In the context of an extremely hard economic downturn, companies of affected sectors such as upstream oil and gas operators are facing extremely tough decisions to reduce their capital and operational expenditures. As discretionary spending is virtually eliminated and reorganizations distract the company while the headcount is reduced, it is a challenge to optimize short term financial performance while setting the company up for long term prosperity.
It is now broadly asserted that the companies who will survive and thrive post the present recession will be those that have embraced a digital mindset. For example, a recent survey has shown that 80% of the respondents would gladly alternate working from home and at the office. Many experts foresee the continuation of social distancing for another 12 to 18 months. This means companies will not be able to allow all of their employees to stay in the office at the same time, for at least the coming year, and will have to adopt digital processes to handle this transition period. As the saying goes, there is nothing more definitive than a temporary solution!
Assessing the company’s digital journey may seem intimidating and unrelated to immediate advances in capital efficiency and operational goals. And yet identifying if you are getting the most value out of your digital program will yield a considerable return. While the majors are deploying large digital programs, it is critical for other operators to develop an efficient digital plan, as simple as it might be (most companies have some degree of digitalization), to balance value, technology maturity, and areas with the highest yield for the company. No two companies have the same initiatives across their organizations, nor should they. Yet companies tend to align with industry core values to lever sensing, data, analytics, and use cases.
Digital technology is enabling companies to enhance proven processes to a much higher level by uncovering useful insights hidden in the data. For example, machine learning is used to monitor and control pumping units thereby reducing downtime by anticipating failures to critical parts of a pump, which in turn contributes to improved production. This technology allows visits to be scheduled by automatically sending alerts to pumpers so they organize their visits by exception rather than on a routine basis. Such progress has a direct impact on uptime (act when it is needed not when you finally discover it), safety (less driving therefore fewer accidents), and therefore the bottom line (optimized production and lighter payroll).
Upstream Oil and Gas could learn from the supply-chain best practices of more mature industries like manufacturing. Similarly, cost efficiency improvements can be found in adopting the latest digital and analytical methods for parts and equipment, demand forecasting, or inventory management. Likewise, logistics and transportation can benefit from transportation management software (TMS) and fleet management software commonly used in other industries. There are many opportunities to improve worker productivity and to standardize routine work thanks to digital tools. Since they are already developed and routinely used by other industries, their deployment costs are affordable and the return on investment quantified.
The difficulty is to properly balance value creation and technology maturity across digital projects. One should first review the digital efforts that have been achieved and measure their impact (once again, size doesn’t matter). Then, secondly, one ought to revisit what projects are envisioned, their expected value, and identify their potential synergies and associated return. This method will lower the uncertainty about whether the company is getting the best return out of its digital initiatives. Depending on current operational efficiency, the value potential will vary. Seeking external guidance to figure out whether initiatives are well-aligned and what opportunities are available to create the most value will often be the best way to get an unbiased assessment to build a way forward. It will also allow one to identify strong performing business areas with capabilities and functions that perform better. Such efforts will allow a company to quickly leverage digital improvements and capture value. Less advanced areas of the business are more suited for implementing simpler capabilities for which digital tools such as logistics, demand forecasting, and inventory management are already implemented in many other industries. Decision-makers have to find a balance between proven digital initiatives and emergent technologies with high potential to adjust risks and their potential benefits. The key is to focus on tangible value indicators such as growth, efficiency, and safety to address drivers like production increase, cost per barrel, time to oil. It is important to realize that the connection to a value driver, such as improving labor productivity doesn’t always translate directly into a tactical monetization imperative. The cost savings resulting from the digital initiative is not always directly evident, and some digital initiatives should be seen as business enablers rather than value-creating projects.
One of the biggest challenges seen across most digital transformation projects is managing pilots so they can scale up and address business deployment constraints, by identifying the hurdles of companywide deployments as part of the pilot. Often, the lack of a dedicated digital program management function to handle change management for wider public acceptance is what is missing. Best-in-class programs bring multidisciplinary teams with both digital and industry knowledge, as well as a deep understanding of the business operations and the people. Of equal importance is scaling up a digital portfolio, which generally requires a review of the operating model and making adjustments where necessary to make the change sustainable.
In a period of contraction more than any other time, it is important to focus on the core business of the company and to build an ecosystem of partners to outsource non-core competencies. This, on its own, requires expertise. One needs to build a coherent portfolio of digital initiatives, and test it for completeness and fit with the organization. Also assessing its risk-adjusted value is something that all upstream companies should be doing, regardless of their place in the digital journey. Although the core business of upstream players is to produce barrels of oil at a profit, those companies embracing digital are likely to achieve higher returns. The challenge will be in identifying industry partners to innovate and interconnect the users to reach new levels of efficiency.
|Example of some technologies to consider (there are many more) |
Machine Learning (ML)
In general, machine learning is becoming a primary component of software development. Upstream companies that introduce machine learning are more likely to see improved operational performance going forward. Attracting and retaining talented data scientists, providing the right infrastructure and governance, and implementing organizational changes are difficult tasks that are the necessary foundations to leverage the potential of machine learning.
Connected Supply Chain
Leveraging digital tools to build a connected supply (commonly found in other industries) constitutes a great potential for cutting costs, improving service and reliability, managing inventories, and creating delivery-channel efficiencies.
To bring productivity and safety to the next level, connecting workers in the field with situational awareness, risk identification, and reporting should be considered. Once data is readily available in a central location and shared across teams, efficiency improvement and savings will appear rapidly. Most workers have phones, and simple applications can go a long way to streamline operations and give the boot to the spreadsheet hidden on a personal hard drive!