with David Cannon, Senior Vice President of Geoscience and Technology at Diamondback Energy
The views expressed here are not the official views of Diamondback Energy, but those solely of the subject of this interview.
Tell us about your background and what you do now.
I’m the Senior Vice President of Geoscience and Technology at Diamondback. Mostly my purview is on the subsurface side—being able to better characterize and extract Diamondback’s resources in a cost-efficient manner.
I started out in the industry back in 2007, a geoscientist by trade and by formal education. I got my Master’s Degree at Penn State University in Structural Geology with a focus mostly on rock mechanics and fracture mechanics, so I’m one of those weird geologists that actually likes math.
In our industry history, geoscientists have always worn the mantle as being those who spend all the money without regard for economics, under the guise of pursuit for truth. As I moved into the oil and gas industry, I think I’ve always had an inherent businessmen’s mind, which resulted in marrying science and technology of the subsurface into sound business decisions.
I know there’s a lot of others that think this way, too. Can we marry the pursuit for data and truth in the subsurface with sound economic practice? We can do these things in a cost-efficient manner that not only allows us to succeed in terms of creating a business case for data collection or data manipulation— which is where I see players like Petro.ai being an integral part of—but that also allows us to get stakeholders in the process.
Engineers tend to have an economic mindset: what’s the most cost-effective practice to be able to maximize my return? And if you can sing along those same lines, I think that you can get a lot of buy-in on new technologies, a lot of buy-in on something that might be disruptive for your particular industry. That’s honestly the way all companies should approach it.
We have to stop thinking that this is an antagonistic setting where the geologists have one way of thinking, engineers another, and the finance guys another. We all have to meld our thought processes together to be able to get the best outcomes.
Why do you have a passion for change in this industry?
Our industry should always have a passion for change. The way I see it is we must always evolve, and if we do not evolve, our industry will perish. It’s borne out in the data. You see historical references to it all the time.
One particular industry that has gone through a period of low innovation, and now feels the repercussions, is the coal industry; one of the preeminent sources of energy for the world from the 1800s through I think about the 1980s. Well, they got complacent. That complacency led to a slowdown in innovation around things like more efficient extraction techniques and more efficient, environmentally friendly conversion techniques. Are there ways to thermally alter coal in a way that can reduce the amount of greenhouse gases and reduce the amount of pollution that is released into our environment? I just don’t think they were ever ahead on that respect.
They always reacted whenever new regulations came out or whenever there was social pressure. Only then would the coal industry react, and they usually reacted in a very minimal way, just enough to get by. They were on top. Coal would reign forever. Why would they have to change?
Technology evolves as new social pressures and new paradigm shifts occur throughout our human society. Other alternative sources for that energy started to come to the forefront, and I think the biggest displacement technology we see now is just switching over to natural gas. It’s simple, right?
You can take a coal plant and convert it to a natural gas plant relatively easily, and with the advent of horizontal drilling and hydraulic stimulation in our industry, this resulted in an oversupply of natural gas. That fuel source became extremely cheap, so all the utilities that ran these coal fire plants saw an opportunity to behave in a much more efficient manner. At the same time, gas was able to better answer the calls for change from environmentalists and from general social pressure around pollution. So, they made the switch.
More and more coal plants are continuing to switch to natural gas even today, and the market share of coal continues to slide. They are no longer the number one producer of electricity in the world. They’ve been displaced and they will continue to be displaced. The only reason why they were displaced isn’t really because natural gas is just better. It’s because they stopped innovating. They stopped seeing where they fit within the future and seeing how they can adapt to that new reality. And that is a problem that a lot of industries have, and that’s something I’m passionate about with our industry, as I can see us traveling down that same road really easily.
If we continue to be complacent about where we fall within the energy industry and overall giving energy to the human population, we can easily be displaced if we’re not thinking about new technologies.
There’s some research that’s being done now with the Earth and Mineral Sciences Department at Penn State in conjunction with private industry in Appalachia, looking at ways to take natural gas methane streams and thermally alter them with microwave plasma. The process breaks down methane and converts it into molecular hydrogen, for hydrogen fuel cell technologies, and graphene for structural additives to steel and concrete. So, they’re thinking about how our industry, the hydrocarbon industry, can be a part of the solution of renewable energy.
It’s not an or statement. It’s an and statement. And that’s one of the things that I’m passionate about is that our industry can be a part of that solution. We just have hurdles, and it’s mostly philosophical hurdles, of people saying, “we’ve always done it this way. We’ve always provided energy this way. This is how we’re going to do it.”
