15th May 2014, BUSINESS STANDARDThe story of shale gas fracking shows how innovations take long to diffuse No matter how much private capital companies suggest that their managements are patient and persistent, it is a reality that their leadership has to consider the bottom line and shareholder value.
The story of shale gas fracking shows how innovations take long to diffuse
No matter how much private capital companies suggest that their managements are patient and persistent, it is a reality that their leadership has to consider the bottom line and shareholder value. This places some inevitable limitations. That is why long gestation innovations with unclear commercial returns are very often funded, and even implemented, by public agencies and universities: super computers, space and defence-related technologies, and basic life sciences research. This created a divide between business sector and social sector innovations. The late C K Prahalad tried to provide an intellectual bridge between the two by inventing the term “bottom of the pyramid”.
The diffusion of an innovation may take very, very long. For example, electricity has not reached all of mankind. Consumer marketing companies in India will take decades more before they are able to deliver their products to every village. Is there a measure of full success when the innovation has reached everybody? Does the innovation journey have to be so long and sometimes even controversial?
I love the story of an innovation miracle that has had an impact in the last few years: shale gas through fracking technology. It is not as well-known as the iPad or Facebook, but has arguably achieved more than those innovations. The shale gas revolution has uplifted the entire American economy, created jobs and given the Obama presidency an extra dose of vim through a sort of economic turnaround during the last two years.
Ten months ago, on July 26, 2013, an oilman, entrepreneur and philanthropist died in Galveston, Texas at the age of 94. His father, a Greek immigrant goat herder, later ran a shoeshine shop. Out of his own and the family earnings, the son studied petroleum engineering at Texas A&M University. He stood first in his class. He went on to serve in the Army Corps of Engineers during the Second World War. After returning from the war, he avoided employment with the big oil companies, whom he distrusted. Instead, he ventured on his own and soon he had drilled 13 wells on land acquired by him.
He was smart enough to infer from the vast government data that there was a huge reserve of oil and gas in the US. By the 1980s, it became an obsession with him to find a technology to release those reserves of oil and gas, which were trapped in what are called shale sedimentary rocks – termed so because they do not have the permeability to release the oil and gas by directly drilling into them.
The traditional way of searching for oil or gas is to locate the place where the oil or gas has pooled, by virtue of geological traps, in the layers of sedimentary rock that are both porous and permeable. Once found, the pools are easy to produce from by drilling straight into the pools. This oilmanwondered why he could not access the oil and gas that occurred in tight shales. He developed an innovative way of unlocking vast amounts of natural gas from shale formations.
His innovation looks elegant. He combined two established technologies. This oilman perfected the technique of combining the two technologies: a 40-year-old technology of directional drilling with a 20- year-old technology of hydraulic fracturing. He found that if he drilled straight down, then turned 90 degrees, thousands of feet underground, not at all an easy thing to do, he could run parallel to the shale gas formations. Under high pressure, by injecting water, sand and chemicals, he could fracture the entire shale formation. This way, the trapped gas could be released. It took more than 15 years to perfect the technique and the oilman had to be doggedly persistent in the face of many naysayers. This process of horizontal drilling and hydraulic fracturing is now common industry practice, known generally as fracking.
Thanks to the widespread adoption of this entrepreneur’s innovative genius and dogged persistence, the US has already become the world’s largest producer of natural gas. In three years’ time, the US could become the world’s leading producer of crude oil as well.
The man who innovated and accomplished all this was George P Mitchell. Have you heard of him or know anything about him? If you are an oil and gas person, of course, you have. Otherwise sadly, not. His long-time associate, Richmond, said that Mitchell had the guts to do things that other people would be too scared to do. “Mitchell did not like to hear ‘no’ so you had to figure out an answer to ‘how’,” said Richmond.
In the late 1990s, Mitchell expressed incredulity that a few upstarts in Silicon Valley could write a software and sell their company for billions of dollars. His energy company had slogged for decades to build a team of 2,000 engineers and vast land holdings. It faced an uncertain future and was worth a fraction of the software companies – quite unfair from his perspective.
Such radical innovations produce unintended consequences. Greens are horrified about the development and rapid adoption of fracking. Documentaries such as Gasland tell you that fracking has no legitimate place in modern society. Mitchell himself made the maverick observation that he “favoured tough regulation that would make fracturing techniques better and safer”. The truth is that this innovation is also very controversial currently.
My previous Innocolumn on toilets elicited wide public interest (‘Neat and clean’ innovation, April 18). The messages that I received emphasised the need for a renewed urgency in both public and private action. The positive role that the Indian corporate sector can play was almost always highlighted, especially now that the two per cent corporate social responsibility expenditure by companies has become mandatory. On reflection, I realise that every response has been sensible and logical.
In management literature, innovation is usually focused on the private sector. The books on innovation almost always relate to the great success stories such as face creams, fuel-efficient cars, or software that magically connects people to create a social network. Clearly, many of these innovations are fabulous, make lots of money and can certainly be regarded as both successful. Many of them take time and patience.
But innovations can take long to diffuse, be unfair and become controversial.