4IR Implications Part 3: Energy Transition

This is the third post in the series considering the left-field consequences of the 4^th Industrial revolution (4IR). Not only are there several technology trends leading to breakthroughs in productivity but also there are drivers pushing changes in approaches to energy. This is a long post, so apologies in advance, but there’s quite a lot to say on the topic.

If you were in Surrey and was asked “does the world need any more cars or need a better standard of living”, you might be tempted to answer no. If, however, you were in the poor parts of south east Asia or Africa you might instead agree that raising living standards is good idea. To do that output per person must go up and that will require technology, know-how, organisation, and energy. As living standards rise demand for domestic energy rises too.

Development has implications for energy demand, supply, and emissions. For capitalism to continue to provide improvements to people’s lives different economic drivers will be required if we are to address environmental constraints. Some will come from technological advances, some by regulation and some by changing desires of consumers. In short, we need a transition in our approach to energy.

I’m going to address energy transition in four ways: energy substitution, energy efficiency, decarbonisation, and decommissioning.

Many members of the Bestem Network are involved in the oil and gas industry. Please don’t read this post as a prediction for oil prices, it’s not. It’s also not about the short-term outlook for the oil industry. It doesn’t deal with the decades of piped gas and LNG and the abundant shale gas available. Instead it explores inescapable (if inconvenient) long-term trends. Guided by the insights from members of the Bestem Network, I am concerned to know if I am investigating along the right track more than demonstrating “being right”.

For oil veterans “Energy Transition” is firmly on the agenda in 2021. Many people I talk to are experiencing declines in their current business. Some are starting to believe the value of resources and capabilities that drove business success in the past should now be reconsidered. For them, it’s tempting to term any new line of business as energy transition – because it is a transition away from the energy business they knew. This phrasing doesn’t aid analysis. That’s why I decided to consider this topic in four dimensions.

There’s a lot of resistance and denial about change in the Oil and Gas industry. People can’t comprehend that skills, resources and assets that seemed so valuable three years ago, may no longer be so. Oil companies are writing off reserves, there is talk of stranded assets. Of course, there are people whose interests are served by changing the public discourse and some of the “illogical” conclusions of proponents of the new order may be “wrong”. Perhaps all parties have the same priorities, but in a different order? If enough people subscribe to a new paradigm, they can sway the outcome. Watch out, history only calls this way once.

What’s the data say?

If you haven’t read the BP statistical report on energy and oil – you’ve missed out. LINK

For my oil and gas colleagues, please note the graph above is for energy usage and therefore does not include consumption of oil and gas for other purposes such as chemical feedstock. These other uses account for about 15-20% of consumption. LINK

Perhaps petrochemicals will become a relatively more important use for oil. There are important developments including the configuration of the new Yanbu refinery that hint at this. Perhaps this market will be dominated by the middle east. LINK.

By far the most important sources of energy are Oil, Gas and Coal. Our modern world is built on their consumption which has increased 10x since 1900. In many ways the history of the 20^th century is the history of oil. I am currently reading Daniel Yergin’s book the New Map, it’s a great reminder of how mega-politics is tied up with energy. LINK

Figures from the USA indicate that approx. 40% of energy is consumed in the home (heating, lighting, powering equipment, etc.), 30% is used for transport (private cars, lorries, boats, planes etc.), and 30% is used in industrial settings (steel, cement, manufacturing, mining, oil production, etc.). LINK

As other parts of the world catch up with the lifestyles of the Europeans and North Americans sheer weight of numbers could mean another 100x increase in energy consumption is on the horizon unless something changes.

Unfortunately, this poses two problems: Firstly, consumable resources are finite causing scarcity and price rises which slow global development, and secondly it appears that the emitted gasses are inconveniently killing us all (albeit quite slowly). LINK

Apparently we must emit no more than 100GigaTonnes of CO2 before the end of the century. LINK. In 2018 we emitted 40MegaTonnes. LINK. Carbon concentration in the atmosphere stands at 400 parts per million (up 50% from where we stood in 1850). At the current rate, excluding growth, we hit our upper limit in about 25 years, leaving us 55 Years where we must emit nothing at all. So, we must grow and use more energy but emit less carbon.

On top of this, advances in power semi-conductors, computerisation and battery technologies are making electricity more interesting. The use of oil, coal, and gas to create electrical energy that will then be transformed into stored potential and then to kinetic energy is less efficient than directly generating electricity in the first place. This is especially true when the price of new generating equipment is benefitting from economies of learning and scale. Since 2010, utility-scale solar PV power cost has declined 82% LINK and LINK

The upshot of all of this is that:

The human population of the world cannot safely advance until its growing energy requirements are met by means other than oil, gas and coal

Not only must we not increase the rate of CO2 production, we must reduce it

Combine this with some trends:

There is a growing desire to use electrical power

Measurement, algorithms, and power-switching leads to reduces losses in electrical power systems

Cost of generating electricity from the sun and wind is reducing

It’s possible to capture CO2 as it is produced so it is not released

It’s possible to remove CO2 already present in our atmosphere

There are other fuels that don’t produce CO2 when they burn

All this points to: growth in renewable generation; a stop in demand for oil, gas, and coal for electricity generation; reduction in the tasks that need doing; ways to use less energy to perform tasks; moves to reduce the production and release of carbon dioxide; and ways to remove the darned stuff from the air if at all possible. This is neatly summed up in categories Energy Substitution, Energy Efficiency and Decarbonisation. And will inevitably lead to Decommissioning.

