
(prices ~ costs)
NO
NO
YES
9
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Incentives to innovate: Fight against competitors?
Prix du pétrole (1949-2002)
60
Loose competition
Very strong
competition
$ 1996 / baril
50
40
Seven sisters oligopoly
(inception in 1928)
30
Oil price collapse (1986)
 competitive prices
20
Oil crises
(rocketing prices)
10
0
1949
© Marc Isabelle 2006
1954
1959
1964
1969
1974
1979
1984
1989
1994
1999
10
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 The technological acceleration: Evidence

R&D investments x 2,3

Innovation counts 4,48 / year (1947-69)


© Marc Isabelle 2006
19731985 in US petroleum industry

4,86 / year (1970-1990)
Operational performance indicators 
e.g. water depth, exploration success ratio, hydrocarbon recovery ratio, etc.
Production costs 
e.g. non-OPEC marginal field 20$/boe (1985)  10$/boe (1995)
11
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Industrial organisation before 1970


Use of the organisational lever to increase performance in allocation of
resources in oil & gas upstream projects
Drivers
—
economies of scale  concentration of resources
—
risks  diversification of resources
 associations between companies
e.g. two companies take 50% stake in eachother’s project with less than
perfectly correlated risks
© Marc Isabelle 2006
12
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Industrial organisation after 1970


Use of the organisational lever to increase performance in creation of
resources in oil & gas upstream projects
Drivers
—
access to new knowledge (as soon as 1970)
—
share financial burden i.e. sunk costs of innovative processes (post 1986)
 co-operations ( from associations) between companies
—
idiosyncratic (partner’s identity matters)
—
optimal rule of sharing = equality of partners’ stakes in projects
© Marc Isabelle 2006
13
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Industrial organisation: Theoretical prescriptions
(post 1986)
© Marc Isabelle 2006
14
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 The data


© Marc Isabelle 2006
Oil & gas companies stakes in upstream projects 1945-2004
—
2300 projects
—
over 60 companies
Calculate two features of industrial organisation
—
concentration of projects’ stakeholders (Herfindahl index)
—
inequality between projects’ stakeholders (Gini index)
15
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 A rising number of companies / project from 1967 onwards

© Marc Isabelle 2006
No risk-sharing before 1967?
16
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 A decreasing inequality between partners from 1984 onwards
© Marc Isabelle 2006
17
Differentiated
technological
regimes
and
changing industrial organisation: Theory and
evidence from the upstream oil and gas industry
 Conclusions and perspectives

Some changes occur in the industrial organisation set up by oil & gas companies in
upstream projects

… at anticipated dates

... they go the “right” direction (conform to theory)

Use another index for inequality so as to not exclude specific projects

Perform more sophisticated statistical tests for breaks

THANK YOU!
© Marc Isabelle 2006
18