Rich McAvey, research vice president for Oil and Gas at Gartner speaks to Pipeline Magazine about what operators and owners are looking at and what needs to be done yet for a digital revolution to take place
Digitalisation of oilfields promises maximum resource recovery, increased profitability and eliminating inefficiencies. Interest for methods and technologies to produce these results is rising as oil and gas companies strive to drive down the breakeven production cost per barrel as the industry takes a beating from two years of low oil prices.
What is the scope of operational change necessary for energy firms to integrate a digital core?
The concept of digitalisation is not well understood in the industry. There are three main parts to it. We call the first part IT optimisation and its objective is to build a business platform that facilitates the flow and accessibility of information across the entire company. Most oil and gas operations are managed in narrow organisation siloes - operations, maintenance, business functions. Often, each silo optimises it technical environment independently which leads to sub-optimal company performance. If legacy IT is modernised to take advantage of cloud, data centre automation, virtualisation and many other modern technologies, then information can flow more freely across the company and great things will happen. Most oil and gas companies have made tremendous progress on IT optimisation during 2015-2016.
Second is business optimisation - It begins as the IT environment becomes leaner, more modern and digitally integrated. At this point, companies have the opportunity to bring fast, low cost and impactful changes to their work practices. Typically, companies approach business by building a portfolio of small projects that deliver high impact for a specific area of work. Each of these projects brings together a small number of people from different groups to streamline or automate a narrow area of work. One example are modern digital oil fields programs which consist of a set of projects that increase recovery or reduce costs from a specific field by automating work or making better decisions in real time. Usually, each business optimisation project is completed in between 1-18 months and provides a very high rate of return. Most oil and gas companies are very active on business optimisation in the current market.
We call the third part of digitalisation digital transformation. This becomes a priority when a company has had good success with it business optimisation and begins to see opportunity beyond the next few projects. Leaders ask if they could do even better if they approached digitalisation with a top-down strategy, rather than just a collection of bottom-up projects. They look outside the oil and gas industry and see how much more benefit other industries are reaping from analytics, artificial intelligence and automation. And they realise that they can deliver competitively superior performance if they learn and transform faster than the rest of the industry. Digital transformation is a new priority for the oil and gas industry, and only a small percentage of firms are actively pursuing it at roughly 10-15 per cent.
How strong is the interest for digital oilfield from Middle East oil companies and IOCs in this region?
In the past, oil and gas companies responded to low prices by just cutting costs and waiting for market conditions to improve. However, in 2015, most IOCs made great progress in the IT optimisation part of digitalisation. Then in 2016, they began making great progress with business optimisation. However, the timeline for many of the government-related companies in the Middle East were delayed roughly a year due to the nature of the government budgeting process. Today, IOCs may be a bit ahead, but all Middle East companies are getting busy with both IT optimisation and business optimisation.
Is there a balance between capital expenditure for digital transformation and cost savings in the near term?
Results from Gartner’s 2017 global CIO survey show that oil and gas companies are expect to increase their spending on digitalisation to 28 per cent of their IT budget in 2018 from 19 per cent in 2016 (spending in the Middle East may trail this increase). While companies are still focused on preserving cash flow, the high-impact nature of digitalisation is proving so attractive that companies want to spend money of it, if they can find the right sort of projects.
What are the challenges and hurdles towards digital oilfield adoption in the Middle East?
Number one is culture. Not Middle Eastern culture, but the operating culture of oil and gas. Every month, the senior management at more and more companies are beginning to see the opportunity. However, the situation is different for middle managers. They have not had direct experience using data and digital technologies to improve business and engineering performance. They see it as uncertain and risky, and are so pressed to deliver results that they are often reluctant to try something innovative that hasn’t been done this before. In addition to culture, second to culture are weak data management practices.
What do you see will be the future for digital technology?
Like other industries, extensive use of data and digital technology has the potential to radically disrupt the value chain in the oil and gas industry. In just the last two years, where digitalisation is just coming to life in oil and gas, we have seen game changing results in the ability to produce more oil/gas from legacy fields, the ability to build/complete wells faster and more effectively, the ability to operate with a lower field and engineering work force and the ability complete major capital projects much faster with lower investment. And there is much untapped potential yet to come. In fact, we are predicting that by 2020, the ability to digitally innovate faster, more effectively and at scale will be the primary differentiating factor in leaders and laggards in oil and gas. While digitalisation is a global phenomenon, the most significant opportunity for disruptive benefit is likely in the Middle East.