Energy Substitution

Perhaps this is the first true energy substitution? We’ve had fuel augmentation before – adding coal on top of wood, and oil on top of coal. Sure, there was a little displacement, but mainly it was new growth that accounted for the new fuel and we continued to consume the old stuff pretty much at the same rate as before. The method for conversion from chemical to mechanical-power did, however, change – steam, internal combustion, turbine. This time is different as we’re transitioning on three fronts simultaneously: the primary method of capturing energy; displacement of established uses; and finding new (more efficient) ways to consume.

The benefit of electro-mechanical conversion

Direct use of electric drives to replace fuel combustion is occurring in both transport and in industrial settings. There are some areas that prove harder to electrify – especially when heat is the desired end-product. These include steel making, cement manufacture, distilling, cooking, and domestic heating.

There are positive drivers pushing the direct use of electricity in mechanical drives. This method provides excellent controllability using complex sensors, computer control and high-power semiconductors. It also provides excellent scalability – very small motors up to massive monsters. Electricity is also relatively easy to distribute.

The downside to electricity has always been difficulties related to is use in temporary, new, or moving applications. This relates to portability, transport, and storage. Battery technology is an issue as is gaining a connection and maintaining grid reliability. Users tend to fall back on diesel-based generation for both portability and reliability.

In transportation (especially aviation) weight is an important factor because, unlike fuel tanks, batteries do not get lighter when they are empty.

The business drivers of electric energy adoption:

Falling cost of direct electricity generation from wind and solar

Increasing battery performance

Requirements for fine-control and monitoring driven by computer control enable new solutions

Opportunities for efficiency from system level monitoring and prediction coupled with intelligent distributed control

Obstacles are:

Cost of infrastructure for grid establishment

Time to establish connection

Difficulty in transporting stored energy

Difficulty of use in mobile applications (battery storage and weight)

The societal drivers are:

De-carbonisation

Energy security

Under the current business rules, when positive drivers are strong enough and the obstacles small, users will naturally substitute. To maximise the societal drivers (or public good) regulation changes may be required to tip business decisions. These can come in the form of subsidies, penalties or license-to-operate. The decision is dynamic – what doesn’t make sense today, may do tomorrow (note the 82% fall in the price of solar over the last decade). The more that electrification occurs: the more technology is developed and the more the price falls; the more experience we gain and the less risky the outcome becomes. As demand and volumes fall for older technologies, they become more expensive and less convenient. Over time tipping points are reached and business decisions become easier to make. I explained this dynamic in relation to electric cars here LINK

There is a great piece by Tim Harford examining the shift from steam to electrical drives at the turn of the 20^th Century. It provides a framework for understanding the drivers of the elongated time lines required for a transition. LINK

Scale Matters

Renewable generation used to be a cottage industry, but scale matters and it’s starting to swing the economics decidedly in favour of renewables.

Solar power is a factory manufacturing and construction problem. Site operation is pretty much zero intervention. Factors that have driven down cost will continue to do so with manufacturing costs decreasing and per-cell-output rising. While it’s unlikely to rival Moore’s law, research into cooling, focussing and reflected energy is promising a 10x improvement in output, which will compound the learning economies we’ve already seen. Solar is already the cheapest way to make power, and result of development may mean that we see a further 10x fall in price per MW generated.

Scale in wind power matters. GE are trialling a 12MW turbine in Rotterdam LINK It won’t be the last.

Standardised production

Unlike oil and gas platforms each turbine is essentially the same as the last one. There is no top-side processing to be designed and no process modification during its life. Wind has already achieved the standard, reusable, modular offshore design that Oil and Gas have been talking about for so long and never managed. This will lead to reduced requirement for engineering design and economies of scale and learning for installation and operation.

Oil and gas have been very wasteful for decades by creating bespoke engineering solutions on a field-by-field basis. There are many apocryphal stories of cost escalation in oil and gas facility engineering. Including one operator specifying 20 shades of yellow for sub-sea valves, which may or may not be true. But here’s a link that makes me think maybe it is LINK

Large generation assets promise cheap, reliable power distributed by a common connection. That’s a welcome development because small-scale generation posed unexpected public-good problems. In several underdeveloped countries central generation is unreliable, and users are tempted to go off-grid. Unfortunately, this has a detrimental effect on the public grid subsidy and leads to a death spiral for national utilities resulting in even worse service for citizens.

