Making the Leap From Research to Innovation

In a November 2012 report, the President’s Council of Advisors on Science and Technology (PCAST) reported that a historically strong commitment to research and development (R&D) by government and industry has assured the United States leads the world in technology and innovation.

The report’s primary concern, however, is on preventing the United States from falling behind other countries because of a relative decline in U.S. government and industry R&D spending.

The Council recommended actions to stimulate research and its transformation into new products, including:

  • Additional funding for both government and industry R&D.
  • Simplification of government procedures for cooperative work with academia and industry.
  • Improvements in science, technology, engineering and mathematics (STEM) education.

The Council concluded that with increased R&D investment and improved research efficiency the United States could maintain its global lead in innovation.


The PCAST report does not specifically consider the status of petroleum industry R&D. However, the industry has similar problems – and it could benefit from changes recommended to the larger science and technology community. For example:

Innovative techniques, derived from decades of basic and applied research by the federal government, academia and industry, have fueled growing U.S. oil and natural gas production.

Fundamental or basic research is the foundation and prerequisite for applied research and development – but basic research funding has declined. Over the past several decades industry R&D, paralleling overall U.S. R&D, has shifted away from basic research to more applied studies and development. Recently R&D spending has declined relative to corporate net income.

The petroleum industry faces a shortage of scientists, engineers and technicians, exacerbated by retirements of its aging work force.

Industry can benefit from continued cooperative work with universities and federal national labs.

U.S. R&D Spending

According to the report, total U.S. R&D spending is about 2.8 percent of gross domestic product (GDP), a share that has changed little over the past 50 years.

However, since the early 1960s the government share of R&D has declined from 65 to 30 percent, and the industry share has increased from 35 to almost 70 percent. This funding shift is paralleled by a shift of emphasis from basic or fundamental research to applied research and product development, which is now the dominant focus of industry: Industry funds 48 percent of all applied research and 78 percent of development in the United States.

Federal government R&D spending was $140 billion in 2012. This spending goes primarily to the Department of Defense (53 percent), and the National Institutes of Health and other health agencies (22 percent).

Federal agencies that provide the majority of support for the physical sciences receive smaller shares of government R&D funding: Department of Energy (7.6 percent), NASA (7.4 percent) and the National Science Foundation (3.8 percent).

Petroleum R&D Spending

Statistics on R&D spending by the U.S. petroleum industry are available from the Energy Information Administration’s Financial Reporting System (FRS), which collects detailed financial data on 27 major energy producing companies, including multi-national corporations based in the United States.

The FRS companies reported spending $2.8 billion on R&D in 2009. It is notable that FRS companies doubled their R&D spending from 2000 to 2009; however, because net income increased even more rapidly over this interval, industry R&D declined as a percentage of net income.

Oilfield service companies represent a major share of U.S. R&D, although data equivalent to the FRS reports are not available. The four largest oilfield service companies that operate in the United States spent over $2 billion on global R&D.

The industry R&D universe also includes company-supported R&D at universities and cooperative studies with government agencies and national labs.

Declining R&D

A major cause for concern, according to the PCAST report, is that U.S. R&D is declining relative to Asia. U.S. spending as a percent of GDP is now lower than that of South Korea and Japan (both near 3.5 percent), and Asia performed a slightly larger percentage of global R&D (32 percent) than the United States (31 percent).

Other statistics suggest this could be a growing trend – in 2008 China produced more doctorates than the United States, and in 2007 the European Union published more scientific papers than the United States.

In the petroleum industry, U.S. superiority in R&D may also decline as the national oil companies expand their R&D capabilities.

Foundational research continues to decline as the petroleum industry has shifted toward more applied research and development. This started with the company mergers and research facility closings of the 1980s and continued with the expansion of service-company R&D.

Role of Federal R&D In Industry Innovation

Some readers may be skeptical of the value of federal R&D to the petroleum industry – many government and industry leaders share the belief that oil and gas R&D should be left to industry.

The weak support for government petroleum research has contributed to budgets that vary frequently in size and technical focus.

For example, the latest addition to federal oil and natural gas funding is the Research Partnership to Secure Energy for America (RPSEA), which receives $50 million per year from federal oil and gas royalties. The use of federal royalty funds was intended to mitigate the funding fluctuation associated with the usual budget processes. However, RPSEA will end in 2014 – about six years after its first R&D award.

Despite government research deficiencies, many industry innovations in areas such as hydraulic fracturing, 3-D seismic and reservoir simulation are outgrowths of government research in oil and gas and in computation technology.

Federal research at national labs and through industry-government cooperative projects was critical to commercializing tight gas and shale gas production. Government studies of eastern U.S. gas shales and western U.S. tight gas reservoirs, and national lab research into the fracture behavior of tight sandstones all started in the mid-1970s. Government-industry collaboration through the Gas Research Institute in the 1980s and 1990s advanced the technology, and a production tax credit from 1980 to 2002 stimulated industry research and experimentation that made these resources commercial.

Basic government research has led to other industry innovations: 3-D seismic and multi-phase, multi-component reservoir simulation would not be possible without supercomputers and parallel computing designs that came from the national labs.

Recommendations

The report contains many recommendations to keep the United States at the forefront of global innovations. Among those most relevant to petroleum innovations are:

The United States should aim for increased R&D funding levels of 3 percent of GDP.

One mechanism for encouraging this would be to make the R&D tax credit permanent and increase it from 14 to 20 percent. In addition, changes in the tax code could make the credit more useful to small- and medium-size companies.

Federal budgeting procedures should be revised to stabilize research-funding levels through time.

Instead of annual R&D proposals, federal agencies would develop long-range plans and budgets much as the military does for new weapons systems.

The federal government should simplify the procedures for universities and industry involved in government-supported R&D.

STEM education should be expanded by using the recommendations of the 2012 PCAST report, “Engage to Excel.”

Changes in visa requirements could allow students and researchers from abroad to stay in the United States – an idea that also has appeared in congressional proposals for immigration reform.

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Policy Watch

Policy Watch - Edie Allison
Edie Allison began as the Director of the AAPG Geoscience and Energy Office in Washington D.C. in 2012.

Policy Watch is a monthly column of the EXPLORER written by the director of AAPG's  Geoscience and Energy Office in Washington, D.C. *The first article appeared in February 2006 under the name "Washington Watch" and the column name was changed to "Policy Watch" in January 2013 to broaden the subject matter to a more global view.

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