Digitization is the new lubricant for the future of the oil and gas industry’s upstream sector.
With supply and demand mismatched and prices likely to remain low until that imbalance starts to ease, the need for new efficiencies is urgent. The industry is going through a wrenching period of change: The name of the game is no longer big production but better margins. Digitization — the collection, analysis, and utilization of huge amounts of data — can bring substantial operational improvements to the field through the use of sensors, analytics, robotics, and control systems.
To be sure, digitization is nothing new, but the oil and gas industry has yet to broadly embrace its implementation on an end-to-end basis. The exploration and production, or upstream, sector has been particularly slow to adapt compared with both midstream transportation and storage operations and downstream refineries and marketing functions. During the industry’s recent boom years, there didn’t seem to be a need to invest in radical new upstream technology, as high energy prices swept away much of the cost of inefficiency. Then, too, information technology has traditionally not been seen as an essential element of operations. Although the expense of these programs is moderate, the need to commit significant personnel, time, and leadership has been off-putting, especially in the face of the cultural changes required. For too many companies, digital has been relegated to a “nice to have” function, implemented in a piecemeal way with off-the-shelf systems. As a result, the technology has been installed on a siloed basis, limiting its full value.
But more companies are giving digitization another look now that the industry is struggling with a particularly painful downturn. Their future, and the industry’s, will depend in large part on how quickly they can rewire their operations to create a complete ecosystem that will set digital’s power free.
Not only does digitization bring much-needed efficiencies, but it also makes it possible for upstream companies to develop powerful new capabilities in order to benefit from smarter exploration, easier capture, and safer operations, all with much better utilized labor. Done well, digitization can also transform the planning process with its predictive analytics, giving companies a better chance to anticipate, and respond to, continuing market shifts.
And as free cash flow and the ability to generate returns become ever more important to an upstream company’s valuation, digitization can help here as well. By accelerating the industry’s very slow payments process, technology can free up cash for exploration, lower a company’s operating expenses, and contribute to higher margins per barrel.
This report examines how digitization can benefit the upstream sector and what companies can do to get around the obstacles to change. In future reports we will examine in detail similar benefits for midstream and downstream players. (For a general overview, see “The impact on other sectors.”)
Digitization hasn’t quite yet ripened into a full-fledged revolution in upstream oil and gas. But it will. Digital has the power to help the sector reap the most from its boom periods and avoid the worst damage when things go bust. The sector is starting to fully recognize that power, and more and more upstream companies are scrambling to seize it.
As with any revolution, those in the vanguard tend to do better than those on the sidelines. In this revolution, the oil and gas companies that wring out new efficiencies by building sustainable digital capabilities will be tomorrow’s winners.