Energy Efficiency

There’s not a huge amount to say about energy efficiency other than its about stopping waste which means: for heating more insulation; for energy conversion making less heat and noise; and for moving parts less friction and less weight. Overall, it means stopping doing what’s not really needed – such as unnecessary journeys by better planning and routing, and not heating or lighting spaces no one is occupying.

This leads to energy reduction technology using predictive algorithms, sensing and fine control of systems.

Examples include google reducing energy consumption of its data centres by 30% by predicting the weather. LINK

High-power semiconductors enabling DC power transmission and reduced line-losses.

How have power semiconductors changed HVDC technology?

And there is tons of work going on using big data and AI to reduce logistics costs. LINK

There are activities that can not only be made more efficient but also completely replaced by new technologies. For instance, additive manufacture and additive construction may displace some of the need for energy used making materials such as cement and steel, thereby increasing construction efficiency and reducing energy requirements and carbon emissions.

Decarbonisation

I’m not a climate scientist but if enough smart people tell me there is a problem, I tend to believe them. Though, in my view, this is not about saving the planet – the Earth will be fine – it is about preserving an environment within the tight tolerances required for the human life we’ve come to expect.

For climate change, my reading of the situation is that we have a problem related to imbalances of gasses and particles in the atmosphere. Energy substitution and energy efficiency will naturally reduce carbon emissions in some areas. It may help continued growth of middle classes across Asia and Africa without a proportionate increase in carbon emission. However, this won’t be enough as there are still areas where electrification is not yet practical, and efficiency gains not enough.

This leads to two approaches to decarbonisation: chemical fuels which are not carbon based; and methods to rid the atmosphere of un-eliminated carbon emissions.

Alternative fuels maintain the thermal cycle but don’t produce CO2. The two most often noted are Hydrogen and Nuclear. I would not want either if it were not for the carbon argument (in almost every application it’s a compromise) but they may be necessary as sub-optimal answers until better ones can be found. Hydrogen wins on portability and Nuclear on reliability and capacity (and portability in applications like marine warfare and space exploration).

Its unfortunate reactions with steel aside, hydrogen is interesting as replacement fuel in domestic settings where pipes, compression and metering etc are available. Like copper phone lines, it is unlikely that any country that does not already have the legacy infrastructure would invest in it now.

Capture and storage

Talking of legacy, the oil and gas folks are pretty good at drilling holes, moving fluids, and running large pipelines. They also have some bits of kit in the North Sea (and pipes running to and from them) that it would be great to find a use for these when the oil stops. There is a lot of interest in finding ways to pump CO2 through the system and store it in underground spaces vacated by the oil that was pumped out.

I can see why you’d want to do that if you owned the infrastructure, and it’s an interesting short-term measure but it doesn’t seem like this would be a scalable solution to on-going growth and just like oil wells run dry, storage facilities will eventually get full. The idea that we have to add a complete industry with scale and complexity of oil and gas solely to deal with the emissions of other industries adds a layer of inefficiency and cost that, if allocated correctly, would make them even more open to replacement by alternatives.

Fuel Cells

The use of hydrogen in fuel cells makes little sense in the long run if battery and super-capacitor storage improves. Generating electricity, to convert to hydrogen, to transport under high pressure, to convert back to electricity seems absurd to me.

In my view, hydrogen is not part of the endgame of energy transition. It may be an interim step where direct electrification and transport/time-shift of stored electrical-energy is not yet practical. It does make sense to accelerate decarbonisation when an alternative has not been established, but it is inferior to many other forms of chemical energy except for its emission properties.

Hydrogen is more viable while legacy resources and assets exist in abundance such as low-cost infrastructure, fabrication facilities, mechanical engineering, and process engineering. It would require a lot of careful handling under pressure, temperature and, combustion. Luckily it can be consumed (less well and with modification) by legacy assets such as internal combustion, jet engines and domestic boilers.

Nuclear

The same arguments apply for Nuclear energy, but not so strongly and even less for fusion. Nuclear fuel is abundant and (with care) easy to transport and energy conversion is centralised. Energy is, however, still derived from the release and recapture of heat and the physical movement and containment of molecules and (and particles) under extreme conditions.

Decommissioning

When thinking about decommissioning my mind normally turns to removing infrastructure from the North Sea at the cessation of oil and gas operations. To be fair with an almost £80Bln prize at stake in the UK alone it’s not surprising that there is interest. LINK

But there is much more. If we are going to move to a low carbon world based on electrification, then there are many more assets that need to be decommissioned or refreshed. Ranging from filling stations, pipelines, car plants, car scrappage, domestic boilers, lorries etc.

If we combine this with the other changes in technology coming from the fourth industrial revolution, we are also going to find new uses for car parks, high streets, out of town retail centres and the list goes on.

