03 May Recasting Energy System Resilience for the Digital Age Part 2
We need resilient energy systems. Our energy systems need to be tough and elastic to recover quickly from events and mishaps. But we now need them to be a bit more adaptive and agile (Part 2).
(This is a partial text of a 45 minute address that I offer to energy companies driving change in their workforce. Here is Part 1. Contact me if you would like to learn more).
Three Laws of Digital
There are three underlying laws about digital.
The first is Moore’s Law, named after Gordon Moore, who was the founder of Intel, and no relation to Roger Moore, who invented the dry martini, shaken not stirred. Gordon noted that the density of transistors on a circuit board doubled every 18 months, an exponential rate of change.
Moore’s law applies to exponential changes in all kinds of man-made things, including reduction in power, or growth in capability or capacity, or a fall in cost. And to earthly natural things like COVID 19 growth rates.
In business terms, Moore’s Law is a compounded annual growth rate of 40%. If we can earn a 1% interest on our savings account, we declare victory over the banking industry. Imagine 40%, year on year, for 4 decades!
We really struggle to grasp this phenomenon because we’re linear beings in a linear world.
If you’re a golfer, you know what I mean. Golfers gauge linear distance with ease. Let’s imagine your shot lands in the fairway and your next shot is to the green. Can a hacker golfer guess how far you are from the pin and what club to use?
For sure. 90 yards is some kind of iron club. 30 yards is a wedge club.
But what is 30 exponential yards? 68 trillion yards, or 206 trillion feet or 210 round trips from earth to the sun.
Things subject to Moore’s Law are changing at this crazy pace, particularly the chips that power the digital world.
There are four kinds of chips that are all growing in number and features at 40% per year.
- Sensor chips that generate data.
- Data chips where we store data.
- Computer chips that do computations on the data.
- Communications chips that move the data and the math results around.
They are collapsing in size, price, and power needs, and growing in throughput, speed, capacity, at 40% compounded per year. Data, analytics and communications are effectively free.
A terabyte is a 1000 gigabytes, and costs $2-3 dollars. 1 terabyte is 500m pages of text. Single spaced. A short haul flight generates 500gb data, a long haul several terabytes. But who cares? It costs just $2.
My $300 Apple Watch has the same computer horsepower as a $6m Cray supercomputer from the 1980s.
In 1984, the world transmitted 1 terabyte of data monthly between continents. We now do that every second. This is a 2.5 million times growth rate.
We can see the impacts in YouTube video watching, photos on our phones, the price of USB sticks, Netflix streaming. When I was a kid, photos cost money. You paid for the film. You paid for development. You paid for the prints. Photos are now free. How else would you rationalise people taking pictures of food, cats and Justin Trudeau?
Cisco, a telecoms company, says that anything that can be digitised will be digitised.
A company called Enersoft in Calgary is a good example. They take HD photos and other measurements of drilling cuttings at a well drilling site, load the data into a cloud database, and then apply artificial intelligence software to piece together the data while drilling. Their system is one million times more detailed than conventional analysis and it happens in real time. The costs are a fraction of the traditional oil industry analysis approach and slow lab turn around.
The second law of digital is Metcalfe’s law. Robert Metcalfe was a researcher at the time of Margaret Thatcher’s government in the UK. His task was to calculate the value of British Telecom, a kind of network asset business, so that Margaret could price it properly. He determined that the value of a network asset is N squared where N is the number of nodes on the network.
Networks become natural monopolies. That’s why we regulate pipelines. Pipelines are monopolies.
Sure enough, networks are appearing everywhere. Automakers have networks of connected cars. Many homes now feature networked thermostats from Nest and Eccobee, and security systems of cameras and motion sensors.
Entrepreneurs everywhere are looking to build networks of connected things that produce data. They’re trying to grow N at 40% compounded because it’s worth N squared. We call such businesses unicorns because they have such huge value.
And where are entrepreneurs looking for opportunity? Anywhere that is stable and hasn’t changed in years. What we call resilient.
Companies that figure out how to harness these digital laws gain hugely as you can see from their trillion dollar stock prices.
The Data Law
The third law is that digital is all about the data. Digital companies excel in creating and extracting value from their data.
