Self driving and the digital avalanche

Justin Rowlatt just published an interesting article (he admits it is provocatively one sided) about the inevitability of self driving cars and the disruption it will cause. The article can be found here: https://www.bbc.co.uk/news/business-45786690.

I urge you to read the article, because it describes accurately the confluence of forces that causes avalanches and a split between the new and the old. When technologies hit a certain point the economies of network, scale and of learning kick-in to reduce the cost and increase the convenience of switching to the new, while the exact opposite happens to the old – making the switch happen in a non linear avalanche of change.

Justin’s article includes a photo of a New York street in 1900 and then in 1913 – in the first, the street is full of horse buggies and one car, in the latter the situation is reversed. The Model T Ford motor car was introduced in 1908.

For electric cars – just like in parts of the world where you still find many horse (and Ox) drawn carriages – motor cars as we know them will not disappear; the rate of manufacturing switch will be slower and cars bought today will still work in 20 years time.

A few years ago I made a calculation that, because of these and other factors, the internal combustion engine would take 50 years to be replaced even if the rate of uptake of electric vehicles accelerated. Justin makes a great point that, because of the effects of self-driving, we need, perhaps, only 10% of the current fleet to change and we’re done. Economics will kill the current car and nothing else matters.

This reminds me of why Amazon can (and has) destroyed the high-street. It doesn’t need to take 100% of the business, but – because bricks-and-motar retail has high fixed costs and low margins – they only need to take 10% of the revenue and Mrs. Smith’s Bookshop is toast.

The Fourth Industrial Revolution will be made on lots of changes like this. The facilities that the self driving car will enable (and the infrastructure needed to support them, and spin offs around that) will mean new industries emerge and old ones die. And it will happen quicker than we imagine.

Elon musk, for all his bluster about electric cars, is really re-inventing manufacturing [Link]. Not only will his disruption hit the auto industry, but any form of manufactured assembly of mass-produced product. And that’s just about everything consumers buy.

Get ready now!.

The Fourth Musk(eteer)

Introduction

Amazon reinvented how we bought books. In the process they re-invented the way we enable people to find and order almost any type of goods. Once ordered, the company arranges to have to have our orders despatched and delivered. Amazon seems to have become an unstoppable force in the world of retail – laying waste to high-streets, department stores and shopping malls along the way.

I see something similar beginning to happen at Tesla. Elon musk has moved on from innovative products such as the electric car and is now on the cusp of reinventing manufacturing. Few people seems to have noticed how general his approach can be and how it can be applied to making just about anything, and making it anywhere.

Innovator’s Dilemma

If you haven’t read “The innovators’ Dilemma” by Clay Christiansen [LINK]  it may be time to do so, or if you have brush up on the contents again. This book was first published 1997, as the world was going internet and computer crazy. It has stood the test of time.

The basic premise of the book is that industry incumbents tend to innovate by making their products better. All their customer focussed research and development is structured to avoid making products that are demonstrably worse than what they have in almost every way. But upstarts can and often do launch products like that to serve market segments uninteresting to the incumbent.

But innovation, it turns out, is dynamic and pretty soon the upstart is learning to get better to the point that their offering becomes “good enough” for a large slice of the market served by main suppliers.  The most demanding customers will still be pushing for extra features from the incumbent but this becomes increasingly difficult to achieve and scale economies fade (as the mass-market defects). This leads to the demise of the once dominant generation and the rise of the innovator.

The examples that Clay based most of his early published research on where the manufacturers of disk drives in Silicon Valley. But he drew the parallels in other industries. The book considered end-product (the disk drive), whereas now I am seeing the same market dynamics emerge in processes and services. Where the first steps of the new methods are not quite as good as the traditional, but the direction of travel means that the inevitable result will be an unstoppable revolution in the way things are done and the way things are made.

Amazon warehouse success and Tesla’s manufacturing innovation

Earlier I wrote about the innovation that was happening in the Ocado warehouse. [LINK] Amazon has quite a lot to say about efficient warehousing but (I don’t think) are licensing their technology to others. The innovation that has happened here has digitalised the warehouses and made them more efficient.

Elon Musk is doing this for manufacturing. What I find interesting about the approach to manufacturing in the Giga Factory [LINK] [LINK] is that it’s fundamentally different approach than updating a car manufacturing plant to become digital. It’s the reverse. Let me explain.

