The upstream oil and gas sector lags behind most other industries when it comes to digitising operations. This is largely attributable to a deeply ingrained aversion to risk.
Given the sensitive nature of offshore operations in terms of health, safety, and the environment, operators have been reluctant to deploy relatively untested digital technologies.
However, the industry has lately become more receptive to digital as traditional operators grow concerned by the emergence of unconventional players with differentiated, market-leading digital capabilities. They have also become more focused on the significant cost and operational efficiencies that digital makes possible in an era of relatively low oil prices.
In its 2017 report on digitisation and energy, the International Energy Agency estimated that digital technologies could cut production costs by as much as 20 per cent. Strategy& conservatively estimates that digital technologies in upstream activities could result in cumulative capital and operating savings of $100 billion by 2025.
Already, many upstream companies have been using elements of digitisation for some time, which we define as the strategic business value of data-based technology that includes the internet of Things (the network of connected devices), cloud computing and artificial intelligence.
Examples of these elements are 3D seismic technology, unmanned oil and gas installations, and advanced reservoir modelling.
However, the industry is just scratching the surface of what is possible with digital. In the near future, the image of oil workers grappling with drill pipes on platforms could be replaced by something dramatically different. Drilling, performance monitoring, and production optimisation could become highly automated.
For example, the application of “digital twin” technology opens up the possibility of replicating physical assets from fields to equipment in digital form. The technology allows companies to model scenarios to optimise everything from production to maintenance.
Decision making could be transformed, with digital twins simulating “first oil” — the initial amount that emerges when commercial drilling begins at a field — before final investment decisions are made.
Companies will also need to plan for certain risks associated with this switch to digital. One will be cybersecurity. As assets become increasingly connected to the network, companies will need to protect critical digital infrastructure against cyber-attacks — by monitoring threats, identifying vulnerabilities, building robust controls, and promoting a culture of security awareness.
With these benefits and risks in mind, there are five guiding principles for companies when designing a digital business model.
The first is that digital technology is the handmaiden of business transformation, a means to solving a company’s largest business problems. Companies should always view this exercise as business-led — as opposed to technology-focused. They should identify the greatest business challenges and assess how digital technology can help.
The second is that digitisation should be transformative and affect all parts of the operating model, including corporate vision, strategy, processes, culture, and employee behaviour. Some oil and gas companies view digital technology as peripheral to the core business. The result of such an approach is “siloed” digitisation that does not provide the cross-functional insights necessary to drive efficiency and value at the enterprise level. Companies need to build new digital capabilities and leverage technology across all key elements of the value chain.
The third is that digital technology should go beyond corporate boundaries to include the entire ecosystem, such as suppliers and external partners. For example, all stakeholders around a new field development — including the host government and the oil service providers and contractors — should be digitally enabled.
The fourth is that each company needs to create its own digital transformation model. There is no single, model digital template to follow. Although they can emulate best-practice examples from leading companies, they should tailor digital solutions to meet their particular business needs and challenges.
The fifth is that companies need the right capabilities mix among engineers and data scientists. In the past, capabilities focused on technical expertise to deliver engineering excellence. Now, with a growing focus on data analytics, companies will need engineers who are more digitally savvy. Finding this balance between technical and technology capabilities may prove one of the trickiest challenges for chief strategy officers and chief information officers.
Those companies that simply view digitisation as a technology play and fail to transform are likely to become digital dinosaurs. However, others will be pioneers in digital solutions, and others will be fast followers. Either is a legitimate approach. What is important is to design and embrace a digital strategy that works for the company and positions it to succeed in a new digital era of oil and gas.
The writer is the Director of Research at Strategy&, part of the PwC Network.