Anything That Can Be Digitized Will Be. The Oil and Gas Industry Should Be On Alert.
Of all the mega trends that are impacting the oil and gas industry, the wave of digital innovation sweeping across the landscape is the most challenging to address because of its unpredictability.
Anything That Can Be Digitized Will Be Digitized
The oil and gas industry is being reshaped by changes in demand and new technologies. Growth in demand is shifting to the Middle East, Africa and Asian economies and away from Europe and North America. Clever technologies such as multi-stage hydraulic stimulation and horizontal drilling are unlocking trapped resources and transforming the U.S. from one of the world’s largest buyers of crude oil and gas to one of its largest sellers.
Less obvious is the wave of digital change that is sweeping over the industry.
Since anything that can be digitized will be digitized (startups and capital markets will make sure of that), it is only a matter of time before the effects of digital innovation are felt in oil and gas. What is uncertain is the degree of impact and the nature of impact.
The oil and gas industry will feel the effects of digital technology both directly in the business and indirectly through the adoption of digital technologies in other sectors. For example, as 3D printing improves as a technology, suppliers will offer high-quality 3D printed parts for oil and gas equipment, lowering costs, shortening the time to repair and accelerating the time to value for resource production.
Printing a part locally also lowers greenhouse gas emissions through a reduction in shipping costs. Applied across manufacturing globally, 3D printing could transform entire supply chains while simultaneously delivering a reduction in fuel consumption.
Digitizing Fuel Delivery
Different responses to digital technology may be appropriate depending on where in the value chain a company participates. A technology company selling software or SCADA systems to greenfield oil installations will need to respond more quickly to this technology than a pipeline operator that has long contracts and a captive market.
Fuel retailing as a segment has not materially changed since the arrival of payment systems at fuel pumps, but new apps that let customers arrange for fuel delivery directly to their car may render convenience stores obsolete.
Drilling companies whose rig fleets turn over every three years will be able to add smart systems—such as sensors that can monitor temperature, vibration and rotation and provide insights on the operating conditions of pumps, valves and other equipment above and below the surface, allowing maintenance to be scheduled according to condition. But oil refineries will struggle to introduce new sensors faster than the current turnaround schedule.
Wait and see is not an option. Companies can harvest the hard-to-digitize profit pools in the industry, abandon the market or defend their position.
The Value of Being Integrated
Regardless of competitive position in the value chain, companies will eventually face a new digitally enabled market entrant. Since wait and see is not an option, companies can harvest the hard-to-digitize profit pools in the industry, abandon the market or defend their position.
It is the integrated oil and gas companies that are in a unique position to manage digital change. The operations of these companies cover the whole oil and gas value chain, across the “upstream,” “midstream” and “downstream” sectors—i.e., everything from the discovery and tapping of the crude resource to the refining and distribution of the product to consumers. By participating in many segments of the industry, these players can more readily detect the arrival of creative new digital solutions and the conditions that enable these new solutions to take hold.
With visibility of the entire chain, they have unique inside knowledge of the profitability of the whole industry, its pain points and its legacy technology. Blessed with vast holdings of data on the industry, they have a tempting new asset to harvest for insight, value and competitive advantage.
‘Out-Innovating’ the Startups
As many as 10 distinct technologies are likely to disrupt the oil and gas sector: analytics, artificial intelligence, augmented/virtual reality, mobility, robotics, cloud computing, the Internet of Things, advanced computer modeling, 3D printing and blockchain. A survey published in The National also shows that more than a third of oil and gas companies are already investing in big data analytics; nearly half of these companies are investing in the Internet of Things; and more than half of these companies are investing in mobile devices.
As one industry executive noted, “The computer power available today has enabled processing sub-surface data in hours and days instead of months and years. This has enabled teams to make decisions based on current reservoir conditions, which saves costs”—particularly important in environments such as Oman’s Khazzan field, where hard rock makes gas difficult to tap.
Another major company has begun to drive down costs by integrating AI into its systems—looking to save an estimated $325,000 per rig by using analytics to more accurately pinpoint the locations of its drills.
Blockchain Governing Oil Contracts
And then there is blockchain. Since an oil well requires contracts governing the lease and rent of equipment—with its costs, revenues and ownership distributed across a number of counterparties—blockchain could find an ideal application.
In Alberta, Canada, the common use of distributed ledger technology and “smart contracts” (which self-execute digitally and irreversibly) could save the oil and gas industry up to $2 billion by avoiding royalty disputes.
Digital transformation could unlock more than $1.5 trillion in new value for the global industry. The benefits include everything from increased revenue, as a result of increased production and reduced downtime, to increased capital efficiency, via improved asset use and capital reduction.
Cut production costs and overheads would result in reduced operating expenditure; reduced asset risks and improved health and safety programs would dampen down operational risks; and sharing data across integrated companies would create fresh insights and value. Peers should keep a watchful gaze on how this transformation agenda plays out.