Amazon didn’t apply digitalisation of retail to book buying, they applied book buying to a digital retail and supply chain – once perfected it was instantly ready to serve across categories. Tesla is doing the same in manufacturing. Once you’ve learned to manufacture in an automated way – it’s a small step from cars to any other type of product.

A good place to start

Books were a good place for Amazon as it was a very inefficient process and bad for the customer. It turns out that car manufacturing is also a great product to choose to apply to digital manufacturing because there is demonstrable market for the finished goods. They are poorly served by the current process and the incumbents are being held back by two big forces – the internal combustion value-chain, and the clogged thinking born of mass employment and model for command-and-control distribution of labour and “industrial man”.  See “My Years at General Motors” Alfred P. Sloan [Link]  for insights on what the world of manufacturing has been striving to emulate since the 2nd industrial revolution started.

How does this apply to oil and gas?

There are two reasons why this is relevant to Oil and Gas.

  • firstly we are organised very much along the lines of division of labour and command and control described by Sloan. If this model is now under threat from people like Musk then we can assume that world of work as we know it in our industry will also change;
  • secondly as Patrick Von Pattay said in my interview with him [Link], perhaps the threat is not going to come from an incumbent applying digitalisation to make their existing oil and gas operations better, but perhaps it will come from someone who has learned to be an efficient operator of facilities who is now going to include oil and gas to their process. Like Amazon starting to sell electronics as well as books.

Conclusion

For the next 25 years, I suggest closely following the advances in automated manufacturing which is happening in Nevada right now, and imagine how such changes in working practice can affect our industry. Because they will.

Get out of the way of digital Chris

A friend of mine runs operations for one of the larger players in the North Sea. He has a chap who works for him. For the purposes of anonymity, I’ll call him Digital Chris.

Digital Chris is a very valuable person. He’s what’s referred to as a “Barrel Chaser” he’s the trouble shooter, the ideas man, the guy that gets things done. Digital Chris adds thousands of barrels of production each year. Production that would otherwise be locked up due to process constraints, lost through shut-in’s and trips or lost through delays getting things back on-line. Digital Chris probably contributes a few million pounds of cash that drops straight to the bottom line.

It’s odd then that not everyone is like Digital Chris and that people like him are so rare. I remember there was a chap I met who worked at Elf in the 1990’s who I’ll now refer to as “Digital Martyn”. I hope he won’t mind me name checking him – Martyn Beardsell – https://www.linkedin.com/in/martyn-beardsell-5639aa1/

Digital Martyn worked as a reservoir engineer and seemed to be able to use software tools he had available to construct answers to geological modelling and reservoir production questions in ways that others couldn’t. He could take information from many different disciplines, combine them and use it to solve sub-surface puzzles in new and imaginative ways.

Digital Martyn and Digital Chris are digital pioneers, a different type of digital twin if you will. They may not think of themselves this way but they are. The problem-solving results they achieve are not only orders of magnitude faster & better than whole departments of people, but I’d go as far as to say that they spot and solve problems to unlock opportunities that would otherwise be lost forever in the fog of bureaucracy.

What’s interesting now is that if you walk into a G&G department they are no longer divided by discipline as they were once: Geology, Petrophysics, Geophysics, Reservoir (with geochemists and bathymetry not knowing where to report); instead they are organised as “Subsurface” and divided by business objective Exploration, Development and Production.  Computing power and data was the underpinning of this change. All companies now organise their G&G departments and behave in the way that Digital Martyn pioneered 25 years ago. I suspect 25 years from now all operations groups will organise and behave in ways that Digital Chris, and those like him, are pioneering today.

The BBC reported that there will be a requirement for 10,000 digital workers in Oil and Gas in the next 20 years. http://www.bbc.co.uk/news/uk-scotland-north-east-orkney-shetland-44067949 On average that means each of the 50 or so operators need to find 10 Digital Chris clones each year. My friend has only found one in the last 15 years.

If Martyn and Chris are twins separated by 25 years and, if Digital Chris is a pioneer, there are three things the wise oil company executive should do: Learn to spot more digital pioneers; develop and grow them; and help them be successful in their roles.

