The upstream oil and gas sector is well behind other industries when it comes to being digitally enabled. The iconic image of “roughnecks” — overall-clad workers with oil-stained faces handling equipment on a drilling rig — has not changed much over the past few decades, even as the industry is recognized for its technological innovation. Yet look at a modern-day automotive manufacturing plant, where lines of workers assembling individual car parts already have been largely replaced by robots. The difference between the two images is clear.
That said, there is an enormous amount of interest in and expectation around the benefits that digital solutions can bring. Although many oil and gas companies are trying out new digital ways of working, no one can claim to have “cracked it” just yet. We believe there are some basic guiding principles that companies should consider when developing their digital business models:
In its 2017 Digitization & Energy report, the International Energy Agency estimates that digital technologies could cut production costs by as much as 20 percent. We conservatively estimate that use of digital technologies in the upstream sector could result in cumulative savings in capital expenditures and operating expenditures of US$100 billion to $1 trillion by 2025. Our own experience confirms this significant potential. As illustrated in Exhibit 1, savings can be realized in operational excellence (such as more efficient maintenance and better operation of assets); in the supply chain; in the use of artificial intelligence; and in the use of integrated platforms (connecting the organization with external partners).
Many upstream companies have for some time been using elements of digitization, which we define as the strategic business value of data-based technology that includes the Internet of Things (IoT), cloud computing, and artificial intelligence. Examples of these elements are 3D seismic technology, unmanned oil and gas installations in the Dutch and Danish parts of the North Sea, and advanced reservoir modeling.
The trend toward digital innovation is accelerating across the sector because companies are much more focused on cost and driving operational efficiencies in an era of relatively low oil prices. Some major companies are already fairly far down this path. Here are a few examples:
At the other end of the spectrum, there are smaller exploration and production (E&P) companies starting to explore digital transformation. As a first step, they are setting up pilots across their organizations to assess how best to apply digitization, as well as to identify the key digital capabilities that need to be developed.
In many such cases, interest in digital transformation was triggered by the perceived threat of new entrants as much as by a desire to cut costs. Traditional operators are concerned by the emergence of unconventional players with differentiated, market-leading digital capabilities. Two good examples are Cognite, a technology company focused on upstream operations in the Norwegian part of the North Sea, and Baker Hughes General Electric, which was created in 2017 in an effort to industrialize digital capabilities.
The reason for this fairly piecemeal approach to date is the industry’s aversion to catastrophic risk, which is well known. Given the increasingly sensitive nature of offshore operations in terms of health, safety, and the environment, operators need to be sure digital technologies can be deployed without risk to operations. Moreover, the industry faces a complex set of challenges including geographically dispersed assets, legacy assets that may be in long-term production decline, and operator (the lead E&P company on a project) versus non-operator (a partner in an E&P project) status.
Why are we nonetheless seeing a gradual awakening in this sector? From a technology perspective, the growth of data analytics coupled with the industrial IoT is generating new ways of optimizing workflows. The application of “digital twin” technology opens up the possibility of replicating physical assets from fields to equipment in digital form, allowing companies to model scenarios to optimize everything from production to maintenance. Statoil has created a digital twin of the Johan Sverdrup offshore field to address troubleshooting and process improvements. The growth of cloud computing services has also enabled companies to process massive amounts of data at relatively low cost. Combine these advances in technology with the fact that the sector is heavily focused on making productivity improvements, and it is easy to appreciate why companies are increasingly excited by the potential of digital solutions.
Here are some guiding principles for operators starting out on a digital journey.
In the not too distant future, the image of oil workers manipulating drill pipe on platforms could be replaced by something dramatically different. Drilling, performance monitoring, and production optimization could become highly automated. Decision making could be transformed, as the use of augmented reality and digital twins would underpin the simulation of “first oil” — the initial amount of oil that emerges from a field that’s being commercially drilled — before final investment decisions are made. Operational excellence, with assets operated much more efficiently, could be achieved through the use of predictive maintenance and drone technology. As illustrated in Exhibit 2, next page, digital technologies could affect all elements of the value chain in a future E&P company.
As with all new business models, there will be associated risks. One key risk will be cybersecurity. As assets become increasingly connected to the network, it is important to protect critical digital infrastructure against cyber-attacks — by monitoring threats, identifying vulnerabilities, building robust controls, and promoting a culture of security awareness.
As operators explore new ways of working, some companies will be pioneers in digital solutions, and others will be fast followers. Those operators that can design and embrace a digital strategy that works for them will be well-placed to succeed in a new digital era of oil and gas. Those companies that simply view digitization as a technology play and fail to transform are likely to become digital dinosaurs and risk extinction.
Adrian Del Maestro
Head of Global Thought Leadership in Energy, Strategy& UK
Tel: +44 (0)7900 163558