That is the mentality that kills you. That’s exactly what happened to the coal industry in the 60s and the 70s, and they refused to change because of that mindset. They basically said, “where else will you get your energy?” Well, they found out where else the world could get their energy. So, we can’t stand by and let that happen. It will be the death knell of our industry if we don’t find ways to couple into the new research around providing energy in a more sustainable way to the world.
It’s a full cycle problem. It’s not just extraction. Extraction is one part of the problem. It’s also taking that product, then converting it to the energy that’s consumable for whoever your consumer base is. That’s one of the things that I think we have an issue with is that we’re always really decoupled in that.
The independent E&P companies, they’re just worried about extraction and production, right? Once they sell the product, you’ve ended the value proposition. End of story. Move on to the next barrel. But some of the engineering, some of the science, some of the application of technologies that we’re using in the extraction realm could also help on the consumption realm, because at the end of the day, the physics, chemistry, biology that we use on a daily basis wraps up into the work done to convert that resource to energy.
Are we going to completely focus on the science of resource conversion? No, because we have our business models that state that we have to extract this resource. But are there ways that we can bring ideas to the forefront that we could change the game on how those resources are then used? Yes, and we as extraction companies should be part of that research and ultimately that solution.
In 2015 and 2016, the downturn gave rise to this digital transformation in oil and gas. How do you see this 2020 downturn affecting things?
I always fall back upon is the diffusion of innovation. It’s a concept that was actually written back in the early 60s talking about how technology or even an idea, moves through and is adopted by a population. It’s an elegant construct really.
When a particular idea or technology starts, you have the innovators, the ones who are creating that process, the ones who are getting the bloody nose because they’re the first ones through the wall. Then you have early adopters, folks who say, “That’s a really cool idea. I want to adopt it and potentially make it better. Let’s push this technology forward.”
One perfect example is Elon Musk. Plug-in electric vehicles have been around since the 1960s. They actually made functional models of plug-in electric vehicles back then, so what he’s been able to deliver with the Tesla vehicle is nothing new. He was an early adopter of that technology. We have better complementary technology around battery tech and energy efficiency to increase range and operate more technologically advanced vehicles. So, he’s an early adopter. I wouldn’t consider him an innovator.
Then once you go past the early adopter phase, you have what’s called the technological chasm. It’s at that point where the technology has to reach some sort of social proof, and social proof can be defined by anything, depending on the social system that you’re trying to push an innovation or an idea through. That social proof can change and vary, dependent upon the answer and solution that technology is trying to address.
To continue with the example of electric vehicles, it’s usually cost and value. A middle-class family of four in Iowa wants not only a vehicle that has a long-extended range, which Tesla has, but they also want a vehicle that has a low cost. When that family buys a Toyota Camry for $30,000, they get the benefits of long range and value. This is why the Tesla Model S hasn’t jumped the chasm, because that vast consumer base, middle-class America, cannot couple range AND value. That’s why electric vehicles have not jumped the chasm, because right now they have not attained the social proof of value.
In our industry, oil and gas, the social proof for technological innovation is also monetary. It’s essentially the price of oil. If the price of oil drops below a certain threshold level a lot of technological advancements can’t jump the chasm to get more adaptation through our industry.
What we do, what we spend money on, is inherently tied to the price of the product we sell. How much money we make, how much revenue we make on a quarter over quarter basis, year over year basis, is going to be our war chest to be able to go out and spend dollars on innovation and potentially be more efficient.
During times like 2015, 2016, and also today, are times where the social proof concept falls apart for our industry, and a lot of innovations fall backwards in that curve. They no longer have social proof, and people start to drop that technology because it’s no longer viable within that social proof context.
The interesting part about that entire thesis from E.M. Rogers around technological adaptations is when you have something that falls out of social acceptance, something else replaces it. There’s always something waiting in the wings to get social proof in times like this. The constant struggle with competing technologies as social proof shifts and changes with time causes a very stilted technological history within our industry. When times are good, we focus innovation on subsurface assessment. When times are poor, we focus innovation on operational efficiency.
Things like data science and machine learning met social proof in 2015 and 2016, as they were disruptors on the efficiency side. Then as things started getting better, there was a stasis, a plateauing of data science. There wasn’t this huge rush of, “Let’s keep pushing the paradigm and pushing the technology for our industry.” Instead, we fell into, “Well, this works, let’s just keep using it.” I predict we will see another creaming event for those technologies in 2020 and beyond, because I think the learnings that were acquired in 2015 and 2016 are going to be brought back up to the forefront and the value propositions are going to be shown again. Then there’s going to be more people paying attention to the technology. In turn, that attention is then going to continue to evolve it, and that evolution then keeps that technology moving forward and doesn’t allow it to get complacent and lag like the coal industry did.