Sampath Kumar| Information Services Group
Even in crisis there is opportunity. Nothing more pertinent can be said about the current state of the global oil exploration and production industry. The crisis at hand is a unique opportunity for transformation.
The Crisis: A confluence of political, economic, technological and social factors is creating a perfect storm in the oil exploration and production industry. Even with recent increases in crude oil prices, the volatility remains. Analysts estimate that North American oil companies are losing nearly $2 billion a week at current prices. Their long-term debt has soared from $200 billion in 2010 to over $350 billion in 2015. By any measure, the top line and the bottom line of nearly every company across the value chain is under tremendous pressure. This calls for unprecedented interventions: political, economic, and, perhaps most promisingly, technological.
The Real Question: The current crisis may continue for the next 24-36 months until the supply-demand imbalance stabilizes. However, oil will continue to play a major role in satisfying the ever-increasing global demand for energy. In 2014, oil satisfied nearly 32 percent of the world’s energy demand, the largest single source of energy. According to the BP Energy Outlook 2035, oil will remain a major source of energy, with about a 25 percent share through 2035, even as renewables, nuclear and hydro continue to increase their combined share to reach almost a quarter. The real question is not whether oil will survive, but how forward-looking oil companies can use the current crisis to transform themselves into more productive, less costly and more environmentally friendly enterprises.
The Answer: Over the past two decades, major technological advances have affected almost every industry. Take the automotive and personal computing industries. The contemporary smart and connected car offers advanced systems, construction materials and hybrid engines that are vastly different from their predecessors. Similarly, the shrinking size and increasing power of computer processors has turned desktop computers into laptops, tablets, smartphones and, now, wearable devices. Unfortunately, such advances are not as obvious in the oil industry: research and development investments are 8-10 percent of revenues for high-tech companies, 4-6 percent for automotive companies and less than one percent for oil and gas companies.
In the midst of these challenges, some progressive oil firms are beginning to embrace the emerging technologies being used in other industries. These include machine-to-machine communication and networking technologies from telecom; cloud computing and big data-based analytics platforms from software; mobility and social applications from digital; and smart factories (or, in this case, digital oilfields) from manufacturing. This convergence and cross-pollination of technologies may bring a renaissance to those oil companies that can embrace adaptability. The laggards, if they are not careful, may simply perish.
These are four areas where oil companies can make their move:
- Converge information technology (IT) and operational technology (OT) to increase efficiency and reduce risks and costs. A fundamental gap that most oil companies suffer, including oil producing and oilfield service (OFS) companies, is the lack of integration between their OT, including MES, SCADA and other control systems, and their IT or enterprise resource planning systems. Different segments of the business use different platforms and technologies, which means they work in complete isolation from one another and enterprise headquarters. Today, there is a vital need to integrate IT and OT by harmonizing processes and technologies and creating a single source of truth accessible to all stakeholders.
An integrated enterprise will gain improved coordination between the business, operations and IT to help planning and decision making, reduce risks and costs, and boost operational efficiencies. Leading service provider Tech Mahindra, for example, has made investments in a cyber security framework and deployed Process Control Network (PCN) security in custom solutions that enable IT-OT convergence for assets spread across operating conditions. They call this their “rig-in-a-box.”
- Integrate digital oilfields with real-time data analytics solutions to reap significant productivity gains and cost benefits. Upstream oil operations depend on capital intensive equipment, which is critical to production and extremely expensive to maintain. Any unscheduled breakdown is a substantial hit to production. Combining the power of the Industrial Internet with high-power computing and big data capabilities, companies can now monitor, assess and optimize the performance of critical equipment and other assets in real time. For example, leading IT services provider Infosys has been partnering with upstream companies to maximize drilling efficiency and production. They use remote monitoring of assets in hazardous and remote locations and predictive analytics for optimizing maintenance of equipment and improving availability and uptime.
- Accelerate technology adoption and address emerging markets with a Hybrid Global Engineering Center (GEC). Conventionally, the global IT, engineering and research and development centers (also known as captive centers or GECs) in places like India, China and Eastern Europe have been set up by large oil producing and OFS firms to tap technical resources at competitive costs. These GECs are becoming increasingly critical to helping enterprises undertake their digital transformation and respond to business needs in rapidly growing emerging markets. Even medium and small enterprises should consider setting up a GEC-hybrid model, in which they enlist the help of one or more established service providers to achieve faster ramp-ups and lower capital expenditures, and leverage diverse skill sets while they keep the intellectual properties in-house.
The Engineering Services arm of engineering and construction giant L&T Technology Services provides end-to-end engineering design services in an onsite-offshore GEC model. It engages in front-end engineering design work for greenfield, brownfield and sustenance engineering work and reapplication engineering areas like process simulation, engineering data integration, costing engineering and plant remediation programs.
- Leverage the investments and domain expertise of engineering services providers to build customized solutions. The current cash-crunch situation has led to major cuts in oil company R&D and capital and operational expenditures. Yet it demands serious investment in next-generation technology solutions. Oil companies can overcome this difficult situation by seeking long-term services agreements with engineering services providers that are building customized solutions in the short-to-medium term and seeking payment only in the long run. These kinds of arrangements with top service providers will result in capital, labor and technology wins that will help oil companies not only survive the crisis but turn it in an opportunity.
IT services provider Wipro, for example, is making proactive investments in HOLMES, an artificial intelligence platform that provides cognitive computing services for the development of digital virtual agents, predictive systems, cognitive process automation, visual computing applications and robotics for addressing specific use cases in the capital project stage and field engineering space of oil companies.
Now is the time to assess your upstream-to-downstream operations, identify the right tools and technologies to help you transform your operations, and ultimately become more sustainable, cost-effective and productive for the long run.