Digital Oil Company - How to...

Lower-for-longer is here to stay and digitalization, being of one of few tools left for an oil company to stay profitable, is something people cannot afford to ignore anymore. According to World Economic Forum, digital transformation can create a value worth of US$ 1 trillion for oil companies. Big number, isn’t it? How about this one – digitalization can potentially unlock the value of US$ 1.6 trillion between 2016 and 2025 for the entire oil & gas industry (World Economic Forum). A bit down the earth now: according to McKinsey & Company digitalization can reduce CAPEX cost by 20% and OPEX cost by 3%-5%. Take-away - the benefits are clearly there and simply too big to ignore.

The oil industry has a very complex infrastructure and relying on ERP, spreadsheets and expert opinions are subject to diminishing returns. Many have reached a level whereby achieving higher standards in operational efficiency require much more than computing power of human brains. Some sort of paradox - the entire petroleum industry generates (or can generate) so much data, but only less than 3% of it is used in a meaningful way (E&Y).

These days there is so much fuzz around digitization in the petroleum industry, especially service offerings, but how much is actually done remain largely unknown. There are great things done by some companies, to name a few: Apache predictive maintenance: HSE wearables & mobility tools within Shell, Schlumberger; 3D printing within Woodside Energy, GE; BP, Shell; GE’s predictive analytics. Can you call it a "digital company"? Is it good enough?

Ironically, the petroleum industry was one of the first who embraced digitalization. Look back to 60s/70s when reservoir modelling and 2D ( and then 3D) seismic took off? There are various names to label it, but at the end of the day- it is digitalization. So, why today, the petroleum industry is somewhat behind others (placed 7 out of 22 on MGI industry digitization index), which may sound a bit odd, given the industry is one of the pioneers and very much “familiar” with the word “digital”. Interestingly, in the same report, digital asset stocking and digitalization of interactions are actually one of the worst performing areas. This means two things 1) lack of connected assets and equipment with digital connectivity capabilities built in, 2) Lack of proper digital workflows, collaboration tools and jobs that are automated and done by machines. If you look at reality - it is exactly the case.

While it is always good to be optimistic and concentrate all the energy on your objectives and what you can control, knowing the barriers or what hinders the progress on a fundamental level is equally important. There is no point of having a Ferrari with wheels from Mini on it. Here we go with the list.  

• The industry of “grey hairs”. If you look at demographics of the petroleum industry, the majority of decision-makers are with 25+ years experience and a great number of them not willing to change, which has its own merits and this is their right to do so. Many of them still prefer the “spreadsheet” style, which means people down the chain need to adjust accordingly and use spreadsheets. In addition, many of those decision-makers are in their 50s, so who wants to put a nice retirement package at risk, by doing smth revolutionary different? I bet very few and this is okay.
• Source of capital & Project financing.  Almost all oil & gas companies, other than NOCs, are either public or financed by private equity funds or institutional investors. In many instances, this may represent a direct conflict between short-termism and long-termism and it is very challenging to make effective tradeoffs. Digitization is a long-term game, which many of the investors may not be interested in.
• Skills drain & Power of uncertainty. Over the last 30+ years, the petroleum industry has been outsourcing most of the technical expertise to the service industry, which probably was the right thing to do at that time. Although petroleum industry was in the forefront of digitalization, oil companies have little to no knowledge of digitalization in the modern meaning of it, as a result of outsourcing culture. What this also means is new and unknown to many, that equates to uncertainty, and people don’t like uncertainty – it is hard-wired in our brains. This is a perfect recipe for massive resistance, we are all human at end of the day.
• Digitalization strategy. Most oil companies have no clear digitalization strategy and would do what is in “fashion” or proven/tested. For example, a typical offshore platform generates between 1TB and 2TB of data every day (Cisco), but what do you do with this data? Sending to shore via satellite is a challenge due to small bandwidth offshore and can take as much as 12 days for that generated data (Cisco)! Hence the choice is to invest in offshore data transmission infrastructure or have the data centre and analytics expertise offshore. Well, how many proper data scientists we have in the oil industry? Or are outsiders (proper data scientists) willing to work offshore? Unlikely, most data scientists are millennials with "uber-all" lifestyle and they are less likely working offshore.
• Can only grasp what makes immediate sense. There are far too many people in the industry who are good to see and grasp things that are related to their immediate working environment. Deviation from that may trigger fight-or-flight response straight away, hence they cannot see opportunities and developed a very strong tunnel vision. In addition, there is no reason or incentives for most people to do things that are not aligned with what they are measured on and does not constitute to their KPIs (with exception of few people who are passionate about what they do).

