4th Wave Value – Upstream Oil and Gas

I’ve been engaged in several discussions recently on the benefits (or otherwise) of the 4^th Industrial revolution [link] applied to oil and gas. I’ve decided to write a couple of pieces on this topic so I can refer to them with clients.

Technologies driving the revolution

I accept the WEF identification of the following general technologies that underpin the revolution:

1. Wide-spread sensing of information
2. Increased computing power, predictive models leading to increased understanding
3. Artificial Intelligence leading to:
   1. Automation of actions
   2. Optimisation of whole systems
4. Distributed, additive manufacturing

Benefits from the revolution

What will be the outcome of the 4^th Industrial Revolution for upstream if we are successful?  Well there can only be three fundamental differences that can be made – I think we’ll get a combination of these:

1. Per unit cost reduction in produced barrels
2. Increased safety for the people involved in operations
3. Decreased impact on the environment from activities

Items 2 & 3 tend to be driven on a compliance basis and form the requirements for permission to operate granted to companies by society using various methods of regulation, consumer pressure and protest. For my purposes I’ll assume that these are utilities [link] and that we always want more when there is no increase in cost, and that we’re unlikely to cut spending or trade down. Therefore, any cost-neutral improvement will be adopted and spending will only increase when it is mandated.

Driving down production costs

I am going to concentrate on the cost per unit production. This comes from the cost of capital used to find and develop a field, the cost to operate facilities, and provisions for decommissioning at end of life. As the owner-operator of an oil field there are distinct supply chains for each of four phases of life:

1. Exploring, Finding and Appraising deposits of oil;
2. Planning, Designing, Building and commissioning facilities to extract and transport it to market;
3. Operating the facilities; and
4. End of life decommissioning, facility disposal and restoration of the environment

Benefits for exploration

In the initial phase of oil field life I would say that we’ve already captured many of the benefits. Wide spread sensing and large computing power would be a great description of what happens with Seismic data, Geoscience earth-modelling and directional drilling.  I am sure that if I looked at the number of people employed and unit-cost of discovery of a deposit I would see a much more efficient scenario than we did in 1980. The figures are somewhat distorted on a cost-per-barrel basis as we have been finding smaller deposits (a feature of geology rather than our abilities).

Benefits for Development and Projects

In the field development phase, we have seen some ingress of new technologies – ROV, Subsea completions, dynamic positioning of FPSO’s and such has led to economically possible concepts for some small or hard-to-reach fields that we’ve found. Field and facility performance is more accurately understood through simulations and we’ve seen some benefits to designers from the use of CAD systems. There is still scope for development to reduce the cost and errors associated with Engineering, Procurement, Construction and Commissioning. There are few real-time feed-back loops here, or analysis of project simulations. The management of large capital projects is still a mine-field of risk, change orders, document control, cost-overruns and schedule blow-out. These are caused by fluctuations in the real-world vs. plan with late in-flight adjustments. More accurate planning, contingency, dependency management, construction order, logistics, pre-commissioning maintenance, start-up etc. would provide benefits.

Benefits for Operations

The revolution should be able to affect operational optimisation the most, this is an area almost untouched by the revolution so far. An OIM on a field from 1980 would recognise a lot of the technology (if not the work-practices) used today. The exception to this is the wide-scale adoption of communication meaning that the split between on-shore and off-shore is far less.

It is possible to argue that the 4^th wave has enabled the shale revolution and that the operating practices from this type of development are fundamentally different to conventional offshore and on-shore fields. The operating margins are smaller, decline curves more dramatic and the constant drill-complete-operate cycle has forced change.

I may be controversial but I’d say a lot of the operational work-practice changes seen in the North Sea have majored on reducing manning offshore and increasing the safety of operations. I believe that, despite the vast increases in potential data, the fundamental way that information is gathered and acted upon has not changed much.

When I walk into a remote operations centre I see a lot of people collaborating with each other, lots of excel spreadsheets, cameras and discussion. Integrated planning and turn around planning are still being done off-line and I don’t see visibility of supply, logistics or automatic optimisation of these functions.

There is a conundrum here of course. The facilities that are in operation (and those still being commissioned) are not designed to harness 4^th wave opportunities so we have (at least) two problems. Firstly we must retro-fit new concepts into facilities that will be with us for the next 30 years, and secondly we need to influence design and development so that this retro-fitting is no longer needed in the future.

Benefits for de-commissioning

It’s early days on the decommissioning front. I suspect that for operators the benefits will show up through normal procurement cycles. The smart profits are likely to accrue to those that can operate quickly and safely. Examples of clever automated technology are emerging – such as the self-levelling rams that lift whole top-sides fitted to the Pioneering Spirit [Link]

Next steps

With the current climate in Oil and Gas we’re seeing an increased interest in how to transform the operational environment and supply chain to drive out OPEX cost (development and exploration are of course now sunk [link)

Now I’ve set the context I’ll start to explore how an operator, or service company, can start to participate in these changes – what an operations business case will look like, what skills and approaches will be needed, what approaches are stopping innovation and what the risks are.

(Image source : http://ohioline.osu.edu/factsheet/cdfs-sed-2 )