It goes without saying though, that we will have to make sure we can decommission without emitting carbon dioxide in the process.

Implications

Implications: Energy Substitution

Even now, without any change in the incentives there are many areas where renewable generation is the best commercial choice. It is only going to get more so as more breakthroughs occur in generation and grid-level and portable energy storage.

The demise of internal combustion engines will have knock-on effects for manufacturers of components including radiators, hoses, vibration dampers, seals, drive belts, spark plugs, lead-acid batteries, gearboxes, and pumps. Innovators may want to consider how to reskill and serve power engineering, distribution systems and electric control. Additionally, they may want to consider which ancillary manufacturing assets will be affected (either interrupting supplies or creating opportunities for low-cost acquisitions). Innovation is also likely to be available in any area which relies on diesel or other fuel oil to create electricity or provide non-transport related rotary motion.

Will cars and solar panels be manufactured and sold as consumer white-goods and semi-conductors? In which case they are going to come from Taiwan, Korea, and China.

As turbines become common place and large ones most economical, they will become like the Airbus A-380. There will only be a few manufacturers. They may not be operators. Unlike an oil-field that starts as a risky proposition but then provides a natural monopoly, offshore wind generation will become routine and be open to competition. Capital may be cheaper, but the returns will be lower. The bloat of the oil and gas industry cannot continue to be supported.

Implications: Energy Efficiency

Anything that can be done to increase the amount of useful energy output from the energy we consume will help. This comes in two forms – reducing the things that need to be done and improving the way they are done if they are unavoidable.

Innovation will come from increasing the utilisation of energy through sharing, careful planning, insulation, and conversion efficiency. Search out unoccupied space in containers, trucks, and aircraft. Plan who goes where when and in what sequence. Predict when power will really be needed and when it’s not. Any process that gets hot when heat is not its primary objective should be examined.

Transmission of energy is inefficient, as is standby generation. Expect to see DC supply, smart grids, community generation and local storage/recharge solutions emerge. Expect the need for AC power to diminish – semiconductors and high-frequency switching is much more efficient, light weight and controllable.

Look for opportunities to displace concrete and steel in manufacturing processes, perhaps finding a new use for solid-state carbon fibre or graphene and for additive manufacture.

Implications: Decarbonisation

In the absence of market distortions there is no business case for decarbonisation. But the world needs it to happen. This will require a combination of intervention policies (subsidies, penalties, regulation) and a willingness for consumers to pay extra for low-carbon products.

Programs to capture carbon at source and sequester it in some form add to the costs of production and only make sense if the alternative (in the form of penalties or sale of credits) tip the balance. The cost of carbon-inclusive production will provide opportunities to innovate in no-carbon alternatives at price points not currently viable, once these products start being adopted, learning and scale economies will kick in to speed adoption.

As carbon pricing becomes widely adopted across industries, innovation is likely. From understanding sources of carbon in supply chains (and engineering it out), planning for low carbon production and finding alternative ways to operate that do not produce carbon.

Fundamental research opportunities are still available for atmospheric scrubbing and short-term opportunities may be available around capture and storage of carbon from industry.

Implications: Decommissioning

Unfortunately, no-one wants to pay for decommissioning. The activity does not create productive assets so there is no return on investment and traditional business cases don’t work. It’s only done because it’s mandated and because there is a sense of responsibility for the environment (which may have brand and license implications).

Contracts will be let to the lowest price operators; innovation will therefore be required to reduce the cost to enable profit while bidding at the lowest price. All Seas managed to do this with their vessels – low cost but, by moving first with large capital assets and capacity to dominate demand thereby deterring competition. They can charge a low price but well above their cost resulting in healthy profits. LINK

When it comes to decommissioning infrastructure such as high voltage AC power transmission lines, domestic boilers and old cars, efficiency in the operation will be important, but so will re-use of the materials. Removing old infrastructure and scrapping cars may not sound like a gold mine, but perhaps it is. Literally.

Decommissioning old power stations, nuclear or conventional, is risky business where quality will count. There are stringent standards for Nuclear and projects that will last for decades. Conventional can be a little more “cowboy”. With wide scale decommissioning perhaps new rules and regulations will be needed to avoid this sort of tragedy? LINK

Points to Ponder

As of January 2021 ExxonMobil was valued at about $175 per barrel of oil equivalent from upstream production over the past nine months. French nuclear generator EDF is valued at $280 per barrel of oil equivalent produced over the same period. Spain’s Iberdrola, with its high renewables output, trades at $1,200 per barrel of oil equivalent produced. LINK

There is some evidence that there may be a squeeze on oil supply in the short term, and there may be a last hurrah of the oil and gas industry, but the writing seems to be on the wall.

We are likely to see more policy interventions around CO2. Business cases need to be dynamic and make space for emerging scenarios. The direction of pricing is clear but magnitude and timing are yet to resolve.

