I was introduced to Patrick [Link] by our mutual friend Short Allerton [Link]. We both worked with Short in Schlumberger days, but our paths had not crossed until recently. Patrick is an exciting individual who has worked on very interesting projects pushing the boundaries of future oil and gas practice in Upstream. We got on well and he shares many of my views on digitalization, and – importantly – our opinions differ about how things may develop in some areas. It was a genuine pleasure to speak with him and he has agreed that I may publish this interview on the blog.
GD: Good Morning Patrick, thank you for agreeing to talk to me about Industry 4.0. It sounds like you are very interested in the topic.
PVP: As you might have recognized I am very passionate about the idea of a disruptive change in the oil and gas industry. Currently I am looking into the strategic implications of digital revolution that is surrounding us and what is likely to be a time of disruption and step-changes in productivity.
GD: I agree with you Patrick digital technologies will make a big difference in upstream oil and gas, I expect to see this most pronounced in operations of existing and new plant. In my view, some fundamentals won’t experience much change – such as how resource licenses are issued by countries and used as security in the capital markets.
PVP: Just because we have not yet identified the potential disruption does not mean to me that there cannot be any. It just means that we haven’t thought hard enough. If it were an obvious change then it wouldn’t be so disruptive as we’d all have the ability to respond. A disruptive completive threat, by its very nature, is likely to come from left field.
GD: I’m not convinced, but interested to hear what you think the changes will be in operations?
PVP: Leaving aside access to resources, I think there will be three main effects of the digital revolution in upstream:
Increase in efficiency:
Automatisation will be key here and I expect that activities will include predictive maintenance, artificial intelligence based auto modeling, augmented reality supported operations, automated manufacturing, Internet of things, etc.
This will result mostly from faster and smarter decisions. Advanced, more complex, more integrated and holistic modeling will enable us to make more educated choices.
Improved uncertainty / risk management.
The advanced and integrated modeling will enable us to model (and therefore manage) uncertainties all the way from the reservoir to the marketing of finished products and the trading of field percentages.
GD: Yes, I agree with you on those three for sure, though it’s a bit mother-hood-and-apple pie. That’s what we’ve always tried to do, and gradually we’ve been improving there over the years. What’s going to change?
PVP: Well of course we’ve been doing that! But, things are about to accelerate and we’ll see enablers for step changes – super and cloud computing is key to holistic asset modelling – but, beyond that especially in the way we contract and co-ordinate the supply chain I expect great changes.
GD: What trends are you seeing there?
PVP: Services of all kind are becoming a commodity. Initially, this is focusing only on basic oilfield services such as cementing. I expect that this will lead to more choice for me as an operator.
Maybe I will not buy such services through classic service contract models any more, but through a web-based and horizontally integrated retail platform. This will increase my flexibility, control and drive down costs. Perhaps drill bits will become a line-item on Alibaba? And maybe this is the domain where we will see most disruptions in the coming years.
GD: I see how that can work. There have been automated purchasing databases before, mainly for supplier pre-qualification and compliance checking. Services like the Achilles system, but they’ve been directed towards procurement departments and not putting the power of supply-chain optimization directly with the end-user of products and services.
PVP: Yes, as time progresses and digitalization evolves, commoditisation will include more and more complex services. Already the service companies and EPCIC contractors are integrating their services and offering me solutions.
Combining this trend with digital technologies could make even the development of a complete oil field a commodity one day (as much as building an airport would be a commodity by then).
GD: How do you see this changing the industry for project owner operators?
PVP: We must expect new players to enter the market. To thrive in this situation means we need to find new differentiators, perhaps even re-invent our business model. This will mean perhaps developing even more complex projects and integrating services/solutions along the horizontal and vertical value chain.
GD: That’s very interesting. What I think you are saying is that the low-end easy returns from deploying capital to safe projects will be competed down to the cost of capital, so you you’ll need to do more difficult things where there is less competition. Can you expand on that a little, how can you use digitalization to achieve that?
PVP: Well of course, there’s the nub of the issue. I can’t tell you everything I’m working on of course, but let me give you three areas where I think we are likely to see disruption: The Value of Data, the use of Cloud Computing and What I call “Buying a Result”.
The value of data
Artificial intelligence is a key technology in digitalization. It will allow us to assist humans in many places and to achieve results significantly quicker / with higher accuracy. In any case the key will be to train the artificial intelligence based on distinct high-quality data sets. Considering such data sets as training material makes them an asset. Trading such data against trained models will be a part of the new business world. Like Google is the best search engine because of its accumulated experience, so it will be with oil fields. Once this is cracked, experience may result in enduring competitive advantages which can be monetized by turning data into decisions in minimum time.
The cloud will be the only place to store and process data in the future. It is the most secure and cost-effective way. A whole new landscape of solution providers will arise from this. The classic service and software providers are establishing their cloud solutions today.
The operators I talk to are concerned about locking up with one of them and being chained to their choice forever. Their data may become trapped. This is going to drive standardisation and open platforms. These will allow plug and play of any software in the cloud. The availability of such a platform and the guarantee of the provider to support the integration of any service / software will provide small solution providers with a new platform to offer their products and reduce the market entry hurdle for them greatly. We can imagine this a bit like the different APP stores.
Buying a result
Today we still buy compressors and then maintain them. In aviation, some airlines buy only accident-free-human-miles-transported from an airplane manufacturer. They focus on planning routes, marketing seats and ensuring client loyalty. Similar things may happen in our industry. Augmented reality allowing to scale the know-how of a single expert, Internet of things, big data analytics, predictive maintenance, etc. will allow various solution providers to offer services to us like the way airplane manufactures do today. The E&P companies will transform into managing and providing more complex solutions and business models. This will include more and more gain share models.
GD: You do paint an interesting view. In your scenario data and machines look like they will take over. That’s bad news for any young engineers surely. Why on earth would you need any people? Are operators going to be run by hedge funds and lawyers?
PVP: Some people think that many oil companies already are! But, seriously, I believe customer focus, personal interaction, social competencies, and creativity will become more valuable. As more and more complex tasks are fulfilled by machines the role of the human will shift towards creativity and social interaction. I am convinced we will be very busy thinking about things that we do not even imagine today as we are busy with the groundwork. It will be great fun!
Look, we know that even after all the money spent on, and focus applied, creating an Amazon a web page, it is still not the key to providing the best possible service. It’s efficient for somethings, but sterile and not very interesting for others. Even Amazon is opening physical stores and Apple has the most valuable retail operation in the world. Human contact and empathy is still important.
The key will be to hook up with the client immediately and to ensure that he/she can’t live without your service ever again. The client has choices, so this must be done through excellence not through lock-in. In the domain of super-mega projects this might simply boil down to the ease of doing business with you.
GD: Thank you for your thoughts on this, it’s very insightful. Where do you think, we go from here?
PVP: Reflecting on our conversation, I might even agree that the oil & gas industry will not change in the fundamentals of exploration – development – production – abandonment. But the landscape of players will shift due to digitalisation and this might be the disruptive change for us all.
GD: Thank you, and good luck. Will you please come back and tell me and my readers how you get on?
PVP: Sure, I’ll keep in touch, and I’d I love to have feedback on my thoughts