07 Jan Disrupting the Alberta Business Model Through Digital
How susceptible is the Alberta business model to disruption from digital innovation? Pretty susceptible, it turns out.
The Alberta Business Model
Regular readers of this column are aware that I usually aim my commentary on broad topics, sweeping agendas and the global setting. The oil and gas industry is border agnostic, and digital technologies move across the internet at the speed of light. Location specific analysis displaces time better spent on big strategic questions. But this week I’m making an exception.
Much of my professional career has been spent toiling in Alberta’s oil sector, and the sector is facing a compounding set of headwinds that show few signs of eventual abatement. The sector calls out for fresh tactics to deal with these pressures.
But what exactly is the Alberta business model? Today’s model is to sustainably develop and produce long-life hydrocarbon resources from the oil sands (a 100+ year resource) at a world-class cost, and sell the production to US-based oil refineries. The biggest players (Suncor, Cenovus, CNRL, Imperial Oil), are now 70% of Canada’s total oil production and they are each long in oil sands. The Alberta government has historically been very active in promoting the development of these resources, by approving projects under favourable royalty terms.
Today’s business model does not involve selling oil to global markets, which would require a large pipeline to a port somewhere on the Pacific coastline, a farm of storage tanks and a jetty for loading operations.
The underlying problems of the Alberta model are that the consumption of oil in the North American market has been flat for a decade, the US has now started to export their own oil, production from oil sands has raced ahead of the capacity to ship the oil to market, and both federal and provincial governments have contributed to the headwinds with fresh regulation and higher taxation.
Disrupting the Model
In what way could this business model be disrupted by digital technologies? I think of a “disruptive” technology (or technologies used in combination) as that which can fundamentally alter the supply and demand balance in a market (in this case, the supply of oil and the demand for oil). I refer to this as primary disruption. Such disruptions could be positive (by expanding demand ahead of supply), or negative (by growing supply ahead of demand).
It’s not conceivable to me that some set of digital technologies will somehow converge to drive the demand for oil or petroleum higher in Alberta’s sole markets (the US or the rest of Canada). I also don’t see digital innovations causing the supply to somehow shrink, and so raise the price of oil and render the oil sands more economically appealing.
Primary disruption will come from using digital technologies to unlock supply (making oil more plentiful), and to reduce demand.
Companies active in Alberta’s oil sector will react to the primary disruption in the supply and demand equation by applying digital innovation to lower the costs and improve the productivity of the existing business model. Fortunately, digital technologies are well suited to this job. I refer to this as secondary disruption.
Negative primary disruptions
In North America (the market for Alberta oil and gas), the supply of hydrocarbons has grown dramatically in the past few years via the combination of multi-stage hydraulic stimulation (fracking) and horizontal drilling. These new well designs might cost $10m to drill and complete, compared to several billion for a new oil sands project. Their relatively quick delivery cycle time (under a year), presents a new platform on which to apply digital innovations.
Using AI and machine learning technologies on massive datasets describing low permeability and low porosity reservoirs (tight), petroleum engineers should be able to shift, over time, the decline curves from tight plays to resemble those of conventional wells. The pattern is already clearly seen in how decline curves have responded to better fracking techniques, proppant concentrations, and other innovations. The IEA estimates that digital innovations will add 5% to global oil reserves, or 500 billion BOE, or US$20+ trillion in incremental value.
Much of this value will accrue to the US who are the beneficiaries of massive shale resources, a competitive services sector, ample funding, and pro fossil fuel governments. The impacts are only just becoming to emerge, but they are clear—4 million barrels of daily production added in just a few years and the rise of the US as a new oil exporter.
Alberta’s oil sands business model is not as amenable to such gains. Mining operations already recover almost all of the available resource. The steam injection plays (or steam assisted gravity drainage) will benefit the most by improving recoveries. Applying fracking and horizontal drilling to known conventional resources, along with AI tools, could enhance the production of those resources as well, but it’s doubtful that the oil sands players will reverse tack and target conventional plays.