What should you do to address the barriers and how to be successful with digitization efforts? Perhaps, what many failed to do is see the real source of resistance and barriers, i.e. the iceberg of resistance. Here we go with the list.

• Leaders vs. Followers. Some companies want to be leaders, whereas other followers. This will affect their appetite for risk, the degree of being open mind, expectations on timing and motivation to put efforts and achieve great results. Followers will likely to have the “wait-and-see” attitude and adopt digital when it becomes “best practices” and play safe (there is nothing wrong with it). On the other extreme, there are oil companies who are actively progressing in digitalization and have put some very serious efforts into it.
• Internal Drivers. Companies want to see how digitalization can apply and result in quick wins for their core competency areas. E.g. oil companies who are best known for project delivery will most likely focus their digitalization efforts in the areas related to project delivery. Others, who are best in running an existing asset (e.g. platform) would spend time on digitalizing the asset operations & maintenance. Those who are best known for reservoir management would do their best to progress with more digitalization in this domain. At the end of the day, a decision maker at C level wants to see how digitalization affects the bottom line. And the closer it is to the core expertise, the more the chances of success in the bottom line.
• CEO’s agenda & Clear digitalization strategy. The aspiration for digitalization should come top-down and be central for a CEO, with a clear strategy on what is important and what is not. E.g. what capabilities shall be built in-house, what co-created with suppliers or totally outsourced? A feedback loop mechanism that will monitor the trends and see what is happening in the digital world is central as well, to harness the full benefits of digitalization.
• Demonstrate quick wins early. Digitalization is a too big step to make from where most of the industry is right now, to where the digitalization claims it can take it to. We get excited about new technologies when we see them at exhibitions, trade-shows and media, but we almost never go beyond it. Why? It is a quantum leap from the current reality oil companies are in. So, ensure you do not use words like “disruptive” – you’ve lost your audience already.
• The HSE fear. According to the prospect theory, people are generally loss-averse and would do much more not to lose something, than the efforts they put into gaining something. According to World Economic Forum, digitalization can prevent accidents, hence reduce environmental liability and keep company reputation in a good shape. Given safety is paramount to oil companies,  starting off in this area, or with emphasis on this, has a great potential to kick off, show quick wins and build the right culture that would open up and prime people, to progress with digitalization in different domains. 
• Assume risk. Oil industry extremely risk-averse and this is for a reason. The problem is, the culture of risk-averseness became so big, that it stops progress and became the dominant mindset. Service industry shall come with strategies that remove risks from oil companies (to a practical extent). Why an oil company should suffer from something that is faulty and that is within the control of a service company? E.g. if the underlying assumptions of an algorism have flaws that may result in incidents or excessive costs as a result of wrong decision being made, no oil company would want to bear a risk for this. So, spell it out upfront – 70% of resistance might be removed, as a result.

Remember, 1) companies run by people and 2) companies have cultures, created by people. People could be “Humans” who are susceptive to emotions and feelings and not able to make rational decisions all the time. Whereas, “Econs” rational and make decisions based on theoretical principals. But how many Econs you have in the industry or the Econs powerful enough to create a sustainable change? If the industry was rational all the time, it would have been the most advanced and profitable industry in the world, by now.

In my next post, I will put some cool ideas on where there is a great potential for digitization, beyond the general buzzwords of big data, analytics, drones, AI and wearables.  

Btw, the yellow subsea inclinometer ( image on top) is still in use in the subseas world and there is nothing wrong with it if it serves the purpose.