The last few years have been a tough and turbulent time for the oil and gas industry. The price of oil collapsed in June 2014 because of several key factors—increased production in the United States, creating a glut in the supply of oil; reduced demand from developing countries, specifically China; geopolitical conditions and diminishing storage space for crude oil. At one point, the price dropped briefly below $30 dollars a barrel and although prices have recovered, now hovering around $50 a barrel, they are still well below the post-recession level highs of over $115.
The June 2014 price collapse resulted in a major contraction in spending by oil and gas companies. The sharp drop in oil prices resulted in a decrease in global investment in oil production and exploration, which fell from $700 billion in 2014, to $550 billion in 2015. A Cisco survey of industry professionals in the oil and gas industry, carried out in 2014, found that, “operational efficiency of existing projects or reserves” and “maintenance of assets and infrastructure” were the top two areas of increased investment over the next 24 months, while, “new capital projects/new reserves,” “exploration,” and “global presence” would be the prime targets of reduced investment over the same time frame.
With a reduced focus on finding new fields to explore, the priority became maximizing operational efficiency in existing facilities, something achieved largely through the digital transformation of the oil and gas industry. Investing in technology was necessary to extract the highest possible value from the resources available and even though the price of oil has rebounded since its historical lows, maximising operational efficiency by following the digital trends in the oil and gas industry is more important than ever.
Digitization
The current objective of the oil and gas industry is maintaining sustainable profitability and much of this will be achieved through digitization in oil and gas. According to the 2016 Upstream Oil and Gas Digital Trends Survey, 72% of industry professionals see cost reduction as an important, or the most important, challenge digital technology can help address, while 91% say they have already seen value from implanting new technologies. Digitization allows oil and gas companies to add value to their business by reducing costs, improve decision-making and increase the productivity of their workforce. Digital solutions create a streamlined process when it comes to hiring and training new employees, enabling companies to scale up with much greater ease and efficiency.
Approximately 69% of oil and gas companies overrun in cost, and about 80% overrun on time. The use of digitization can help companies manage over-spending and operations, ultimately increasing overall productivity, pointed out Havard Devold, group V.P. of digital oil, gas and chemicals at the recent ABB Customer World.
Research by McKinsey & Co. has found that effective use of digital technologies in the oil and gas sector could lead to substantial rewards, reducing capital expenditures by up to 20 percent and operating costs in the upstream by 3-5%.
Thanks to the latest technological advancements, we are now poised for a second digital age that could further reduce costs, unleash unparalleled productivity, and boost performance significantly – if executives can harness the right technologies to support their business strategy – McKinsey & Co. noted
Structural challenges
Most professionals in the oil and gas industry recognize the importance of embracing digital technology but there are several challenges facing executives seeking to implement digitization within oil and gas companies. One of the major pitfalls that companies fall into are structural difficulties. The digitization of a company disrupts value chains, organizational structures and operational processes. Change can be disruptive but managing this change is what is important.
That is why it is imperative that there is digital tenacity, i.e. a strong willingness to invest in and embrace digitization, in the oil and gas industry. Strong and focused leadership is at the core of successful companies. Digital trends in the oil and gas industry need to be embraced by the company’s leadership if they are to be implemented successfully. Digital technology should be placed at the core of the business strategy to show that transformation is a high priority for the company. However, leadership must go hand in hand with a shift in organizational culture and that requires everyone in the company, from top to bottom, buying into new ways of operating made possible by technological change. Employees and contractors should be properly trained and taught the organizational culture of the company, including all relevant new technologies and practices.
Data Analytics
Oil and gas companies have traditionally been immersed in big data. They were at the forefront of industry in collecting mountains of data through the use of sensors since the 1980’s. However, there is a difference in collecting data and understanding and using data to your company’s advantage. Many oil and gas companies have difficulty in unlocking the value in all the data they collect, as expertise in data analytics can be difficult to source. In the Upstream Oil and Gas digitization Survey, 66% of those surveyed believe analytics represents a transformational opportunity for their business but only 13% believe their company has fully mature analytics capabilities.
