Factors affecting R&D expenses for major Oil & Gas companies
|
Introduction 4
1. Theoretical Background 1
1.1 Overview of the Oil and Gas Industry 1
1.1.1 Overview of the global Oil and Gas sector (2000-2024) 1
1.1.2 Russian Oil and Gas industry profile (2000-2023) 7
1.1.3 The Overview of the Oil & Gas sectors in USA, Norway, Canada, Italy, Netherlands, UK, China, Brazil and Spain 13
1.2 The Concept of R&D Expenses 21
1.2.1 Definition and classification of company’s expenses 21
1.2.2 R&D expenses of a company 23
1.2.3 Formulation of hypotheses 30
2 Empirical Research 34
2.1 Company Selection 34
2.2 Data Collection 36
2.3 Data Analysis 41
2.4 Data Interpretation 42
2.5 The Validity of Analysis 43
2.6 Hypotheses Testing 46
2.7 Company-level analysis 48
Implications for Management 51
Conclusion 52
1. Theoretical Background 1
1.1 Overview of the Oil and Gas Industry 1
1.1.1 Overview of the global Oil and Gas sector (2000-2024) 1
1.1.2 Russian Oil and Gas industry profile (2000-2023) 7
1.1.3 The Overview of the Oil & Gas sectors in USA, Norway, Canada, Italy, Netherlands, UK, China, Brazil and Spain 13
1.2 The Concept of R&D Expenses 21
1.2.1 Definition and classification of company’s expenses 21
1.2.2 R&D expenses of a company 23
1.2.3 Formulation of hypotheses 30
2 Empirical Research 34
2.1 Company Selection 34
2.2 Data Collection 36
2.3 Data Analysis 41
2.4 Data Interpretation 42
2.5 The Validity of Analysis 43
2.6 Hypotheses Testing 46
2.7 Company-level analysis 48
Implications for Management 51
Conclusion 52
Factors affecting R&D expenses of International Oil and Gas companies.
Especially during the 3rd Industrial Revolution, R&D expenses have become very important since R&D expenses were found vital in achieving further success and gaining competitive advantage for the companies. The same view on R&D expenses is present in today’s era, which is the era of the 4th Industrial Revolution. Whether it is the development of Machine Learning algorithms or integration of AI-powered operations inside the company, what makes them come true are the continuous efforts and research carried out by companies to modernize and achieve greater efficiency of business.
If to look at the overall landscape of R&D spending, we find that the overall R&D spending has increased considerably. For instance, R&D expenditure in OECD countries has grown nearly 1,5 times in 2020 compared to the base year of 2007 (OECD archives). Also, the share of R&D expenditures in GDP (amongst OECD countries) made up 2,718%. The leading countries in terms of share of R&D expenditures in GDP are Israel (5,56%), Korea (4,93%) and Chinese Taipei (3,78%). The figure for Russia appears to be low, making up nearly 1,1% (OECD, 2022). Interestingly, if in 2014 Higher Education accounted for the highest share of R&D expenditures, in 2020 Business Enterprises have obtained the largest share of R&D expenditures in OECD countries (OECD archives). As for the industries, the hardware industry, automobile industry and healthcare industry were leading in terms of share of total R&D spending in the world in 2022. The Energy sector, which especially interests us accounted for only 1,7%, which translated to USD making nearly 42,5 billion USD (Statista reports). Apparently, for an industry that ranks 2nd in terms of GDP contribution (measured in total revenue in the industry over the total GDP) in the world, this number of 1,7% seems very low (IBISWorld, 2024). And even in terms of spending on energy R&D, Oil and Gas companies are the third-largest contributors, with R&D spending by publicly listed Oil and Gas companies being $ 19.5 billion in 2022, a figure lower than that of Automotive ($ 52.4 billion) and Electricity companies ($ 25.7 billion) (IEA database, 2022).