To help you spot them, here are the traits of a digital pioneer:

  1. Is technically advanced in area of specialty
  2. Is a creative problem-solver
  3. Maintains broad overview of situation
  4. Prioritises attention to areas that maximise value
  5. Digs into extreme detail when required
  6. Tests Hypotheses with data, discarding ideas when necessary
  7. Develops networks and creates social and political capital
  8. Naturally works across organisational boundaries
  9. Can’t stand bureaucracy and form filling

 

Once you’ve found them here’s a few suggestions to help them develop and grow

  1. Develop tools to gauge the business impact of decisions
  2. Create common language to enable discussions on relative value
  3. Share strategic vision and what will be considered “good”
  4. Reward the identification and quantification of problems
  5. Provide unfiltered access to whatever information is needed, even if only needed for curiosity
  6. Encourage diversity of approach and non-conforming ideas
  7. Ensure that safety is not compromised by new ideas without killing the idea-generation process itself

As they develop, it’s your responsibility to help them be successful in their roles

  1. Prevent nay-sayers from using trivial detail to thwart progress
  2. Align interests by addressing the gap between process-driven functions like finance, procurement and IT and those working in the white-heat of operational time-frames
  3. Deploy technology that reduces information-friction and promotes transparency
  4. Try to work with the minimum of forms, reports, emails or meetings

 

It’s going to be a long process to re-equip the whole workforce with digital skills, some of that will happen naturally as new workers enter the industry. There will be a need for conversion to new ways of working to be established within existing workers as well.  The challenge is going to be attracting new people with digital skills, embracing those new skills and associated ways of working (letting them flourish and keeping work meaningful and not frustrating) then combining them with the know-how from established practices in the industry.

In the short run we’re going to need to work in teams – and teams with diversity of thought and approach. Not the sort of team I’ve seen (and experienced) where all new digital methods are pooh-poohed. Not the type of “team” where the old guard try to reprogramme the progressive new digital guys to adopt the way it’s done here – and the digital guys opt out and are replaced with IT people (who haver IT skills but are not Digital, see traits above). The IT guys end up going off on IT projects for their own sake and impose so many restrictions on technology adoption by the operations teams that the whole thing falls flat and fails.

Be Digital!

 

 

 

 

 

 

 

 

Four Grand Challenges

Comments on Jodrell Bank Speech

Theresa May, British Prime Minister, May 21st 2018, Macclesfield

In yesterday’s post I had high expectations of scooping a major news story, but no. Maybe it’s because I don’t own a television, but I am very disappointed by the lack of coverage of a speech that history may look back as a turning point when we, “as a nation” – to borrow a phrase, shifted our focus from banking and finance back to inventiveness and engineering. Maybe that’s just my hope though.

I’ve listened to radio 4 and searched on the BBC and ITV websites, but all the references to the speech are in relation to Brexit and are all sound bites. They all miss the point entirely.

The speech was full of historical rhetoric about how great we used to be in science and name checked a roll-call of the great and the good. It therefore managed to tick both the jingoistic and nostalgic boxes. This was, however, not a light-weight speech but instead sets out a direction of travel and intent that we should all be aware of, because it has the potential to change our industrial history.

The full speech can be read here https://www.gov.uk/government/speeches/pm-speech-on-science-and-modern-industrial-strategy-21-may-2018

Like with Harold Wilson’s “white heat of revolution” speech where I didn’t comment on his pro-soviet views, I will also not comment on the Brexit views contained within this speech. That is as divisive and full of misinformation as was the capitalist/communist argument in the 1930s to 1960s and a rabbit hole that yesterday’s media went straight down – missing the point entirely.

Here are some of my highlights of the speech. Some of these, as predicted, do echo the structure used by Wilson in 1963, though to be fair, perhaps it was closer to the 1961 speech to congress by JFK [link].

On the scale of change of the 4th Industrial Revolution we now face, referencing of 1945 Britain

Their grand-parents lit their homes with oil lamps and travelled by horse and cart, but they would live to see jet travel and space flight.

