Abstract

Relentless cost cutting through mergers, staff reductions, outsourcing, and other strategies was certainly the hallmark of the late 1990's and early 21st century. Included in these various rounds of profit improvement activities were drastic cuts in operating company research and technology development. The operating companies have further pushed much of the remaining R&D activity to the service sector where budgets and consequently technology development continued to shrink. Further, a close review of the larger service companies indicates the 'source' of their technology is mostly external purchase versus internally growth. The service company technology acquisition targets have for the most part been small, start-up companies which have been the 'source' of innovation. The 'spark' of innovation within these small companies often comes from industry veterans recently departed from the larger operating and service companies. Of course, fuel (money) and oxygen (customers - first users / early adopters) are required to feed the flame and grow the company to a critical mass which is large enough to be of interest to a service company. So, now that we have outlined the upstream technology food-chain, let's do a 'follow the money' health check.

The recent 'rising tide' of product prices has continued to 'lift all (operating company) ships' from an overall financial return perspective, astounding even veteran observers. However, as prices seem to stabilize at this higher plateau, there is renewed discussion regarding how operating companies will continue to grow earnings in an environment of flat (or shrinking) production and reserve booking. Applied technology of course has been the traditional answer. But, since the technology is no longer 'grown' within the operating companies, we must look further down the food chain to the service companies.

A health check of the service sector reveals financial results not quite as rosy as with the operating companies. Unlike earlier cycles, operating company demand for services has not kept pace with their revenues. Operators are returning 'excess' cash to shareholders via stock buy-backs and dividend increases. As a result, demand for service has been much more closely aligned with supply, making it difficult for service companies to raise prices. Without the increased cash flow, service companies have found it difficult to fund technology growth, either internally or through acquisition1. The companies that have been acquired are typically ones that have an existing book of customers and good cash flow, hardly what would be characterized as still in the 'start-up' mode of operation.

A bottom up review indicates a number of energy technology related startups companies are in the trenches, attempting to attract funding and early customers. Just in the Houston area alone, some 22 companies covering a broad spectrum of promising new technologies are working under the Houston Technology Center (HTC) umbrella. Many more technology based companies are out there attempting to even reach the HTC level of critical mass. One of the main critical ingredients for growth, capital seems to be missing.

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