29 Oct Digital Oil and Gas Still in Early Innings
The oil and gas industry is clearly into digital innovation, but if this was like a baseball game, what inning are we in?
This past week I was invited to address ARC Financial’s CEO Summit on the impacts of digital innovation in oil and gas. Jackie Forrest, the Senior Director of Research at the ARC Energy Research Institute, interviewed me on stage, and asked me how I would compare the adoption of digital innovation to a baseball game. Well, I know a thing or two about baseball, so game on!
Baseball was a childhood pastime of mine. My dad had a pair of the oldest baseball gloves imaginable and in hindsight, they really belonged in a museum. He taught me and my brother how to throw and catch the ball, how to hit, and eventually I entered a short-lived career playing sandlot ball near Forest Hills Elementary School in Saint John, NB. I gravitated between pitching and catching, because those two positions were the most active in the game, and I was pretty good slugger. The unique twists in our version of the game were the frequent postponements due to fog, which was sometimes so thick that the fielders could not see home plate to know if a ball was coming their way.
It’s Early Innings
I believe we’re in the early innings in this digital adoption wave. There are few, if any, sizeable software companies devoted to oil and gas whose success is tied to digital innovation, which implies that digital hasn’t yet triggered the kind of viral growth you see in the consumer area. Calgary’s Global Petroleum Show, one of the preeminent venues to check out the latest developments for the industry, set aside perhaps 10% of the exhibition space for purely digital solutions, and the vast majority of the exhibitors had yet to incorporate any digital innovations into their wares. I can’t think of a single oil and gas outfit who has elected to distinguish themselves from their peers through their aggressive use of digital innovation.
Even having a conference devoted to digital innovation in the industry is probably a sign that digital is only just a topic of conversation.
Certainly in Calgary, most oil and gas producers have only tentatively begun to explore digital and what it can do for them. My team of researchers looked at dozens of oil and gas producers and services companies for clear signs of digital awareness, and came up short. There isn’t the executive leadership that you’d see in other industries. A meeting of Calgary’s oil and gas Chief Digital Officers could be held in the back seat of an Uber.
It’s clearly not too late to get started.
Big League Ball
Some companies play pretty sophisticated ball already.
At the ARC event, the CEO of one of the city’s early adopters sketched out how his company was winning through digital innovation. They added $100m of new free cash flow on a base of $200m (a 50% improvement at a time of depressingly low prices) through digital. They purchased thousands of barrels of new production through an acquisition and did not add headcount to their production accounting team (normally buying production brings fresh headcount), because of digital. They eliminated all royalty and payment disputes with their joint venture counter parties. The accounts payable function had been simply automated out of existence, with over 95% of all payments being completed electronically.
One of their stated goals was to run 100% of their production wells at 100% of their productive capacity 100% of the time. Of course, this is impossible to achieve (things need maintenance after all), but they concluded that digital innovations like predictive maintenance through artificial intelligence would move them much closer to this goal. A second goal was to eliminate well site visits by operators. Digital tools like remote monitoring, cameras and sensors would downshift well visits from the usual circuit run to a “by exception” model. Operators visiting a well know exactly what awaits them, making the trip far less stressful.
Perhaps the most significant gain they experienced was capacity expansion. Digital innovations, like robotic process automation, freed up their talent to spend time working on the business, rather than in the business, doing analysis and not data gathering. These productivity gains meant that the company priced acquisitions more aggressively than the competition, which created a superior growth engine.
It’s clear that this company is moving into the middle innings, building up a lead.
Coming From Behind
The thing about baseball is that even when your team is falls behind, there’s always a chance it can catch up. A pitcher flags as the game wears on, the hitters come to life, a rally gets going and pretty soon some runs appear on the board. I’m not so sure that’s true of digital.
The world is littered with companies who thought they could catch up after some digital innovations began to appear. Taxi companies and Uber, bricks and mortar retailers and Amazon, newspapers and Google News, movie rentals and Netflix, music sales and iTunes. Only those outfits with truly gargantuan scale with the resource depth and big turnover look like they can play into middle innings and survive. Walmart is a case in point — they waited a very long time to match Amazon’s online model, but they are surviving.
To catch up, oil and gas leadership teams must want to catch up. It won’t happen unless managers agree that they need to chase the leaders, because companies will need new talent, new ways of working, new coaching and new tools.
Catching up has to happen on the field, and in the game. Unlike baseball, where players practice before the game—and I don’t mean a warm up, I mean pitching, batting and fielding practice—oil and gas companies jump straight to playing. In fact, few companies even have a budget or resources for things like trials, experiments and proofs of concepts in digital. That sort of thing feels like science projects for engineers, and most leadership teams want their people focused on the day to day of production and making money.
The New Game
Have you watched the movie Moneyball? It’s a 2011 movie about the 2002 Oakland Athletics and their extraordinary rise to the top of Major League Baseball. Using analytics to find undervalued players and to build a killer team on a shoestring payroll, they matched the highly paid New York Yankees in wins, but spent only $260 thousand per win, versus $1.4 million.
Many naysayers refused to admit that baseball had changed, but change it had. Now, analytics are ubiquitous in sports, not just baseball. Years ago, I worked on a pro bono project for Bobsleigh Canada Skeleton in the run up to the Vancouver Olympics, where we strapped a $100 sensor to a sled using duct tape, and recorded velocity, pitch and turns as the teams descended during practice runs. At that time, no one had any real data about how the skipper was commanding the sled, choosing the line, and managing the turns. Suddenly we had analytics. We had changed the game.
I believe oil and gas is entering a new game, but too many companies are still playing the old game. Perhaps they’re still thinking about it. Perhaps they’re waiting for a leader to emerge.
Most worryingly, they may be unable to acknowledge the warning signs that the game has changed. They’re still bringing their hockey sticks to the ball park.
Get In The Game
Moneyball is instructive for the management lessons that it teaches, and these apply fully to oil and gas and this digital wave.
Some talent has to go
Billy Beane fires one of his talent scouts who refuses to embrace new ways of thinking. Identify who on your team is not getting on board, and move them on.
Educate the owner
In Moneyball, the GM periodically educates the owner on the new ways of working, how it’s progressing and his needs. Be ready to educate your shareholders, investors and market analysts. They are all aware of the need for change and are keen to hear your story.
Coach the team
Scene after scene shows the GM talking to the players about the new game. Management has to bring the rest of the team along for the journey. Spend hours on the road, meeting with the team and telling them the story of change.
Fight for what you need
Some old stones won’t easily move. In Moneyball, Art Howe the coach disagrees with the GM about the new ways of working and refuses to go along. Eventually, the GM forces the coach to comply by trading key talent. Once you’re convinced that your digital innovations are correct, make bold moves that telegraph you’re serious.
We’re in the early innings of a brand new game. If you’re in it to win, learn the new rules.
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