Throughout the Twentieth Century, the City of Houston’s (“Houston” or the “City”) economic strength and prosperity were firmly rooted in its capacity for innovation, leadership and excellence in the energy sector. Indeed, Houston’s embrace of bold and innovative concepts produced and/or attracted some of the most successful and respected oil and gas companies the World over. Like many other sectors, however, changing social attitudes and technological advances hold the potential to reshape the energy sector in fundamental ways.
Houston, also, like many other growing cities worldwide, is being challenged by a growing population, increased energy and municipal service needs, economic housing shortfalls, and environmental justice and socio-economic issues. This has been heightened by the need to increase resiliency to global level problems like automation, the energy shift, and climate change driven weather, water, and energy problems. This has brought Houston to a cross-roads, where we can now redefine and prepare our city for the future or wait until it is too late to change.
As the incumbent companies, institutions and organizations within the Houston and Texas energy sector seek to navigate, adapt to, and ultimately capitalize upon this rapidly evolving landscape, cities around World, from San Jose to Dubai, are vying to establish themselves as ideal host cities for the newest wave of energy innovation and innovators with hopes of becoming the “Houston” success stories of the Twenty-First Century. In the face of this rising domestic and global competition and the emergence of an international innovation “golden age,” Houston must take stock not only of the opportunities, but also of the attendant challenges it is likely to face to its historical – and coveted – position as the World’s preeminent energy capital.
Background: Low R&D Spending in Texas
While research and development (“R&D”) spending is broadly recognized as a critical precursor to innovation in all sectors, private sector energy sector R&D spending has traditionally lagged that of other industries, resulting in significantly depressed levels of R&D spending in the State of Texas. In fact, in addition to top quintile R&D states like California and Massachusetts surpassing Texas’ rate of R&D spending by a factor of approximately four times, the average rate of R&D spending across the entire U.S. exceeds that of Texas by a shocking 80%.
These figures are largely attributable to Texas’ longstanding relationship with the energy sector, which, in addition to already having traditionally low rates of R&D spending relative to other sectors, is in the midst of dramatically cutting rates of R&D spending, due to factors ranging from uncertainty regarding long-term Federal commitment to R&D initiatives, low perceived profitability of R&D spending relative to core business expansion, and lack of extant institutional expertise in nascent and/or unproven technologies.
As explained by energy consultancy firm Woods Mackenzie “It’s very difficult [for energy companies] to justify allocating [R&D] capital from their legacy high return businesses to low return projects such as renewables and other clean energy. Laszlo Varro, Chief Economist at the International Energy Agency, succinctly summarizes why companies in the energy sector largely choose to avoid R&D initiatives involving nascent and/or emerging clean energy technologies as follows: “There is a natural division of labor in clean energy R&D and it only makes sense to invest in areas where you have the expertise.” And Harry Brekelmans of the Shell Oil Company concisely explains energy companies’ preferences for avoiding participation in the risky R&D innovation process and instead focusing on deployment of innovative technologies only once they have been proven by others:
Stated another way, firms in the energy sector – like firms in virtually every other industry – recognize that innovation represents a potential linchpin for future growth opportunities, but lack the in-house expertise to efficiently develop those technologies themselves and do not view current avenues for R&D spending as productive and/or efficient use of capital expenditure. The results are staggering reduction in R&D budgets, even as R&D spending across most other industries has registered significant increases over the same period. Given Houston’s outsized exposure to the energy sector, we should expect that Houston’s “double whammy” combination of (1) low rates of R&D spending in the State of Texas and (2) drastic cuts in R&D spending in the energy sector are likely to disproportionately – and possibly profoundly – impact Houston’s standing as the standard bearer for international energy innovation.
It’s time to begin the serious efforts of creating the energy innovation eco-systems that brings the best ideas and people to Houston, and leverages the collective intellectual energy, world class energy partner companies and can do environment of Texas to accelerate the growth of technology solutions that provide energy, resilience, and sustainable growth for the whole world.