The primary disruption in demand will come from the transportation sector, which accounts for anywhere between 25% and 50% of total oil demand. Connected, autonomous, shared, and electric transportation (or CASE for short), has the potential to destroy oil demand permanently, in a market that is not growing. Capital markets and social pressures will motivate the commercial transportation sector (large fleet owners, cities) to respond to climate concerns which will trigger shifts in fleet configurations (already visible in the adoption of electric buses, for example).
Positive secondary disruptions
A few digital technologies will be key to helping the Alberta business model react to primary disruptions by targeting cost and productivity prospects.
Machine learning, artificial intelligence, neural networks, deep learning—all of these new advanced analytical tools will find a ready home in the Alberta business model. In fact, Alberta is already home to one of the world’s leading AI research houses in the University of Alberta, and the University of Calgary has launched the SODA Lab. The Alberta business model is rich in data, and most oil companies readily admit that they lack the capacity to analyse their holdings to the fullest degree possible.
The amount of money and investment pouring into AI, coupled with the phenomenon of fleet learning—individual AI engines that share what each other learn the instant they learn it—point to constantly falling cost and improving capability. Local Alberta companies are stepping up. White Whale Analytics is a clever AI start up in Calgary that is creating an AI platform for easy analytics. Osprey Informatics interprets visual data from sensors and provides real world insight. Ambyint delivers an AI engine that keeps wells working at their optimum.
Autonomous technologies (or robots) consume the AI-interpreted data to carry out real work. Heavy haulers in the oil sands mines are good examples—their onboard cameras and sensors feed data into AI machines to interpret the real world and its hazards, and the hauler starts, stops, turns and accelerates. Robots improve the productivity of existing business processes by removing the variability and cost associated with human workers.
Robots are not confined to the field. Increasingly robots are office-bound, and others exist as services available in the cloud accessed through a web browser. In the future, many industrial machines in the Alberta business model will have on-board AI capabilities through which they will make increasingly smart decisions.
NAL Resources is a pioneer in the use of robots in the back office. Demand for robot know-how is booming.
Cloud computing is the foundation for unlocking new business processes, as it has in so many other industries (retailing, transportation, media, entertainment, travel, financial services, healthcare). For example, the interface between oil companies and their suppliers is still trapped in business practices from the 1960’s. I recently worked for a super major who insisted that I send them a paper voided cheque to get set up as a supplier. When I told my son, he asked “what’s a cheque?”.
The power of apps, location-based services, a fully mobile workforce, robots, the internet of things, and distributed ledger technology all depend on using cloud-based software or cloud computing to enable those processes.
For Alberta companies that sell technologies, cloud is very compelling. Instead of developing for multiple database environments, they select one, on which they become very capable. Their customers then subscribe to services, rather than obtain licenses to use, a model that is much easier for businesses to control.
If AI and robots alter the cost and productivity of the existing business model, then blockchain technology offers the potential to radically transform the model. Blockchain delivers a new trust mechanism that is not human centric, and can be applied to asset ownership, contract execution, and identity management of people and things. Since sensors, data movements, the AI engines and the robots all need to assure they are reliable and not compromised, they will turn to blockchain technology to achieve that outcome.
In this way, blockchain opens up entirely new business models, such as asset sharing. Instead of a business needing to own an asset, it can subscribe to the asset, and pay only for the cycles consumed, which are recorded with trust on blockchain. Balance sheets are transformed when long life, low utilization assets can be available when needed. Blockchain won’t solve all the problems facing the Alberta business model, but it is the only technology that could dramatically transform the sector.
VAKT is launching petroleum trading on blockchain which will transform product sales and at the same time remove hundreds of millions in back office costs.
The Alberta business model needs to embrace the key digital innovations of cloud computing, robots, artificial intelligence and blockchain to disrupt the cost and productivity equation that has long dominated the business model.
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