I fear for my friends in Aberdeen and Stavanger who expect to be involved in renewable generation. Despite these places being repositories of skills and expertise, I doubt there will be labour shortages significant enough to drive a search for talent – and the inflated labour prices and high-cost working practices are unlikely to be appealing.

Areas such as decarbonisation are likely to be subsidised. Engineering skills bases exist in the North West ship building areas, in Teesside, the Welsh Valleys as well as the South East coast of Norway, southern Sweden, Northern Germany, industrial Belgium and Denmark. There is no obvious reason that governments will bestow subsidies on the oil-rich provincial towns, and there is no unusual depth in high-power electrical engineering skills or modular manufacture that creates a pulling force. Look to Airbus and RollsRoyce for a hint on which locations may be subsidised.

Energy production is turning into a 4th industrial age process now. Over time energy will become essentially free to western consumers (in the absence of new taxes) and will become affordable for developing countries providing the elements required to swell the educated middle classes

Tax and Trade

In the UK fuel is taxed at the point of consumption, domestic electricity is taxed at a lower rate than petrol. North Sea oil has its own tax and royalty regime (on a field-by-field basis). When electricity moves cars and oil stops pumping, these tax revenues will need to be replaced. Expect changes to the tax system.

Globally this tax issue is one of national wealth, balance of trade and currency. Many economies are supported by petro-dollars. That may cease. Even if impoverished populations can benefit from cheaper energy, it is still likely that there will be political tensions within and between many countries.

As we continue to electrify there will be increased demand for copper, nickel and rare earth metals. These extractive industries are out of keeping with 4^th industrial age processes. Perhaps we will see a boom in resource rich areas such as Africa and south America until such time as we can harness graphene and ceramic based super conductors.

Business models that are based on bespoke designs, complex operations, resource scarcity and speculative exploration are likely to be replaced by ones supported by more standardisation, predictable un-manned operation, with steady, predictable returns. This will lead to reduction in man-power requirements, creativity, and variability. Cost structures and operating characteristics (and associated returns) across the energy industry are likely to evolve to resemble those of other utilities such as water.

Large oil and gas companies are currently moving to re-invent themselves as renewable energy companies. They have spotted the trend, but there is no guarantee that they will bring the right behaviours to the table to be able to operate in the way that will be required. Their strong balance sheets, engineering skills and ability to operate in harsh environments internationally may provide them with a well-financed head start.

During the 1980s RACAL was a military radio, radar and missile guidance provider. They were highly experienced in complex frequency hopping radio systems. This gave them a well-financed head start into a new industry, just like oil companies have today. Racal were well placed to develop mobile phone technology.

However, Racal was the wrong place create a consumer marketing and general-public-facing service. By 1991, as the technology became mainstream, the Racal board took the wise decision to float the division and spin it out as a standalone company that could develop its own culture. RACAL ceased to be independent when it was acquired by Thales in 2000. Vodafone, the division it spun out has done rather well. LINK

Perhaps we will see the renewables divisions of Shell, BP and Statoil spin out and compete with Iberdrola if they want to be utilities or Siemens, GE and RollsRoyce if they want to make turbines. Unlike Vodafone, their spin outs will be competing with established successful companies with long track records. It may not work out as well as it did for Racal shareholders.

Innovation is Key

In whatever way this pans out there is one thing clear – there are lots of unknowns and lots of variables. The only way to survive will be to be vigilant of the macro forces and constantly innovate to evolve offerings as events reveal themselves.

Digital overload?

I’ve just had the time to scan the Sept-Oct ’18 issue of HBR and there is one article that all digitalisation professionals should read. Titled “Too many projects” by Hollister and Watkins [https://hbr.org/2018/09/too-many-projects].

Not only does it provide an example of why cutting IT budgets across the board is a bad idea for business, and an explanation of “logrolling” where executives support each-other’s pet projects, but also it provides a neat framework for assessing initiatives prior to launch.

I touched on initiative selection as part of a prioritisation framework Introduction to Prioritisation V 1.0, I also wrote an article in 2017 which was recently published in Oil and Gas Technology that touches on some of the concepts [link]

I hope HBR don’t mind me paraphrasing one of their templates but it’s really quite excellent:

Questions to Ask Before You Launch an Initiative:

Analyse the project

What problem is this initiative meant to fix?
What data or other evidence tells us that this initiative will have the desired impact?

Assessing resources

What is the true human capital demand?

What resources (time, budget, and head count) are needed to design and launch the initiative?
In addition to the department that owns the initiative what departments or functions will be tasked with supporting it?
What time Commitments will be asked of leaders and staff members to attend meetings or develop the skills needed to understand or implement the initiative?
What resources will be needed to sustain it?

How does the human capital demand compare with the potential business impact? Does the cost outweigh the benefit?
How will the organization determine whether it has the capacity to take on the initiative?

Sizing up stakeholder support

Who are the key stakeholders?
What actions will be required to support the initiative?
How fully is that support in place?