Echoing the 1960’s speeches

[…] the world today stands at the threshold of a new technological age as exciting as any in our past. Great changes in how we live, how we work, how we trade will reshape our economy and transform our society in the years ahead. This technical revolution presents huge opportunities for countries with the means to seize them. And Britain is in pole position to do just that […]

[…] But success is not automatic. We are at the forefront of scientific invention because we embrace change and use regulation not to stifle but to stimulate an environment for creativity […]

[…] Scientific research is a noble pursuit and a public good – whether or not it leads directly to a commercial application. But when a discovery does have the potential to create or transform an industrial sector, time and again British entrepreneurs have been the first to capitalise on it[…]

[…] However, the nature of innovation and progress is that new technology inevitably replaces old. And in the twenty first century, some parts of the country that once thrived because of innovation and technology has seen the jobs and opportunities of the past fall away […]

[…] Our challenge as a nation, and my determination as Prime Minister, is not just to lead the world in the 4th Industrial Revolution – but to ensure that every part of our country powers that success. […] Nurturing the talent of tomorrow – through more outstanding schools, world-leading universities and the technical skills that will drive our economy.

On Investment in Science and Technology

£7Billion in new public funding for science, research and innovation […] goal of 2.4% GDP invested by 2027 […] Could translate into £80 billion investment over the next decade.

On Education in new technology

£26K tax-free bursaries for new teachers in priority subjects […] New T-Levels as good as A-Levels […] New Institutes of Technology […] National retraining scheme to help workers of all ages adapt their skills to the jobs of tomorrow.

On other elements of the strategy

Renewing and extending our infrastructure with faster trains, bigger stations, better roads […] Delivering the next generation of mobile and broadband connections […] Right regulation, modern employment standards, effective corporate governance.

At this point in the speech Theressa May laid out what she calls 4 grand challenges. Noting that it’s hard to predict exactly what breakthroughs lie ahead, she set out a Mission for each of the challenges with promises of more to come. So stay awake!

Grand Challenge 1: AI and data

Mission: Use AI and data to save lives.

In short use AI and data to predict diseases that kill people which if detected early are treatable.

Grand Challenge 2: Healthy Ageing

Mission: 5 extra years of healthy living by 2035.

Use technology to keep people happy, healthy and independent in their own homes, change employment responsibilities and innovate new products.

Grand Challenge 3: Future Mobility

Mission: Only zero emission vehicles by 2040

We pioneered trains and jet air travel, so this should be a doddle. A bit light on details though. But get on with it, we invented Formula 1 for heaven’s sake.

Grand Challenge 4: Clean Growth

Mission: Halve energy usage of new buildings by 2040.

Well pretty much what it says on the tin for that one.

These four missions are just the beginning – and in setting further missions across the four grand challenge areas, we will work closely with business and [the private] sector.  In each one of these four missions, scientific and technological innovations have the potential to create jobs, drive economic growth across the country and deliver tangible improvements for everyone in our country.

Conclusion

This is the first use of the term “4th Industrial Revolution” by a British Prime Minister. It shows a recognition that big changes are underway in the structure of society and the way it integrates with the world of work and therefore inevitably in the distribution of wealth and allocation of capital.

The OGTC in Aberdeen must be a happy place today, if there is anything to note for them there will be much more funding for institutions like them and their influence on policy can only increase.

Of the four “Grand Challenges” it seems to me that “AI and Data” will be required for the other three too, so the structure is a bit wrong. The missions however seem like a good concrete way to lay things out – though, to be fair, they are not really up their with JFK’s mission announcement at Rice University in 1962 [link]

At least she didn’t say : We didn’t choose to go to Cheshire because it is easy, we do this and the other things because they are hard. Have you seen the potholes on the M6 or the price of a train ticket to Prestbury?

Though technology may even have reached that far North. I am reliably informed you can now get an Uber in Prestbury. There is – exactly – one. British enterprise knows no bounds.

Industrial strategy revisited

Today, May 21st 2018, the UK Prime Minister, Theresa May is scheduled to give a speech regarding AI and the use of health data. This is the start of the revelation of the UK government’s new industrial strategy. From my vantage point, I see this political response to be part of the Fourth Industrial Revolution. My post was written (and published) before this speech and is a naughty attempt by me to see how well her speech writers know their political history. I have framed this in the terms of the Oil and Gas industry, Mrs. May’s speech will address Health Tech, but maybe some of the broader themes will resonate.

Industrial strategy is a something that the government hasn’t really majored on since the days of Anthony Wedgewood Benn.  They do say that history doesn’t repeat – but it does echo. This post draws on the “White Heat of Technology Revolution” speech given by Harold Wilson in October 1963.

