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How digital technology can relieve margin pressure

Jun 28, 2018
7 min read
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By: Paul Carthy, Managing Director, Accenture Energy Industry Group, Middle East and Turkey and Iain Munro, Consultant, Accenture Strategy

 The oil and gas industry may have overcome plenty of trials in the past, but it currently faces its greatest set of long-term challenges to date. Although oil prices have improved significantly, there are still several substantial threats to producers. U.S. shale companies are continuing to increase production and sell at relatively low prices, and a volatile political landscape is contributing to business uncertainty.

There are also longer-term threats. Demand for oil and gas is changing as climate regulations tighten and use of electric vehicles and new energy storage technologies increases. Investment in renewable energy is expected to climb to US$7.8 trillion by 2040, according to a report by the World Economic Forum and Accenture. Meanwhile, new utility models such as smart grids are emerging. These factors are likely to keep oil and gas margins slim for the foreseeable future.

Suppliers will be under increasing pressure to operate more profitably. Amid these challenges, enthusiasm for digital technology is growing among oil and gas companies. They are recognising the opportunity to use digital technologies in a way typically associated with the agile technology companies born in the internet era. As oil and gas companies begin to embrace cutting-edge digital technologies, a new era is dawning for the industry.

In fact, more than 70 per cent of 300 leading upstream companies around the world expect to see fully digital oil fields in the next five years, according to the most recent Upstream Oil and Gas Digital Trends Survey, commissioned by Accenture and in conjunction with Microsoft.

Relieving margin pressures

Digital technology offers enormous potential benefits to the oil and gas industry, its customers and society, according to the World Economic Forum’s report.

The report estimated that digital transformation could unlock up to $2.5 trillion in value for stakeholders. U.S. shale producers are one segment of the industry seeing the benefits of digital technology.

The chief executive of BP, Bob Dudley, told The Financial Times the company had piloted the use of data analytics in some of its wells and, in doing so, managed to increase production by 20 per cent. The Financial Times article also quoted Schlumberger’s executive vice president for Technology, Ashok Belani, who predicted that the company’s DELFI software could reduce production costs in U.S. shale oilfields by 40 per cent within a decade.

Greater use of digital technologies could also have environmental benefits, according to the World Economic Forum and Accenture report. It estimated that digital transformation could reduce CO2-equivalent emissions by approximately 1,300 million tonnes. The report also suggested digital technology could save hundreds of millions of litres of water and avoid oil spills equivalent to around 230,000 barrels in volume.

The industry is embracing digital

The oil and gas industry’s enthusiasm for these technologies is growing. More than half of those who took part in Accenture and Microsoft’s upstream survey said they recognised the value of digital technology. More than 70 per cent of upstream companies in Accenture’s survey planned to increase their digital investment during the next five years.

Their spending plans cover a wide range of technologies, from artificial intelligence to wearable computing, robotics, high-performance computing and mixed-reality technology. The most popular technology over the next five years is likely to be big data analytics, with 46 per cent of respondents saying they planned to invest in this area.

Most planned on deploying this technology to manage assets, drilling and completions; manage capital; and optimise production. The survey also found that investment in analytics is shifting from monitoring production to a focus on drilling and completions.

Approximately 35 per cent of participants in the upstream survey planned on investing in the Internet of Things (IoT), which uses sensors to connect equipment to digital networks. This enables companies to analyse data in real-time, then act quickly to optimise production and maintenance. Some are even combining IoT with analytics to reduce chemical injection, fuel and steam costs. As companies connect more equipment to these digital systems, they will be able to collect and analyse more data, and present the result in digital dashboards.

This will give employees greater visibility of operations and reduce the time they spend looking at reports. Approximately 30 per cent of respondents planned to invest in machine learning to help them more accurately predict the cost of oil wells.

Machine learning can automatically analyse large reports to identify problems with wells, saving oil and gas employees hundreds of hours.

Almost a quarter of the survey respondents also planned on investing in blockchain technology in the next five years. While the distributed ledger technology has found most interest from financial services companies, it also has the potential to dramatically to lower expenses in the oil and gas industry.

Blockchain could improve the way business is conducted throughout the oil and gas supply chain. Currently, each company records and reconciles transactions, and a central third party validates contracts. Blockchain could remove the need to duplicate these steps at each stage in the supply chain, reducing administration costs. It could be used to speed up petroleum product trades, accounting within joint ventures and many other tasks.

Accenture estimates blockchain could reduce business operating costs and compliance costs by up to 50 per cent. Nearly 30 per cent planned on investing in robotics and drones. For example, autonomous or remote-controlled devices can be used to inspect drill sites or pipelines, reducing safety risks by eliminating the need to have people on the drill floor.

Next steps

Many companies haven’t yet seen large financial gains from their investment in digital technology. Approximately 38 per cent of the participants in Accenture’s upstream survey said that digital technology had only added $50 million or less in value to their businesses. About 34 per cent reported that they didn’t know how much value digital technology had added.

So, what is holding the oil and gas industry back from achieving these outcomes? The industry has adopted technology in an ad hoc manner, typically implementing it selectively, rather than as part of a systematic effort to improve efficiency throughout the value chain. The report by the World Economic Forum and Accenture described the industry’s approach to digital as incremental and conservative.

Oil and gas companies have implemented technology in silos, using customised solutions to solve challenges in individual business units. Their risk-averse culture has also limited the sharing of data between different business units. Additionally, more than half of the respondents to the 2017 Upstream Oil and Gas Digital Trends Survey reported that they were still implementing relatively immature analytics projects, such as deploying big data storage.

These factors have slowed down decision making within these companies, resulting in decisions that are aimed at solving local issues rather than wider business concerns.

To solve these problems, oil and gas leaders must overcome several key hurdles. One is the need to implement new operating models. Connecting systems throughout the value chain and using the data to optimise production will involve re-skilling the workforce, redesigning processes and adopting new operating models to support new technologies.

Oil and gas companies will have to revise the structure of their businesses, from the field to the boardroom, making them as streamlined as their operations.

Digital transformation also requires companies to reassess their workforce strategy. Employees will need to learn to work in new ways, using connected devices and technologies such as augmented reality. They will need data scientists to distil oceans of information for decision makers to act on. Change management will be vital to help workforces adjust to these new developments.

Perhaps the greatest challenge is the incredibly complex nature of large-scale digital projects. Companies must juggle technology, people, business goals, budgets and deadlines, while connecting their operations on a greater scale than ever before.

Although challenging times have emerged for the oil and gas industry, the opportunities in the digital revolution can revitalise margins for those companies willing to take advantage.

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