Selecting limits

What trade-offs are we willing to make? In other words, if we do this, what won’t get done?
What’s the sunset schedule and process?

In summary then: next time you're asked to add yet another digital initiative make sure that it takes into account the impact and value to operations!

image credit: http://www.chinadaily.com.cn/photo/2013-12/02/content_17143892_2.htm

O&G –Development, Projects and Industry 4.0

In an earlier post [link] I introduced four areas of the Oil and Gas value chain that would change because of Industry 4.0 (I4.0). In this post I am going to present some ideas about what might change the activities occurring between finding a deposit of oil and gas and going into production.

There are four widely recognised phases during this period I’ll label these: Concept, Design, Construction and Commissioning.

There are many interacting functions contributing to this process besides engineering. These include: Project Controls, Stakeholder Management, Finance, Legal, Risk, Marketing, Contracting & Procurement. Because oil projects tend to range from 100’s of millions to 10’s of billions of dollars these activities can have more impact on a project’s viability than the engineering.

In this post I am not going to consider the changes that I4.0 will bring to the underlying technology deployed in a field (such as intelligent completions, sub-sea completion systems etc.) but rather will concentrate on the operator process of bringing a field from discovery to on-line production and how this may change.

CONCEPT SELECTION

Concept selection involves generating options for ways to develop a field – such as what type of platform, how many wells, where to sell the product, how to transport it etc. This involves assessing various trade-off’s between cost, production profile, technical risk and time to market.

This area is one where experience and networks count. Advisors add value here. Unless an operator is a super major, the number of concept selections processes undertaken during their development teams’ career can be low.

Concepts rely on relationships and contracts with external parties such as governments, partners and financiers. The goal of selection is to examine possibilities and choose the most promising to work up in more detail. Detailed work-up of ideas costs a lot and takes time, so it’s best to avoid re-doing it. Selecting the best concept is important.

Selection is through an assessment of feasibility and creation of valuable approaches for external parties aligned to their appetite to participate. Better modelling of risk/reward profiles and the ability of AI and machine learning to help with option generation and assessment will create change here.

To generate viable options and to make introductions to partners requires wide experience, a diverse set of skills and set of external relationships. Companies like io oil and gas consulting, Granherne, Genesis and Xodus and others are go-to companies for serious operators.

I4.0 will likely impact the work of these companies in three ways:

Technologies will be adopted that enable better collaboration between parties and facilitate the exchange of information. This, by itself, will result in faster turnaround, reduced waste and lower cost.
The value of networks and relationships cultivated by consultants to both source work and to introduce in related parties may reduce. Part of the value captured is because of “knowledge gaps” where players do not know all the parties who may be interested or how to contact them. It is likely that some of this role will be augmented with the introduction of automated agents. Reputation and relationships will still matter and will become a differentiator but it is likely that the ability to command premium pricing will be reduced.
The value of experience will almost be wiped out. As an anology, consider how an app on a smart phone has given Uber drivers the ability to use the backroads of London like a black cab driver with 30 years personal experience. In concept generation, a system that constantly learns all the options that have been considered before around the world, combines them and add twists will provide novel approaches. This will mean the creative aspects of concept design will become increasingly automated. There is the potential for a google-like winner-takes all first mover advantage. Captured experience will lead to more opportunities for work and hence generate more experience. Perhaps we will see one consultancy decide that the value of knowledge will be higher than the cost of acquiring it and will start to work under cost price for the chance to become the first mover?

For concept selection, the differentiation will not only come from the depth of the accumulated knowledge-base but also from the ability to deploy emotional intelligence and maintain the confidence of stakeholders. Like many I4.0 opportunities value will be generated from blending human soft-skills with an ability to harness the power of the new machines and ways of working.

DESIGN

There are various iterations of design and “stage-gates” on the way from Front-End Engineering Design (FEED) to Detailed Design. For the sake of this piece I’m going to be broad brush in my approach, so apologies in advance to my engineering friends for the lack of detail.

There are four main areas within the Design phase that need to be addressed

The engineering of components and systems
The co-ordination of the design activity
Developing the commerciality of design
Maintaining the consistency to the original concept

Engineering of Components and systems

The engineering process has already been revolutionised by computational power and the transportability of information. No longer are drawings done on dye-line blue prints and red-lined in pen. The computation revolution included things like reservoir simulations, process simulation, CAD drawings and automated parts lists.

I4.0 will enhance the process by enabling more simulation – such as simulation of construction, operations and maintenance. The type of output that will be required is likely to change. As operations move towards more “digital twin” enabled processes the as-designed, as-built and as-operated models will require more detail and will contain more information. Therefore, I4.0 approaches will need to enable this by, for instance during design, automatically populating tags for equipment, and providing normal operating ranges for instrumentation alarms – all pulled directly from manufacturers information.