To provide some context, Mr. Wilson’s speech was given during the early days of the 3rd industrial revolution. At this point we were seeing the start of computerisation and automation. Within a few short years we would see: the end of the typing pool; the death of the statistical time-and-motion studies; ledgers would be replaced with spreadsheets; and punch cards with magnetic tape with hard disk drives.

Unlike Mr. Wilson, who basically suggested that we better get on board with computerisation or we are all doomed; it appears that Mrs. May’s speech is going to suggest that AI can help cure cancer. Maybe it’s true that you can catch more wasps with honey than with vinegar. Mr Wilson’s political approach led, eventually, to the “Winter of Discontent” and the inevitable computerisation/automation led to the mass unemployment and the industrial upheaval of the 1970’s. Perhaps there are “interesting times” ahead?

I’ve taken some liberties by extracting parts of the 55 year old speech and reframed them. Perhaps you, too, will hear the echoes of history and see the implication of the change that we now face. For a transcript of the full speech have a look at this link

White Heat of Technology in Oil and Gas

(with apologies to Harold Wilson)

Now, this morning, I present this blog post to the world, the oil industry and the 4th Industrial Revolution, because the strength, the solvency and influence of the oil and gas industry which some still think depends upon nostalgic illusions or upon sub-sea posturing – these things are going to depend in the remainder of this century to a unique extent on the speed with which we come to terms with the world of change.

There is no more dangerous illusion than the comfortable doctrine that the world owes us a living […..] From now on The Oil Industry will have just as much influence on energy supply as we can deserve. We have no accumulated reserves on which to live.

It is, of course, a cliché that we are living in a time of such rapid scientific change that our children are accepting as part of their everyday life things which would have been dismissed as science fiction a few years ago. We are living perhaps in a more rapid revolution than some of us realise. The period from 2018 until the mid 2020’s will embrace a period of technical change particularly in production methods, greater than the whole industrial revolution and period of computerisation that went before.

It is only a few years since we first talked about digitalisation […..] Let us be frank about one thing. It is no good trying to comfort ourselves with the thought that digitalisation need not happen here; that it is going to create so many problems that we should perhaps put our heads in the sand and let it pass us by. Because there is no room for Luddites in our industry. If we try to abstract from the digitalisation age, the only result will be that the Oil Industry will become a stagnant backwater, pitied and condemned by the rest of commerce.

[….]

Because we have to recognize that digitalisation is not just one more process in the history of computerisation, if by computerisation we mean the application of technology to eliminate the need for data gathering and analysis by middle-management. The essence of modern digitalisation is that it replaces hitherto unique human functions of: risk assessment; judgement, decision making in the face of uncertainty; and ultimately action taking. Now digitalisation has reached the point where it commands facilities of memory and of judgement far beyond the capacity of any human being or group of human beings who have ever lived.

[….]

Or listen to the problem in another way. We can now set a machine learning system so that, without the intervention of any human agency, it can produce a new set of algorithms smarter than itself. And when these tools have acquired, as they have now, the faculty of unassisted reproduction, you have reached a point of no return where if man is not going to assert his control over machines, the machines are going to assert their control over man.

[….]

The problem is this. Since technological progress left to the mechanism of private property can lead only to high profits for a few, a high rate of employment for a few and to mass redundancies for the many.

[…]

Now I come to what we must do, and there are four things:

  1. We must produce more digitally trained engineers
  2. Once produced we must be more successful in keeping them in the industry
  3. We must make intelligent use of them
  4. We must organize the oil Industry so that it applies the results of their insights to the efficient production of hydrocarbons

[…..]

Relevant, also, to these problems are our plans for on-demand cyber training and MOOC’s (Massive Online Open Courses). These are designed to provide an opportunity to those who have not been trained in digital methods to do so with all that the internet and mobile technologies can offer.

[…..]

I have talked in other companies to ex oil-and-gas digital-workers who have left the industry. It is not so much a question salary; it is the poor valuation put on their work by our industries; the lack of interest in their work; and the inadequate provision of digital infrastructure and equipment. It is because in many cases in the Oil industry today, promotion of those versed in technological methods and their new ideas for ways-of-working are thwarted by middle management.

One message I hope this conference can send out, not only to those who are wondering whether to leave the industry or not, but to those who have already left is this: we want you to stay here. We want those of you who have left the industry to think about coming back, because the industry is going to need you.

[….]