Google does this with search results. Netflix does this with your atrocious viewing habits. Facebook does this with ads. Don’t get me started on Twitter. TikTok?
The energy industry practically invented big data. We’ve been selling subsurface data for years. Our SCADA historians generate torrents of data. But we stop there.
Our industry treats data like a scarce commodity, to be hoarded, kept confidential, to be used as a weapon, or just ignored.
The capital market knows this, and our stock prices suffer.
So why now?
Because the timing is right. The pandemic has primed the pump for us. There’s ample evidence that digital works. We have undervalued data. Undervalued stock prices. A capital market opportunity. There are billions of dollars waiting to invest in digital innovation in energy. Our industry is aging fast and we need young people. Our industry is ripe because it’s resilient.
Why Not Delay?
What happens if we delay a little, until conditions improve. Like the end of the pandemic, or when the price of oil goes up. Or when pigs fly.
Let me recount the story of Tesla the car company.
The 2008 Roadster
The first Tesla vehicle was the roadster, which debuted in 2008. As a car it was unremarkable. It barely worked. Automakers dismissed it as junk, and the company as a joke, a hobby, not serious, the inventor a flaky dot com entrepreneur with an outsized ego. And those are his good points.
The 2012 Model S
The model S appeared in 2012 and along with it, a network of cars to exploit Metcalfe’s Law. Automakers mocked its high cost, short range, long charge times, lack of charge points, and modest production volumes, and the console was this huge ipad. It made fart noises and had something called ludicrous mode. It was more like a mobile phone than a proper car. It had an imperceptibly small market share.
The 2015 Model 3
The model 3 preorders started in 2015, with first vehicles in 2017. Automakers laughed at the idiots who pre-ordered. No one pre orders cars. There was no way Tesla could produce a low cost electric car for the masses. Quality would be poor, the supply chain didn’t exist, the battery factories were unable to keep up, there’s no dealer network. The company spent months in production hell.
The 2016 Model X
The model X appeared in 2016, with its cool gull wing doors, and ridiculous price tag of $150k. Automakers laughed off the doors as impractical, easily broken, and the car couldn’t take a roof rack. What kind of SUV can’t support a roof rack?
The 2019 Model Y
The model Y was announced in 2019 with first model rolling off the assembly line in 2020. The model Y is an SUV version of the model 3 sharing 75% of its parts.
You might dismiss this as a one off, just so much Tesla noise, from a bitcoin loving flame throwing nut job. And those are his good points.
But Telsa’s market cap is now $700b, and is worth as much as the next 9 auto companies combined. Germany’s auto industry is 5 times the size of Canada’s oil industry. Germany’s auto sector is in full national meltdown. Hundreds of thousands of high paid jobs are at risk.
Did you know that Ford has had just 13 CEOs in 118 years, but 4 in the last 7 years? Toyota says that Tesla, which is just 13 years old, now has a 6 year advantage over Toyota in vehicle electronics. The top 6 automakers in the world by volume who produce 50% of the world’s cars (GM, Ford, Volkswagen, Toyota, Daimler, Honda) have all announced plans to shift over to electric vehicles. They have all been forced to change.
And it’s been the same story for music, photos (kodak), retailing (ToysRUs), newspapers, maps, phone books, entertainment, movies, games, financial services, pharmaceuticals, manufacturing and telecoms.
The truly subtle thing about stuff that is being built to Moore’s Law and Metcalfe’s Law is that they are initially unremarkable and imperceptible. They often fail. They’re hard work to get right.
And then suddenly, they’re everywhere and it’s too late to do anything. They dominate. If you delay, you fall behind, and then it’s impossible to catch up.
Delay is not just a bad strategy, it’s a terminal strategy.
And you can’t tell whether you’re behind or ahead because these digital changes all start out like Tesla, unremarkable and imperceptibly small.
How Much Time Remains
How much time does the energy company of today have? How do you tell? One way is to see how capital markets value energy companies. Fortunately for the energy industry, capital markets do not believe any energy company has broken out from the pack. So there is still time. You still have time.
Bad Outcomes and Good Outcomes
Now to Mike’s last question: what bad things happen if you do nothing, and what good things might come your way?
It’s difficult to be definitive about specific things that will happen to any one company.
