27 Apr The Time of the Digital Ecosystem is Nigh
Successful industries have successful ecosystems. Now is the time for the digital ecosystem to help reshape and reform oil and gas, and capitalize on the opportunity.
This post are my remarks for a webinar on the topic of the digital ecosystem.
My First Digital Project
My first true digital project was for a bus company that drove workers from an oil town to the oil production fields.
At first glance, I thought this was a simple business. The buses run a series of routes in the town picking up workers, and drive the highway to the site. Once there, the buses collect the workers who just ended their shift and drive the routes in reverse. This process repeats at shift change, 2-3 times/day.
But when it came time to renew the contract, the oil company informed the bus company that their service was stuck in the ‘Stone Age’. Usage data was paper based, invoices were perpetually wrong, and worker complaints were rising. Unless the bus company fixed the service, or discounted the price dramatically, the contract would not be renewed. This would be a devastation — there’s no alternative use for a fleet of buses in the area.
My job was to help the CEO reimagine the business. We decided to make the bus an extension of the oil company’s business, rather than a service that they simply purchased.
We reimagined the bus as a kind of mobile office on wheels. We installed WIFI and GPS on the buses. We deployed a new ERP system to eliminate all the manual paper work. Finally, we invested in a clever analytics system to optimise driver shifts, pick up routes, and bus utilization.
The day we turned the system on, we gathered around a big monitor and watched one of the buses getting coffee from a drive-through, and backing up into a light pole. The CEO was not amused.
The improvements were much more than we hoped for. We dramatically reduced the number of routes and simultaneously improved pick up times. This reduced fuel usage, creating a carbon saving, and prolonged the life of the brake pads, reducing maintenance costs. Safety went way up. We even freed up a number of buses, allowing the company to take on other contracts with no further capital outlay.
The next year, at renewal, the oil company declared the bus company to be “light years ahead” of even the oil company. They happily renewed the contract as a win-win.
A successful oil and gas industry has a successful ecosystem. Ecosystems of customers, suppliers, banks, scientists, investors, innovators, researchers, think tanks, advisors, entrepreneurs, technology houses, and regulators, and buses. Few industries, and even fewer companies, can be successful by working entirely on their own. Deep insight, customer responsiveness, and collaboration create confident investments throughout the supply chain.
In this case, a traditional services company used a crisis to embrace digital technologies and digital partners to shape and transform their slice of the industry, and secured a prosperous future.
A Titanic Struggle to Survive
Today, though, the oil and gas industry is in a struggle to survive, let alone be successful. Let’s call it a terrible, horrible, no good very bad year.
- Global GDP will be in recession, down 3.3% this year, or as much as $9T, according to the IMF.
- The G20 has poured $5T in economic stimulus to sustain their economies during the lockdown.
- The IEA forecasts daily oil demand to be down this entire year by 9.3m bpd.
- Brent has fallen by 86% this year, from $70 down to $9.
- Led by OPEC and Russia, the market is flooded with oil, with the EIA forecasting up to 1.6b barrels of production with no customer.
- Capital spend for the coming year looks to be 20-30% less. Canada has cut $4.4b in capital spend. In 2008, almost $1T was cut from capital spend.
- Standard and Poors says that 95% of tracked oil and gas companies have distressed credit ratios. Bond yields are greater than during 2008.
- Bankruptcies in the upstream and services are already underway, because of looming refinancing needs.
- Long term structural issues — stranding assets, decarbonisation, environmental activism — have not gone away.
Vessel tracking software reveals the state of the inventory build up. Here’s a shot from Long Beach CA. All those red dots are crude carriers not moving.
Anyone working in the industry is suffering. Even governments dependent on the royalties from oil and gas are struggling. And the turnaround is uncertain.
The oil and gas industry can’t grow its way out. It has no option but to capture all possible cost and productivity improvements to survive. And there will be many shifts in behaviour in the industry that will give rise to new opportunity. Social distancing alone creates demand pull for innovation.
It turns out the ecosystem for oil and gas is very important in this endeavor.
The Ecosystem Struggle
One of the reasons the oil and gas industry has been successful is because it has a strong ecosystem. The ecosystem is global, and ideas move easily from place to place. Solution discovery is easy because of oil and gas trade shows, conferences and journals.
And oil and gas is highly dependent on its ecosystem for innovation. A survey by Prof Rob Perrons shows just how much. Services companies account for the vast majority of the innovation in the sector. This is a legacy effect from the 1980s when the industry restructured and created the big services companies like Schlumberger, BakerHughes, Halliburton and many others.
The rest of innovation comes by copying other oil companies. You can see the formula. Service company develops an innovation, deploys it, and it gets copied. That’s why oil and gas is called a fast follower industry.
The industry needs its ecosystem now more than ever, which should be good news for suppliers.
But here’s the rub. Most of the ecosystem is oriented to the problem of getting more product out of the ground more efficiently. A combination of annual natural field decline rates of 5-6% and an annual demand growth rate of 1-2% mean the pressure to find oil is a constant. But we don’t need to find and produce more oil when we already have too much.