The oil industry that is going to be forged in the white heat of this revolution will be no place for restrictive practices or for outdated methods on either side of IT or the Business. We shall need a totally new attitude to the problems of educating for changing working practices. If there is one thing where the traditional philosophy of capitalism breaks down it is in the training for digitalization, because quite frankly it does not pay any individual operator, unless it is very altruistic, quixotic or farsighted, to train the digital workers if it knows at the end they will be snapped up by some unscrupulous firm that makes no contribution to the training. That is what economists mean when they talk about the difference between marginal private cost and net social cost.

I’ll leave you to read the original and draw your own conclusions, I don’t agree with all the cut-and-thrust and pro-soviet views expressed but there are echoes from history that we ignore now at our peril.

Image Credit is from MI5. Oh, and if you like a good conspiracy theory have a look at the denials on MI5’s website about the alleged plot to bring down the Wilson government of 1974-76, and – interestingly – that George W Bush was head of the CIA (who knew? He kept that quiet). https://www.mi5.gov.uk/the-wilson-plot

 

 

Oil Companies Can’t Innovate?

I have just returned from two digital-operations conferences in Aberdeen. There was a common complaint among technology providers. They complained constantly that oil companies are slow to make decisions and don’t innovate (or specifically – buy their products). Some vendors even suggested that oil companies were 20 years behind the curve – that there are proven technologies available and in use in other industries that are yet to be deployed.

Of course, this is demonstrably wrong. Other than space and defence, I cannot name many other industries that can do something comparable to placing a drill bit 3KM into the earth in a water depth of 1KM with an accuracy of a few tens of meters. Engineers do this with real-time information from the drill-bit being beamed across the globe to operations centres thousands of miles away. That’s pretty amazing.

In truth – much engineering innovation comes from service companies rather than oil companies. Lots of technology and information processing is applied to exploration and drilling, a lot less in production-operations. The split in innovation from oil company to service company can be traced to decisions in the 1970’s and 80’s, the efficiencies and breakthroughs arose from companies such as Schlumberger, Gearheart and Atlas. However, the super majors such as Shell, BP and NOC’s (National Oil Companies)  like Aramco still undertake loads of research and have come up with solutions – such as polymers, de-ionised water for injection and their own seismic interpretation algorithms.

Still the point is valid – the 4th industrial revolution will mainly affect industrial operations. There is a distinction between operations within the business of oil-field services, and operations within the production of hydrocarbons. Both have the opportunity to become more efficient. Despite the opportunity, I’ve witnessed the complexity of buying and lack of progress in technology adoption within oil company operations, and it’s very frustrating.

I had a conversation with a senior exec at one of the new independents. I asked him why new ways of working were not being adopted.  His answer was very interesting. He told me that his team had just completed a new well on an old field. The well cost about £20m, took about 8 weeks from spud to completion, and was flowing at 3-5K BBl/day. It was simple, quick, contained, could be purchased as a work-package and was very much business as usual. No disruption to the organisation. That’s a return of more than 100% pa, a payback period of less than a year, and simple.

New technology implementation (the types of activity I was proposing) couldn’t promise that sort of percentage (or absolute) return, sounded complex and would – inevitably – require significant change to implement within the organisation. He had a point.

But that’s not an excuse. One day, and it may be soon, the sort of margins available on wells will disappear. There will be fields where the lifting cost exceeds the sale price for crude – but where there are still significant hydrocarbons left in the reservoir. In these situations, the impetus to reduce the cost of operations will be provided by the opportunities for profit. Somebody will be interested.

Look at what happened with shale in the USA. Fracking is not a new idea. The innovation of shale came from the combination of planning drainage patterns, drilling accurately, hooking up without interruption and – crucially – increasing the rate of development while dramatically reducing the per-well cost. Once this approach to development was established, it was game on.

When the big boys bought in – I was at BG we bought into Exco [link] – they didn’t come to the low-cost shale drillers and tell them to adopt the big-oil processes. The ponderous decision making and bureaucratic approvals required for $100m HTHP that takes 6 months to plan and drill, would have been impossible to handle the programme needed for a campaign of sub 100K 4-day wells required for shale.

It’s going to be the same again. With the late-life fields and new players, someone is going to figure a way to get the operating costs per barrel in a late-life field down below $10/Bbl and the big-boys are going take notice and learn.