As for R&D spending within Oil and Gas companies, they have a varying nature. For example, for some companies, the R&D spending was primarily undertaken to achieve greater efficiency (e.g. by packing more sand into fracking jobs) and cost minimization (by achieving greater maintenance of equipment (Hartenergy, 2017). Another example of R&D spending might be the introduction of Artificial Intelligence into the Oil & Gas industry - a major project that was undertaken jointly by Canadian Natural Resources and Ernst & Young Consulting company throughout the 2010s. Also, in another Canadian example, the R&D expenses were made into clean technologies particularly, Carbon Capture Storage technology (Canadian Energy Centre, 2023). If to continue in the direction of low-carbon extraction strategies and clean energy investments, Russia's major Oil and Gas companyGazpromincur R&D expenses focused on:
“Efforts aimed to develop and implement Russian high-tech equipment and sophisticated engineering complexes unrivalled in the world as well as to create advanced R&D solutions”.
“Identifying Gazprom’s sustainable development strategy until 2050 in the light of global low- carbon economy transition”.
Overall, globally, R&D expenses undertaken by Oil and Gas companies have the following purposes:
1. Development and further evolution of exploration and production technologies, which further include seismic imagining and data analysis (mainly about precision increasing), Enhanced Oil Recovery (extract more from the same-size reserve) and Drilling Technologies evolution (more effective and safer drilling methods). An example might be an investment made by BP into robotic drone development that could “read gauges, monitor corrosion, and measure methane” (BP, 2021).
2. Environmental Sustainability and Carbon Capture optimization, which further include Carbon capture, utilization, and storage optimization (technologies aimed at capturing carbon emissions from industrial processes and consolidating them in the underground facilities) and renewable energy integration (to diversify their energy portfolios). An example might be investments in solar panels and offshore wind farms by Equinor (Equinor, CCUS).
3. Digitalization and Data analytics, which further include data analytics and predictive maintenance (to optimize operations, achieve greater usage of equipment and improve maintenance scheduling) and the creation of digital twins. For example, Saudi Aramco invests heavily in digitalization, data analytics and cloud computing as part of its optimization initiatives (Saudi Aramco, 2024).
4. Improved Safety and Risk Management, aimed at achieving greater work safety and minimization the environmental risks. To reduce the need for human intervention in hazardous areas, TotalEnergies, for example, invests in robotics and drones for remote inspections of offshore installations (Total Energies, 2017)...
Especially during the 3rd Industrial Revolution, R&D expenses have become very important since R&D expenses were found vital in achieving further success and gaining competitive advantage for the companies. The same view on R&D expenses is present in today’s era, which is the era of the 4th Industrial Revolution. Whether it is the development of Machine Learning algorithms or integration of AI-powered operations inside the company, what makes them come true are the continuous efforts and research carried out by companies to modernize and achieve greater efficiency of business.
If to look at the overall landscape of R&D spending, we find that the overall R&D spending has increased considerably. For instance, R&D expenditure in OECD countries has grown nearly 1,5 times in 2020 compared to the base year of 2007 (OECD archives). Also, the share of R&D expenditures in GDP (amongst OECD countries) made up 2,718%. The leading countries in terms of share of R&D expenditures in GDP are Israel (5,56%), Korea (4,93%) and Chinese Taipei (3,78%). The figure for Russia appears to be low, making up nearly 1,1% (OECD, 2022). Interestingly, if in 2014 Higher Education accounted for the highest share of R&D expenditures, in 2020 Business Enterprises have obtained the largest share of R&D expenditures in OECD countries (OECD archives). As for the industries, the hardware industry, automobile industry and healthcare industry were leading in terms of share of total R&D spending in the world in 2022. The Energy sector, which especially interests us accounted for only 1,7%, which translated to USD making nearly 42,5 billion USD (Statista reports). Apparently, for an industry that ranks 2nd in terms of GDP contribution (measured in total revenue in the industry over the total GDP) in the world, this number of 1,7% seems very low (IBISWorld, 2024). And even in terms of spending on energy R&D, Oil and Gas companies are the third-largest contributors, with R&D spending by publicly listed Oil and Gas companies being $ 19.5 billion in 2022, a figure lower than that of Automotive ($ 52.4 billion) and Electricity companies ($ 25.7 billion) (IEA database, 2022).
