Category: digitalisation

Five Digital Vectors

Frameworks for Digitalisation – Part 1

I’ve been working on frameworks that help me describe concepts around Digitalisation in upstream oil and gas. I plan to publish these in several formats but so far I’ve been too busy to do this to my satisfaction – so I’m going to put them out here for comment and then work them up as packaged tools.

This first framework – five digital vectors – is designed to set the context for the strategic intent of a digitalisation initiative. This is important because senior management had better know why they are embarking on programme of change, what they expect to get from it and where threats to it will come from.

I was recently talking to the CEO of a multinational engineering consultancy based in Norway. To slightly protect his identity, I’ll call him Egil.

Egil:  “Gareth, you know [insert Big 4 consultancy here] was just in my office telling me that digitalisation was going to radically alter my business. They said just look what NetFlix did for the video store. It must be important or they wouldn’t be here. But I’m busy and, frankly, I don’t get it”.

Communicating strategic intent is important. I am as guilty as anybody about trotting out tired lines about how digitalisation will disrupt industries and then helpfully pointing out that Uber has no cars, AirBNB no property and Amazon no shops. This may be intriguing but it’s no longer precisely true (as all three are busy making strategic bets in traditional assets), and it’s of very little help if you’re in Oil and Gas wondering how this applies to your business.

Using this Five Digital Vectors framework provides a way to classify the objectives of an initiative, how innovation in the area may cause competitive shifts and explain where to look in order to measure success. There are Five main vectors for digitalisation. They are:

  1. Pure Digital
  2. Digitally Enhanced Products and Services
  3. Digitally Efficient Operations
  4. Digitally Effective Supply Chain
  5. Digital License to Operate

I’ll explain a little about each of these, and then hopefully you’ll get the idea. If you take each in turn you can look for potential disrupters and initiatives and decouple them. Some of these will be more likely to impact your business than others. At least now you can decide which few to concentrate on first.

Vector 1: Pure Digital

Pure Digital strategies work when a product can be codified as information. Think Music, E-books, Films. Once the physical product is removed massive scale economies accrue to storage and distribution. What is called “long-tail” economics kicks in around inventory and specialisation, customisation and choice. In Oil and Gas, we may see some spare parts digitised, emailed and then 3D printed on-site. This will reduce carrying costs and delays. We may also see pure information products trade more freely (such as production forecasting, planning, sub-surface models, training data sets and educated machine-learning algorithms).

Vector 2: Digitally Enhanced Products and Services

Digitally enhanced strategies arise when the fundamental “product” becomes augmented with information. For instance, Uber generates a fair portion of its demand not only on price, but also because it provides information about where the cars are, when they will arrive, the route they take and the price you will pay. They then ease the transaction by collecting payment and supplying receipts. However, all the digitalisation in the world will be useless without the underlying physical product (in this case, a car to take you home). In upstream oil and gas we may see that a supplier of products such as spare parts, services or even crude oil become a preferred option when they supply accompanying information before their wares arrive and when they keep you informed while they are in service.

Vector 3: Digitally Efficient Operations

In oil and gas this is the area where I am witnessing most digitalisation activity.

Using information within your own business to reduce waste and increase accuracy is hardly a new idea, but digitalisation changes the game. As more information becomes available – because of better connections, more sensors and accumulated history – so it becomes possible to change the way you do things. Prioritisation, scheduling, just-in-time: these concepts work better when you can access more information and use it sensibly. Today’s engineers entering the workplace can probably not remember a world that didn’t have an iPhone and Google (Google is almost 20 years old). So, they are used to being able to think of a question and get an answer quickly. If you can harness this creative real-time problem-solving ability (by making information available) you can improve your operations.

Vector 4: Digitally Effective Supply Chain

Both vertically and horizontally there is potential to add value through more efficient exchange. The digitally efficient operation strategy will reduce the waste and hence cost within a single company (see Porter on what it will do for price). Supply chain strategies focus on removing friction between companies so inter-company waste will also reduce. This is, in many ways, a move from Digitally Efficient Operations to Digitally Efficient Industry. It is about expanding the focus from the individual company to the collection of companies.

For this to work requires standards, data compatibility and platforms where buyers and sellers can transact. Some suppliers (think about a stationery company) will supply various industries – say automotive and oil and gas. So eventually some standards will need to be cross industry, whereas others (say for drilling services) won’t be.  Though the benefits can be large, there are two main problems: co-ordination of participants; and allocation of cost and benefit.

Vector 5: Digital License to Operate

This is an interesting insight that came to me when I was discussing the apocryphal case of a town inviting bids from contractors to build a pipeline through it. One bidder offered to expose in real time the contents of the pipe, the corrosion status, inspection procedures and compliance, the leaks and seeps and other such. The other company claimed it was confidential. Guess who got the permission to build.

Whether the information was confidential or whether the quality of it and how to access it was suspect, I don’t know. But we see similar exposure of operational data for services such as trains and busses through simple APIs. This data is then “mashed up” by active citizens for public good to help people plan journeys or avoid breakdowns.

In the future, perhaps it will be a requirement of regulators that operational, safety and environmental data is made available to the public in real-time, if not – then you won’t be allowed to operate your field. Once that data’s out there you can expect to be held to account for your actions. Welcome to CSR in Industry 4.0.

Summary

The five vectors described here help to provide a primary direction for an initiative. For maximum impact, like all good vector mathematics, the magnitude of value delivered will increase as the direction of the vectors align. This tool helps to focus the mind on the primary vector and provides insights to the effect on the others to enable informed choices to be made.

As always, email me direct or leave comments here and I’ll do my best to respond.

Image credit http://www.kimonmatara.com/vector_ops/

 

Interview with Patrick von Pattay

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.

Increasing effectiveness.

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.

Cloud computing

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