The value of data analytics is potentially transformative in the oil and gas industry. Companies are now able to use data analytics to predict failures of critical pieces of equipment. Data analytics can allow for the pairing of real-time drilling data and production data to adapt drilling strategy and achieve better results. When incorporated correctly inside a company, data analytics can be utilized in a multitude of ways to improve cost certainty, predict risk and boost efficiency by allowing the company to be flexible and do more with less personnel. Bain and Company project that advantages gained through the use of data analytics could help oil and gas companies improve production by 6% to 8%.
To improve data analytics, companies should aim to use cloud computing to leverage the power of their data. 56% of industry professionals surveyed plan to use the cloud to enable analytics in the next 3-5 years. Internet accessibility on oil rigs has improved a lot in the last few years, improving the quality of life for rig workers and making cloud based solutions possible. Cloud computing allows for a level of scalability impossible without digitization . The cloud can be the main factor in data collection, storage, analysis, and archive, allowing companies access to a wealth of information. Utilising the cloud can also help the company’s cyber security efforts. IT specialists Gartner estimate that cybersecurity services based in the cloud will face 60% fewer security incidents than those in traditional data centers. Some people might feel that cloud computing is less secure because your information is somewhere remote but that separation actually makes it more secure. The lack of physical access in cloud based security makes it harder for invaders to gain entry.
Internet of Things (IoT)
One of the major trends identified in the Upstream Oil and Gas Digital Trends Survey was that investment in robotics, wearables and artificial intelligence will see the largest percentage increase in the next 3-5 years. Innovations in these areas will potentially automate more parts of the process and improve efficiency and production. However, the largest investments in digitization will be in big data/analytics and IoT. As wearables and other aspects of the Internet of Things (IoT) become commonplace, more and better data will be collected and stored in the cloud, allowing for improved data analytics.
Oil and gas companies are more experienced than most companies when it comes to the “things” component of IoT, given a large number of sensors and other devices already deployed throughout their operations. It is the other areas that relate to the IoT—data, people, and process—that oil and gas companies must improve their efficiency in to maximize business and operational benefits and position themselves for growth. Wearable technology, combined with the capabilities unlocked by the cloud, can dramatically improve worker safety by allowing managers to monitor employee risk. When used correctly, the data that oil and gas companies collect is of enormous value in improving every aspect of an operation.
In many cases, the majority of workers in the oil and gas industries are contractors, and this can cause significant people management challenges. In the current economic environment, workers need to be got up to speed as quickly as possible so productivity is not affected. Another challenge is the dangerous nature of the work involved. The US oil and gas extraction industry has a fatality rate seven times higher than the average US worker so ensuring contractors have the necessary health and safety training is essential. New digital orientation software allows contractors to do a lot of this training before they even set foot on the rig, saving vital hours. Identity capture technology ensures that the worker has completed the online orientation process themselves, hugely important when working in a profession as potentially hazardous as oil and gas extraction. Keeping track of workers is also a challenge for supervisors but training management software allows them to ensure all workers have up-to-date training and qualifications.
Conclusion
Oil and gas companies embraced new technology when prices collapsed and it was of critical importance to maximize operational efficiency. Now, there is renewed optimism in the industry as the price of oil has rallied in recent months following the last meeting of leading members by the Organization of the Petroleum Exporting Countries (OPEC) when the group discussed possible measures to further tighten oil markets. Prices are trending in the right direction for the oil and gas industry but the technological knowledge that was learned in the years following the price collapse should continue to be implemented and improved upon as the industry seeks sustained profitability.
Oil and gas companies should continue to embrace and invest in technological change with the aim of becoming “digital technology companies”. We live in the age of big data and analytics and oil and gas companies have the opportunity to once again be industry leaders in the use of digital technology.