As for R&D spending within Oil and Gas companies, they have a varying nature. For example, for some companies, the R&D spending was primarily undertaken to achieve greater efficiency (e.g. by packing more sand into fracking jobs) and cost minimization (by achieving greater maintenance of equipment (Hartenergy, 2017). Another example of R&D spending might be the introduction of Artificial Intelligence into the Oil & Gas industry - a major project that was undertaken jointly by Canadian Natural Resources and Ernst & Young Consulting company throughout the 2010s. Also, in another Canadian example, the R&D expenses were made into clean technologies particularly, Carbon Capture Storage technology (Canadian Energy Centre, 2023). If to continue in the direction of low-carbon extraction strategies and clean energy investments, Russia's major Oil and Gas companyGazpromincur R&D expenses focused on:
“Efforts aimed to develop and implement Russian high-tech equipment and sophisticated engineering complexes unrivalled in the world as well as to create advanced R&D solutions”.
“Identifying Gazprom’s sustainable development strategy until 2050 in the light of global low- carbon economy transition”.
Overall, globally, R&D expenses undertaken by Oil and Gas companies have the following purposes:
1. Development and further evolution of exploration and production technologies, which further include seismic imagining and data analysis (mainly about precision increasing), Enhanced Oil Recovery (extract more from the same-size reserve) and Drilling Technologies evolution (more effective and safer drilling methods). An example might be an investment made by BP into robotic drone development that could “read gauges, monitor corrosion, and measure methane” (BP, 2021).
2. Environmental Sustainability and Carbon Capture optimization, which further include Carbon capture, utilization, and storage optimization (technologies aimed at capturing carbon emissions from industrial processes and consolidating them in the underground facilities) and renewable energy integration (to diversify their energy portfolios). An example might be investments in solar panels and offshore wind farms by Equinor (Equinor, CCUS).
3. Digitalization and Data analytics, which further include data analytics and predictive maintenance (to optimize operations, achieve greater usage of equipment and improve maintenance scheduling) and the creation of digital twins. For example, Saudi Aramco invests heavily in digitalization, data analytics and cloud computing as part of its optimization initiatives (Saudi Aramco, 2024).
4. Improved Safety and Risk Management, aimed at achieving greater work safety and minimization the environmental risks. To reduce the need for human intervention in hazardous areas, TotalEnergies, for example, invests in robotics and drones for remote inspections of offshore installations (Total Energies, 2017)...
The goal of this study was to make a comprehensive investigation of factors affecting R&D expenses for major Oil and Gas companies, identify the main drivers and conduct a comparative analysis of factors for Russian and International Oil and Gas companies. First, an overview of the global Oil & Gas sector was made as well as an overview of the petroleum industry for 11 countries. Second, the concept of R&D expenses, their nature, their role for companies, and the way they are utilized in the petroleum sector was analyzed. Third, the existing studies of factors related to R&D expenses as well as studies of a related nature were covered. Upon reviewing the existing literature, the hypotheses were set about the factors which might possibly affect the R&D expenses, following which the empirical part of the research was passed on. For this purpose, data from 12 companies representing 11 countries were collected for 19 consecutive years (from 2005 to 2023). From the data collected, the model was created for further analysis. It is worth noticing that though the number of companies was limited, still, for 2023 only, the summed value of their revenues made up more than 50% of the total revenue of Oil & Gas companies.
Analysis of the model created showed us that the intercept term had a positive value of 2,56, which meant that both the zero values for our independent variables were inside the plausible range for the model and that the problem of omitted variables was partially solved. Even if all regressors were set to the value of 0 (which is unrealistic at the core), we still would have positive R&D spending of 2,56 per mile of Revenue.
All other regressors, except the two standing for the growth rate of the company (measured as revenue growth rate) and development level of a country, had positive coefficients. The possible explanation for RGR having a negative coefficient is that an increase in Revenue often comes from R&D spending, but not vice-versa. Additionally, in times of growth of revenue, the intrinsic motivation to increase R&D spending might decrease, as one of the primary objectives of the managers is to make business grow. Regarding the development level of a company, we believe that companies representing developing nations might often possess a lack access to advanced infrastructure and technologies, forcing them to incur additional expenses for developing and reaching new technologies. Additionally, companies in developed countries might have more stable and predictable markets, making them focus on optimizing existing operations instead of investing in high-risk R&D projects.
Also, the correlation tests were run between R&D spending and other variables. The results (only statistically significant ones) were that there was a negative relationship between Oil price changes, innovativeness of a country and revenue growth rate. The positive linear relationship was observed for Earnings before taxes only.
Overall, the model created was statistically significant and had RA2 making up 0,85, which we believe is an incredible result.
