A sector in flux

The global energy sector is experiencing supply-side and demand-force shifts resulting in reduced profit margins. Industry experts consider this the new normal. Expected changes ahead are immense. The U.S. is forecasted to become the fourth largest global oil exporter by 2022, behind Saudi Arabia, Russia, and Iraq. The growth in global sources of hydrocarbons from U.S. shale and offshore resources will account for approximately 12 per cent and 18 per cent, respectively. The easy-on, easy-off production of shale has changed portfolio management, as shale drilling is profitable, even if hydrocarbon prices sink to roughly US$45 per barrel.

Additionally, changed geopolitical energy supplies have the US Light Tight Oil forecasted to become the lead producer, rather than the Middle East. OPEC’s role is evolving in response to the emergence of new energy frontiers.

To further exacerbate the unsettled landscape, renewable energy is more economical. The cost of solar power is forecasted to reduce by 60 per cent by 2025. Lastly, the energy sector is adapting to a plethora of new technologies and materials resulting in increased efficiencies in hydrocarbon extraction. On the demand side, historically the Organisation for Economic Co-operation and Development (OECD) countries were the core consumers of petroleum products and accounted for the significant growth in demand for oil and gas (O&G).

However, recently, non-OECD countries have taken the lead and now account for approximately 96 per cent of the increase in demand for energy.

Why? One reason is that Millennials’ consume less energy. The adoption of electric and autonomous vehicles has reduced the market for oil by approximately one-and-a-half-million barrels per day. Further exacerbating the downward pressure on demand are renewables and developments in storage capabilities such as batteries.

Two additional factors dampening demand are changing utility models, including the use of smart grids and energy monitoring by consumers, and a global shift in climate regulation with a focus on reduction in emissions (World Economic Forum and Accenture, 2017).

In response, O&G companies seek to make strategic investments to provide stable cash flows in against forecasted oil prices between $50 and $60 a barrel. The tactics vary, e.g., Total and Shell are focused on renewable power, while Devon, ConocoPhillips, and BP look to improve their core holdings to generate cash flow. Devon and ConocoPhillips are also expanding theirs in shale. BP is investing in deep-water exploration and production. ExxonMobil and Shell view petrochemical manufacturing and lubricant sales as worthwhile. Are these the correct responses long-term?

Are there other options that will set O&G companies on a better footing? Yes!

Digital opportunities for entities in the oil and gas sector

For a sector in flux, significant opportunities do exist. An analysis by Oliver Wyman (2017), concluded that this new norm for the industry coincided with advances in cloud computing, the digital oil field, service-oriented architectures, and industrialization that have dramatically expanded management’s ability to reduce IT costs while increasing business-wide agility and efficiency. The report indicates how IT value optimization can result in step-change value creation over time including the decreased cost to serve; reduced complexity; increased responsiveness; and, higher business performance and efficiency.

Further, Oliver Wyman continues, for the entities that get IT-enabled value optimization correct, the financial and operational rewards will be astounding, including:

• 25 per cent or more in selling, general, and administrative, and operating cost savings
• 8 per cent or higher production rates
• 2-4 per cent lower production costs
• And, ultimately, 10-20 per cent bottom-line (EBIT) improvement

As current fields are depleted, and firms are forced to find more complex, remote, and costly sources of energy, especially during prolonged periods of low oil and gas prices, the efficiency boost (above) will be crucial for survival.

A report by Smart, Adams, and James (2017), outlined multiple digital opportunities for the oil and gas sector and how to convert such opportunities. It all starts with the ability to articulate a clear digital strategy into the overall business plan, which will allow the organization to allocate proper resources toward its goals and avoid non-productive investments.

Employing a value-adding capacity of digital technologies to improve operational efficiency and build synergies with relevant business partners is an additional benefit. Another opportunity for value creation is the use of digital platforms and innovations to create value as an asset category. In other words, firms should demand similar financial performance from their investments in their core businesses (oil and gas) and their digital assets.

The net benefits of this strategy will be improved economic margins through digital solutions and the relinquishment of overreliance on the oil and gas business as the sole breadwinner. The third is for a transformation of the consumer process toward personalization and seamless experiences.

As the oil and gas sector adopts digital technologies in its operations, including artificial intelligence and robotics, performance and efficiencies will improve, and downtime and expensive shutdowns will be reduced.

The fourth opportunity for value creation is the transformation of business models for entities throughout the oil and gas value chain toward digital-centered models to gain maximum efficiency without the lag associated with old-fashioned methods.

The role of the chief digital officer to propel digital strategy

To reap maximum benefits from a robust digital strategy, the leader—its chief digital officer (CDO)—must be an executive with a strong background in business architecture and accomplished in change management, but most importantly, the individual must have experience in leading a culture change.

Hard skills associated with this position include the capability to reinforce the entity’s strategic vision; the ability to timely identify problems, including their root causes, and resolve them; expertise in leading business transformations, particularly business architecture and change management; and, the leadership relationship building and management skills necessary to facilitate collaborative relationships among different functions in the organization.

The CDO must also possess leadership skills and charisma to stimulate the organization and drive the digital transformation through effective change management. The O&G industry has the most to gain from the incorporation of CDOs and the maximization of digital opportunities. The study noted that the O&G sector had the lowest percentage of CDOs (3 per cent) of the segment any evaluated.

The leading industries were insurance (35 per cent), communication (28 per cent), media and entertainment (27 per cent), and banking (27 per cent), with retail and consumer products right up there.

Use of digital transformation to improve the business model

According to Santamarta, Singh, and Forbes (2017), the envisaged digital solutions in the upstream oil and gas ecosystem will be realized via business model transformations in four stacks: exploration; project; drilling and well; and production.

The investment in the exploration stack includes investments in machine learning to enhance reservoir modeling. Operators and oil-field service (OFS) service firms will share in this; however, operators must manage the oil and gas value chain to ensure that the majority of critical data belongs to them as it has enormous competitive value and will keep the operators at the forefront of the energy sector. The investment in the project stack will incorporate digital modeling and simulation tools to build a single digital framework to integrate reservoir data, field architecture, equipment design, and economics.

The goals are improved decision making for the process and overall economic viability of the oil and gas fields. Compensation shifts from hourly wages to remuneration based on efficiency. For the drilling and well stack, the focus will be on building closed-loop, independent drilling systems. Rig owners must have cooperation among oil field suppliers (OFS), OEMs, and automated drilling systems to provide increased efficiency, reduced costs, time-savings, and improved quality of the wellbores.

Again, compensation will shift to efficiency-based incentives for rewarding firms with the most proficient technologies. Digital benefits at the production stack will be realized through operational performance improvement. Big data will facilitate predictive maintenance, improve uptime, and increase the performance of mission-critical machinery in the production process. The integration of data from various sources will allow continuous updating of reservoir models and will enhance the rate of production and recovery.

In sum, the global energy sector’s early successful adaptors of the best digital strategies, adequately implemented and inculcated, will make strides against their competitors and will be well-positioned to survive as the energy sector continues to shift and evolve in the future.

*First published in Pipeline Oil and Gas Magazine https://www.pipelineoilandgasnews.com/interviewsfeatures/interviews/2018/october/how-digital-transformation-will-unlock-value/