The innovation required is going to come from low-cost technologies combined with an efficient operating model. Clay Christiansen in his book The Innovators Dilemma [Link  ]examined the disk drive industry and how the “big-oil” of storage were out competed by start-ups with sub-performance (but cheap) technology. Once a foot hold was established in the market – the performance of the new technology rapidly improved to the point where the big buyers switched. This left the previous big providers to decay into obscurity.

The North Sea oil industry was a pioneer in offshore development and much of the current techniques for long-reach directional drilling, FPSO and sub-sea originated there. With the business opportunity afforded to entrepreneurs by late-life field extensions, now is the time for innovation in how to operate cheaply. On-shore Middle East can produce oil sub $10 / Bbl the Offshore North Sea is $45. It’s time to innovate that gap away. (link):

(OK, I know the figures aren’t that simple due to capex and taxes but the principle stands!).

Image credit: https://jillwallace.com/vignettes/2017/11/8/pimple-on-the-ass-of-elephant

 

 

 

Ocado, where’s my Avocado?

Can Ocado’s warehouse teach oil and gas a trick or two?

Today the BBC carried a story regarding a visit to the semi-automated Ocado warehouse in Andover http://www.bbc.co.uk/news/technology-43968495 . It made me think about what their basis of competition was and how this might apply to oil and gas.

Ocado is a company that embraced digitalisation early on, without perhaps realising that they were a leading light in the 4th Industrial Revolution.  What Ocado do is not conceptually difficult to understand. They deliver groceries. The value they deliver to the customer is very like that available from Tesco, Sainsbury and other on-line retailers. So what’s the difference?

There are four elements required to make this business system work:

  1. Establishing a source of supply (things to sell)
  2. A way to get customers to place and pay for orders
  3. Methods for grouping the contents of the warehouse into packages
  4. Efficient delivery from warehouse to end customer

All four areas are ripe for digitalisation to make them more operationally efficient and increase the return on fixed assets.
At first the innovation that Ocado brought was to digitalise the shopping experience. As others have caught up, I think that Ocado has understood that their business model is going to have to compete on efficient order-fulfilment.  Customers don’t care about how that’s done (so long as it is) but other retailers might, and they might be prepared to pay for the service.

To be successful (in the traditional sense) means maximising retained profit in the face of competition. Each of Ocado’s four parts of their operation can be disaggregated and sell services to different customers. This is the classic “value engineering” popularised by Tom Peters and his peers in the 1990s.

Consider one scenario for a moment.  Maybe Ocado should consider if more value for the warehouse comes from the exclusive use by them (because they can charge a premium for their excellent picking), or perhaps they supply capacity to others and capture value by fulfilling orders more cheaply than their “competitors” can. Charging their competitors a fee above their cost.

When they brain-storm their options for this part of their value chain, some things they may consider include:

  • Would making their competitors more reliable hurt their revenue coming from the Ocado website?
  • Would increasing the volume of orders handled increase error rates?
  • If their service suffered and took-down Tesco deliveries, whose reputation would suffer?
  • Would more volume lead to economies of scale and reduced costs, and more profit?
  • Is the way that they develop and use technology in their warehouse patentable? Is it a trade secret, can they license the method to others and help them set up their warehouses?
  • What if someone else offered this service, would they use it or choose to compete?

When the four elements are combined, competition comes from the likes of Sainsbury Online and the Tesco Website and Substitution from a traditional Supermarket. Each of the four main parts of the operation faces different competitors such as: Walmart for efficient sourcing; Ebay for customer experience; Amazon for warehouse management; and FedEx for customer package routing and delivery.

What I find interesting is that the basis for innovation and efficiency is all driven by different aspects of Digitalisation and I4.0, but the opportunity for innovation comes from the vertical integration of the four elements together. One day, the new model will have consolidated around new “digital design patterns” and the window will open for value creation through consolidation, outsourcing and specialisation within the value-chain.

This is a lead-in to my next post which I’m writing where I will consider if the move in the 1990’s to outsource everything “non-core” in oil and gas operators has left the previous generation of leading companies unable to digitally innovate across their value chain. This is because they no longer have the end-to-end knowledge to combine with emerging digital ways of working. If I am right, then future innovation may be driven by new players who have not outsourced their operations to a myriad of subcontractors. Interesting times.

Image credit: https://vivitherapy.com/product/avocado-oil-organic-virgin-1-litre/