AI systems in the future may even make suggestions for more efficient ways to plan pipe-runs, or help by making suggestions concerning process engineering or instrumentation. For an example of this type of guidance look at MS Word. As I type I get underlining in blue when I misspell a word and in red when my grammar is off. This is accompanied with helpful suggestions should I want them. Engineering design systems in the future may do similar tasks alongside engineers.

We will see an ever-expanding repository of re-usable design components which will continue the progression towards modularisation and re-use of designs. Standardised design and construction (where appropriate) will reduce costs. Couple this with additive manufacture for specialist parts and design work may move away from run-of-the mill towards assembly of modules and the design of very specialised be-spoke components.

Co-ordination of design activity

Anyone who has worked in a large-scale engineering design office will say that much of the work (and most of the errors, and most of the wasted cost) is incurred in the co-ordination of work between engineering teams, subcontractors and clients.

Firstly, there is the problem of controlling the internal integrity of the design. For instance engineers need to know things like flow-rates, reservoir pressures numbers of wells etc. I have seen examples where the reservoir group and the engineering team will progress for quite some time when their assumptions have diverged. Same goes for all upstream-downstream processing, topside weights, fire-systems and instrumentation. This is an information co-ordination problem. I4.0 will help because there will be fewer engineers required to work on design due to automation (therefore less co-ordination will be required) and where it is by “compiling” the individual designs into an evolving a digital-twin, techniques from software engineering used to co-ordinate source code, apply updates. automate error checking and run-test can be used.

Sign-off between clients and contractors means document trails can be an immense source of frustration. The control of versions and reviews often needs a whole department of people dedicated to it. Contracts are tied to sign-offs and all have time-limits that must be observed. I4.0 has the potential to apply block-chain audit trails, digital twins, version control & roll-back. Block chains can even be used to automatically transfer value between parties to settle contracts.

Managing Interfaces is a whole discipline. Different teams – sometimes different companies – design parts of the plant and it’s important that pipes and wires all match up when the modules are constructed and delivered. Again, design component submission into a digital twin from the start can detect problems and eliminate this type of error from propagating.

There is schedule and cost management activity required. Normally this is either a P6 or MS-Project based process with email reporting of progress required from all parties and manual co-ordination to provide an approximation of current progress. This tries to highlight any dependency busts that have blocked the project and provide forecasts to management. Designing within a digital twin, where the design process can be simulated, will enable a risk-based approach to schedule and cost management to occur automatically providing visibility and risk-control.

Developing the commerciality of the design

I4.0 will require changes to decision process here so it may take a while for things to change. Good design provides both construction-dividends and operation-dividends. Designing a plant in a way that eases construction currently increases the cost of the design work. I4.0 automation may reduce or eliminate this extra cost, but the types of material or module may be more expensive to buy but cheaper to construct – balancing those trade-offs are difficult both because the information and the consequence of decisions are not visible to everyone, and procurement rules may favour a least-cost approach. I4.0 may help to present more transparent business cases and enable more informed decisions to be made.

Operation-Dividend is a hard one to address. Even today there are information, models and design files that can be created and could be of great value to operations. They may never be created or delivered to clients because of cost pressure. Many Oil and Gas project procurement processes are based on lowest cost supply – this drives out added extras which are not strictly necessary during design, but would have produced dividends later in the life-cyle of the project.

It is my belief that as I4.0 techniques become established and drive efficiency in the design process there will be a natural tendency for these dividends to arrive, however by forcing the issue now – operators could accelerate the adoption of I4.0 techniques among their suppliers. This they should do.

Maintaining Integrity of the Concept

It is a phenomenon that design decisions are taken for good reasons in the depths of the project and these can, unintentionally, add up to a fundamental change in the economics of the concept. These decisions are taken for good reason, but without the impact being fully understood.

A forward-thinking operator may employ representatives from the concept team to assure that, during design, no decisions are taken that alter the concept economics without due care and attention. Even then, however, it may be very difficult to detect all the small changes that may add up to a problem later on.

I4.0 means not only will this process be built into the “compiler” checks for the design but also it will have knowledge of the assumptions underlying the concept. The project owner will be able to track real-time fit between as-designed facility and the expected concept value. This means also that the validity of the concept economics can be monitored as external events challenge the assumptions made. By setting appropriate risk-tolerances actions can be taken to steer the design of a project faster the normal stage-gate system.

CONSTRUCTION

This is a huge topic with lots of interaction between subcontractors, yards, welders, steel producers, component suppliers, machinery vendors, site logistics etc. etc.

The order in which construction happens can be crucial. it’s an involved problem to solve because sometimes something can’t be built until a large piece of equipment has been manoeuvred into place. Sometimes there are contingencies such as road access or camp construction or constraints on access to lifting equipment time. These types of scheduling problems, full of constraints, dependencies, lead-times and uncertainties interact with physical layout. This type of problem is one that AI based simulation and machine learning has demonstrated value. I expect that the planning of construction work packages and sequencing will become much more efficient with I4.0.