The industry needs to capture cost and productivity savings fast.
McKinsey published a study that presented oil and gas as the slowest industry in adopting innovation. There are many reasons it’s so slow:
- Operations are 24/7, leaving no time for change.
- Most of oil and gas is brownfield and predates things like digital.
- Oil and gas assets are energized and pressurised, leading to a strict management of change process.
- The product itself is hazardous, which further slows down change.
- Oil and gas is most often produced in dark, cramped, cold and wet conditions.
An oil company had an opportunity to purchase a new $17k digitally enabled pump in its operations to replace the old non-digital $15k pump. But installing the new pump triggered the full MOC process and would cost over $300k. Suffice to say, they stayed with the old pump.
An unsuccessful industry and an unsuccessful ecosystem are not a good combination. Both are at risk of annihilation through the downturn, and with being poorly positioned for the eventual upturn. The talent the industry needs to sustain its operations and drive its innovation agenda will instead go to other more progressive industries. And for those digital start ups that were in motion, your exit strategy is at risk.
2020 is turning into a terrible, horrible no good very bad year for the ecosystem.
By late 2019, it was clear that the oil and gas industry recognised that adopting new digital ways of working will help unlock value and improve the sustainability of the industry. What the industry needs to do is work with its ecosystem to go after the cost and productivity savings that get pushed to the side during normal times. And it needs to work with the ecosystem to speed up its ability to adopt change.
The prize to the industry is very compelling.
First, the IEA estimates that digital tools applied to the costs of production would cut costs by 20% or more.
Second, digital tools applied to the work of wells, workers, facilities, services, turnarounds, you name it, improve productivity by 20%.
That’s a combined 40% swing in fortunes.
In the process digital creates lots of new jobs, supporting the new tools, rethinking work. Calgary is already reporting hundreds of unfilled jobs in data science areas.
I was on a webinar last week and the venture capitalists from Denver noted there was $1.5T in venture funding available for energy technology, just waiting for the right opportunity.
By working with the ecosystem, to pull in digital players along side more traditional players, I’m confident the industry will capture these benefits from digital. I’ve seen it from the front seat of a bus.
Here are three ideas that work:
First, oil and gas companies and suppliers should plug into the new technology incubators and accelerators that have sprung up in recent years. And not just those in their home towns or industries, but in key peer cities. That’s where the young entrepreneurs can be found and where the investors in technology hang out. Venture capitalists know that only 1% of all start ups succeed, but success rises to 30% for those that work closely with a big customer on a real business problem
Second, i would replicate the concept behind COSIA, the Canadian Oil Sands Innovation Alliance. It was initially set up to pool research in water, but a fine structure to collaborate on industry-level digital topics, such as AI, 5G, cyber security, and blockchain.
Finally, I would explore another industry collaboration, the Onshore Offshore Consortium, or OOC, set up to explore how blockchain solutions could help transform the industry. They have kicked off a number of trial projects in water management, royalties and engineering content access.
Speeding up adoption is the harder problem.
The scale mismatch between small digital companies and large oil and gas companies is a huge barrier. Getting access to data, which is key for solutions like machine learning, is made harder by the lockdown. Capital to spend on fixing the business is still scarce when capital is needed just to survive.
Some leading oil and gas companies have set up their own investment arms or venture funds to target investments in digital. Shell, Equinor, Suncor, Cenovus, Repsol and Saudi Aramco are examples. These funds attract digital entrepreneurship and help overcome the scale challenge.
Another option is for small technology companies to work with large incumbents who are already at scale. Big technology companies know how to scale solutions to the market. They have the sales force to drive uptake, the product catalogues to deliver more complete solutions, the implementation teams to drive deployment, the integration known how to deliver interconnections, and the change management chops to overcome resistance. They provide trust to the market that the solution will work, in all situations, under pressure.
Industry leaders who are serious about scaling up digital will put in place their own internal digital accelerators. Dedicated corporate teams work with a portfolio of digital solutions to sort out scaling issues, promote change management, figure out deployment pathways, and measure value.
Tech firms need to rethink their overall approach to drive adoption. Being software only, and having no hardware impacts is key to avoiding the management of change process. Agreeing carefully what the decision criteria are for scaling up in advance, and measuring the baseline business performance will help avoid perpetual pilot projects.
There should also be clear value created for the initial customer that is only available if the pilot grows. This could be additional features that are available through fleet learning, or new pricing, or both.
At this stage of the industry lifecycle, adding more production isn’t helpful, but the prospects of cost and productivity savings from digital are not only attractive, they’re downright mandatory.
Successful industries have successful ecosystems. The digital ecosystem has a lot to offer, and now is its time to help shape and reform the oil and gas industry.
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.
Mobile: ☎️ +1(587)830-6900
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website: 🖥 geoffreycann.com
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