But here’s been the experiences of others.
Inability to attract talent.
This is already a factor in energy, and you can’t grow your company if you can’t hire the right people.
Inability to attract capital.
It takes capital to grow and issuing shares with low prices means you dilute the ownership for not much money.
Take over risk grows.
Low share price means you are more easily acquired. You don’t want to ever be the target of a take over. I’ve been part of three acquisitions (Touche Ross and Deloitte Haskins and Sells; Suncor and PetroCanada; and Fortress Investments and Intrawest) and the acquired never come out ahead.
Risk of divestiture.
GM has had to sell off its businesses around the world to raise the funds to transform the company. You don’t want to be sold.
Personally, I prefer to think of the good things coming your way if you can be a bit more adaptable and a bit more agile.
- You’re a talent magnet. Young people want to work for responsible companies, for companies with leading technology.
- You get invited back to schools to talk about your work.
- Your brand is sexy again. You’re respected.
- You can grow the business, which creates personal opportunities.
- You become valuable, which protects your pension and your livelihoods.
- You become the hunter, not the hunted.
We are rightfully proud of our resiliency in the energy industry, our toughness, our elasticity. It serves us very well. But what we need is a bit more adaptability to absorb change and agility to move a bit more quickly. We know we can. We’ve proven it during the pandemic.
Here’s my formula for finding your digital success.
- Things generate data that machine learning interprets and robots apply.
Let me just repeat that.
- Things generate data that machine learning interprets and robots apply.
Every business, every division, every team, every unit, every machine, every tool generates and consumes data that has the potential to create value.
As we add sensors (basically chips that combine data and communications), we create exponentially growing data.
Machine learning algorithms interpret the data and provide instructions for robots and automation to execute.
These four things, combined and recombined, create signature ways of working.
So what do you need to do?
Look for parts of your business that have not been changed by technology in 5 years, and ask where digital technologies might work. There’s probably a new signature way of working to unlock.
Next time someone wants to introduce some change, consider if they’ve discovered something going on that is presently imperceptible and unremarkable, but might lead to something dramatic. Are Moore and Metcalfe lurking in the shadows?
Next time you discover something interesting and digital in your personal life, ask yourself if it could have a bearing on your work life. Are your kids playing with augmented reality goggles? Bring them to work. Are you using a cool new app in your hobby? Bring it to work.
Climbing a Mountain
A friend of mine, Esther Colwill, is one of those rare people of extraordinary accomplishment. She has climbed to the top of the tallest mountains on all the continents (yes, that includes Everest). She used to invite me to go hiking with her in the Rockies. It’s very intimidating to be asked by someone who has stood on the summit of Mt Everest to go hiking.
I asked her once how she convinced people to take a day off and climb a mountain — walking relentlessly up hill carrying all your water and food, taking a crap in the woods, getting sunburnt, encountering bears, avoiding forest fires. And that’s on a good day.
Esther said you never tell people how hard the journey is going to be. They’ll never come with you. Instead, tell them about the view from the top.
How on Mt Everest, you can see that the earth is round. The stars don’t twinkle because there’s no atmosphere. You can see for 336 km, the distance between Calgary and Edmonton. Imagine being able to look down on Calgary from Edmonton. Actually Edmontonians already do.
Next time you dwell on how hard the change is, ask if you’re concentrating too much on the pain of the journey and not enough on the magnificence of the destination.
As our time together comes to an end, let me close with a few final thoughts.
We need our energy systems to be resilient, tough and elastic.
But we also now need our energy systems to be adaptive and agile so we can capture cost and productivity gains, improve environmental performance and attract talent, and renew the faith of the capital markets in our efforts.
The pandemic has created just the right conditions to do this now and has shown us how.
And the combination of Moore and Metcalfe, and the miracle of computer chips, are both the secret to our success and the implement of our demise.
Waiting for some future perfect set of conditions won’t work.
At times it will feel slow and painful, unremarkable and imperceptible, like climbing a mountain.
But the prize, to secure our present and our future, to be the next generation leaders of the energy industry, is within your grasp.
This is a partial text of a 45 minute address that I offer to energy companies driving change in their workforce. Contact me if you would like to learn more.
Check out my book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.
Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course.
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