The negative linear relationship is possibly explained in three ways:
Companies in times of high oil prices might invest in short-term projects, in order to better capitalize, instead of long-term R&D projects, the results of which might be expected only after 2-3 years. Also, their decreased risk-aversion in times of high oil prices, according to which they are eager to invest in less risky short-term projects instead of long-term R&D projects.
Also, some companies might increase their R&D spending in times of crisis to innovate and become more competitive when prices recover. This is also linked to diversification efforts - in times of low oil prices, companies might seek diversification and further optimization through R&D investments.
Additionally, often in times of high oil prices, petroleum companies might choose to pay out their debts, reduce financial burden, seek other capital projects and think of dividend payments instead of investing in R&D. Another important factor here is played by investors, which put a high pressure in pursuit of immediate returns.
The negative linear relationship, on the other hand, can be partially derived from the negative relationship between R&D spending and the development level of a country.
As for Operating profitability (measured as the share of Earnings before taxes in Revenue), the positive relationship can be explained simply as the more profitable the company is, the more can it invest in R&D.
Additionally, the models were created company-wide, analyzing the factors influencing R&D expenses for each company. Apart from the models, the correlation tests were run. The results of the correlation tests as well as the model analysis showed that there was a persistent negative relationship between R&D expenses and (a) Revenue growth rate and (b) Oil Price dynamics. The explanations of these phenomena were made above...
Analysis of the model created showed us that the intercept term had a positive value of 2,56, which meant that both the zero values for our independent variables were inside the plausible range for the model and that the problem of omitted variables was partially solved. Even if all regressors were set to the value of 0 (which is unrealistic at the core), we still would have positive R&D spending of 2,56 per mile of Revenue.
All other regressors, except the two standing for the growth rate of the company (measured as revenue growth rate) and development level of a country, had positive coefficients. The possible explanation for RGR having a negative coefficient is that an increase in Revenue often comes from R&D spending, but not vice-versa. Additionally, in times of growth of revenue, the intrinsic motivation to increase R&D spending might decrease, as one of the primary objectives of the managers is to make business grow. Regarding the development level of a company, we believe that companies representing developing nations might often possess a lack access to advanced infrastructure and technologies, forcing them to incur additional expenses for developing and reaching new technologies. Additionally, companies in developed countries might have more stable and predictable markets, making them focus on optimizing existing operations instead of investing in high-risk R&D projects.
Also, the correlation tests were run between R&D spending and other variables. The results (only statistically significant ones) were that there was a negative relationship between Oil price changes, innovativeness of a country and revenue growth rate. The positive linear relationship was observed for Earnings before taxes only.
Overall, the model created was statistically significant and had RA2 making up 0,85, which we believe is an incredible result.
The negative linear relationship is possibly explained in three ways:
Companies in times of high oil prices might invest in short-term projects, in order to better capitalize, instead of long-term R&D projects, the results of which might be expected only after 2-3 years. Also, their decreased risk-aversion in times of high oil prices, according to which they are eager to invest in less risky short-term projects instead of long-term R&D projects.
Also, some companies might increase their R&D spending in times of crisis to innovate and become more competitive when prices recover. This is also linked to diversification efforts - in times of low oil prices, companies might seek diversification and further optimization through R&D investments.
Additionally, often in times of high oil prices, petroleum companies might choose to pay out their debts, reduce financial burden, seek other capital projects and think of dividend payments instead of investing in R&D. Another important factor here is played by investors, which put a high pressure in pursuit of immediate returns.
The negative linear relationship, on the other hand, can be partially derived from the negative relationship between R&D spending and the development level of a country.
As for Operating profitability (measured as the share of Earnings before taxes in Revenue), the positive relationship can be explained simply as the more profitable the company is, the more can it invest in R&D.
Additionally, the models were created company-wide, analyzing the factors influencing R&D expenses for each company. Apart from the models, the correlation tests were run. The results of the correlation tests as well as the model analysis showed that there was a persistent negative relationship between R&D expenses and (a) Revenue growth rate and (b) Oil Price dynamics. The explanations of these phenomena were made above...
Подобные работы
- GRADUATE DEVELOPMENT PROGRAMS AS AN
EMPLOYER BRANDING TOOL IN FMCG
Магистерская диссертация, менеджмент. Язык работы: Английский. Цена: 5700 р. Год сдачи: 2017