13 May Is It Game Over for Digital in Oil and Gas?
Is digital transformation all over in Alberta’s oil and gas industry? That seems to be the feedback some Alberta companies are giving to conference organizers. It couldn’t be further from the truth.
Is Digital All Done in Oil and Gas?
A conference organizer contacted me this week to confirm his findings from a recent trip to Calgary. He’s contemplating bringing a conference about digital transformation that he organizes in other Canadian cities to the heart of oil country, but is receiving a discouraging reaction to this idea. He floated it with a number of large companies about the demand for such a conference and was politely told that oil and gas was already digital.
It’s completely accurate that some aspects of oil and gas are highly digital. The upstream sector is very data intense, and has been collecting and interpreting seismic data for decades now. Big oil companies match governments in their ownership of super large data centers and supercomputers to process their data holdings. The industry has a history of selling data which I have not encountered in any other sector. The upstream sector connects almost all of its infrastructure to SCADA equipment.
But the oil and gas approach to digital is consistently out of sync with a digital world that is expanding in capability on an exponential basis (every 18 months, something that is digital has doubled in capacity and halved in cost). The industry business model anticipates scarcity of data, storage, and computational horsepower, a few large business partners, and a stately pace of change. The business reality is rapidly shifting with a super-abundance of data, unlimited storage, and flexible on demand analytics, lots of clever start up innovators, and a hyper kinetic business cadence. A single digital company, Amazon, designs, tests and introduces over 50,000,000 software updates a year, during which time an oil and gas company might launch a few hundred.
To describe the industry as “already digital” is a mischievous misdirection.
The Problems of Perception
I’m alarmed that some in the industry think it helpful to paint the industry as on par with the digital industry leaders.
It communicates to next generation talent that there’s no opportunity in the industry. This isn’t healthy. The industry already faces strong headwinds from society, and the youth contemplating their career options have ample opportunities elsewhere. Instead the industry should be presenting itself as the center of digital innovation among all Canadian industries.
Capital market participants need strong encouragement to invest in oil and gas. There are a number of movements around the world to divest or severely restrict capital investment in the fossil fuel sector. The industry needs a new narrative that it is a high tech sector, not just leveraging technology but pioneering new technologies (the top six largest companies by market capitalisation are all digital companies — Apple, Alphabet, Amazon, Facebook, Microsoft and Tencent).
It robs the industry of much-needed attention from digital entrepreneurs. Since digital is impacting all industries at the same, just not at the same pace and intensity, entrepreneurs and start ups have lots of opportunity to chase. Without clear signals of interest from the industry, these entrepreneurs are going to direct their attention elsewhere.
A late adopter
There’s ample evidence that suggests oil and gas will be a late comer to the wave of digital change.
The book Digital Vortex, co-written by IMD and Cisco, looks at a dozen industry sectors to forecast the timing and impact of digital innovation. They conclude that oil and gas is 11th out of 12 sectors, well behind retail, banking, transportation, and technology. Only the pharmaceutical industry will feel the effects of digital later. I reach similar conclusions for my book, ‘Bits, Bytes, and Barrels’, where I look exclusively at the various segments of the oil and gas industry (upstream, midstream, downstream, services). The IEA, in their global study about the impact of digital on energy, argue that oil and gas would only slowly be digitalised.
This analysis all makes sense to me.
It’s much easier to design digital in than add it after the fact. Digital on paper is pretty cheap compared to adding digital to steel in operation. 85% or more of the assets in oil and gas were in place before digital was even a thing. The window for adding digital smarts is usually pretty tight—the annual or semi-annual turnaround, which is at most only a few days in duration. On off-shore platforms, the window is even tighter, particularly if hardware is involved.
Oil and gas is a cautious industry and risk averse. For this society is grateful. Spills of crude oil are hard to clean up, gas pipeline ruptures turn into fireballs, and the product is toxic. The industry applies the highest standards for human and process safety, and environmental compliance. Equipment must meet exacting engineering standards, and the introduction of new equipment, including digital, is done under strict management of change processes.
Economically, it hasn’t made much sense for the industry to invest in digital. The downturn in commodity prices in 2014 has scaled back the industry’s ability to invest, and the limited capital available tends to go towards growth in reserves or production. With conventional oil basins operating only for a few years, it is hard to justify investing in new technology. It’s challenging for managers to demonstrate with clarity that a digital investment pays off.
The culture of oil and gas industry is also biased against external digital innovation. The industry relies on industry insiders (traditional technology incumbents) to design and introduce new solutions. Those insiders are often tied to legacy technology architectures and designs that date back decades and were never designed for the more open environment within which digital thrives. They are incentivised by contracting models and licensing structures to keep small firms at bay. Big oil struggles to figure out how to work with small nimble start ups.
The Ninth Inning
Here are five signs that would convince me that the oil and gas industry has fully digitized and we’re in the final innings.
Everything is digitised
Everything that can be digitized will be digitized, according to the Digital Vortex. In oil and gas, that includes tools and equipment, rental gear, vehicles, and workers, even rocks. The cost of using digital technology has fallen to such ridiculous lows that it is no longer a driver. For example, Enersoft uses $300 consumer digital cameras (13 megapixels) to scan drilling cuttings, which it uses to build a model of the subsurface at the level of detail of a grain of sand. Each well is converted into 2 terabytes of data, which digital tools (unlike Excel) handily ingest (in comparison, Alberta’s entire well log library, built using legacy technology, is a fraction of this resolution).
Work is rethought
Oil and gas companies will design work for robots and then add humans. Today, oil and gas continues to design work around a human worker, and supplements that human with technology tools to do the job (a laptop, tablet, mobile phone). Solid industrial digital, what we can see in manufacturing, means designing jobs for a robot or an artificial intelligence engine, and figuring out the role of the human to improve the effectiveness of the bot. A survey of job postings in oil and gas suggests jobs are still very much human-first.
Technology penetration rate
The penetration rate of leading digital technologies in oil and gas is 50% or greater. According to one of its various publications, McKinsey considers a technology to be mainstream when it is implemented in 50% of an industry’s participants. “Implemented” does not mean “in pilot”, or ‘being tested”—it means fully deployed in the business. The key digital technologies that must be widely deployed for the industry to claim that digital is done include: cloud computing; bot technology; blockchain; virtual reality; and, the internet of things.
Digital oil companies exist
There will be oil and gas companies that are purely digital. Hard asset industries have consistently viewed themselves as immune to the impacts of digital innovation, but experience now shows that is a false premise. Bricks and mortar retailing, banking, mobility, transportation, hoteling, printing—all of these industries are based on converting shareholder capital into hard assets that are put to work in a business model. Every single one now has a digital market leader who competes directly in the sector, but with a fundamentally different balance sheet. The earliest example is in the downstream, where fuel delivery apps threaten the retail business model. Companion to the existence of digital oil companies, there will be bankruptcies among the old guard.
Oil and gas is rebranded
The industry will be fully rebranded back to its historical narrative as one of the most technologically advanced anywhere. For the past decade, since the BP Macondo event in 2010, the industry has been on the defensive. The narrative is about safety, environmental respect, compliance, sustainability, as the industry surrendered technology leadership to many other sectors (banking, telecoms, even digital companies). The sustainability narrative is important, but it is inherently defensive and futile since the industry cannot reduce all of its environmental impacts to zero (combusting the product creates the final unsolvable environmental effect).
Oil and gas is a long way from being digital. There is still untold opportunity for young people and tech entrepreneurs to find fortunes in the industry. Just ignore the message that the industry is a digital leader. It’s not.
Check out my new book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.
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