I4.0 is likely to deliver technology in terms of sensors, autonomous survey vehicles and 3D model population that provide accurate tracking of progress against schedule. There are likely to be wireless condition sensors provided with equipment (such as rotating machinery) to ensure that it is properly maintained in the time before delivery and installation. This will save pre-installation maintenance and avoid delays.

We are likely to see technologies such as automated reporting of equipment positon on the way to site meaning that schedules and daily work-plans can be optimised to the prevailing circumstances. Block chain style transactions are likely to reduce the formidable overhead associated with contractors and their execution of work. The same technology that can provide better than ISO-9001 trail of supply, fitting etc.

I expect to see more automated construction, on-site manufacture of parts (3D printing) and more just-in-time manufacture and delivery of equipment. All of this is going to combine with better visibility of progress to lead to faster construction, with less waste (and hence less cost) and deliver much higher quality and predictability.

COMMISSIONING

Commissioning of new plant as it starts up and before it is presented to operations is likely to change too. Simulation and machine learning will mean understand that different parts of the plant need to be brought on-line and in sequence. Experience and learning will shine a light on areas most likely to fail and their failure modes. Some potential failures will be detected and ironed out prior to attempted start-up.

As plant is brought on-line equipment settings will be noted in their “tags” and can be automatically compared to the as-designed expectation and the manufacturer’s recommendations. Equipment performance can be tracked through sensors from day-one, this will help with predicting failures in the future. Intelligent software can be used to highlight unexpected situations.

The automated learning and recording of the start-up procedure and equipment settings can be used by operations for plant re-start and for comparing as-operated settings to as-commissioned to track where, when and why parts of the plant are being changed.

CONCLUSION

Industry 4.0 has the potential to provide substantial benefits to the development of oil fields. Many of the processes described above have been technology back-waters relying on manual systems, ad-hoc applications and a lot of tacit know-how. I believe that this will change. It will take new technology and also take new ways of working. The supply chain will need to respond. FEED, EPC and PMC contractors who get on the bandwagon first will create the opportunity to assemble unassailable leads and take a dominant market-share in the way that Google did for internet search.

(Image credit : https://www.gie.com/)

Energy security and geopolitics

This big topic was brought to mind during a recent breakfast with Capt. Mike Paterson (Royal Navy retired). In the oil and gas industry we are often at the mercy of large political forces playing out. This shows up in both commodity prices and physical security. Employees of few other businesses are as acutely aware of this as they are in Oil and Gas.

You don’t need me to tell you the current oil price nor the speculate about the reasons, but it is clear that there are national interests at play. Is Saudi Arabia waging a price-war to drive unconventional sources of production out of business? Is there some form of cross-state agreement to undermine the Russian position? Are there ulterior motives for allowing Iran back into the market? What will be the effect on South America and African politics? What will the destabilisation of Iraq and the Levant states mean?

Here is interesting view: CNBC saudi’s and Russians game of bluff.

While it is interesting to ruminate on what the price will be, there is really nothing that I (and probably you) can do about it, and predicting which factors will combine with global economic growth and low-carbon technologies to influence Oil prices is something I’m not qualified to talk about. When I need to find an opinion my first port of call is my friend Delia Morris who is now with RigZone.

There were many theories around why OPEC (namely Saudi Arabia) would [refuse to cut production]. I am of the opinion that it was to make better sense/better predict the behavior of the US shale players (force them to consolidate, not necessarily to put them out of business). Frontier plays (like the Arctic and ultra-deepwater plays) and Canadian oil sands (which require huge upfront capital costs) I think were targets (by OPEC) to forcibly put them out of business. And we are seeing that play out now. Delia Morris quoted in Vice.Com [Link]

When Mike Paterson gave a talk on security at one of last year’s networking dinners, he provided a simple framework that every business can use to structure their thinking about emerging threats.

Where this really matters is for security of workers and assets within countries. That’s where the Oil and Gas industry and national security agencies start to align interests. There is are very intriguing analysis sets available from the military which provides many insights, this for instance:

The Baltic Sea is one of the busiest shipping areas in the world; the volume of maritime transportation navigating it has doubled in the last 20 years. Energy shipments from Russia are particularly important and the entrance to the Sea, through the Danish Straits, is one of the world’s eight strategic oil transit chokepoints. The Nord Stream gas undersea pipelines from Russia to Germany are also an important strategic element in the BSR. Energy dependencies within the BSR vary, with nations having different strategies, and most importantly, varying degrees of dependence on Russia. It should be remembered that the Russian economy is reliant on the energy market. Significant reductions in demand may, therefore, have a major effect on its economy, and potentially have a destabilising effect on regional security. “Future Security Challenges in the Baltic Sea Region” [Link]

There is a very thoughtful piece by Anusar written under the pen-name PolicyTensor which is available here [Link]. In this piece written in 2012 concerned why prices were so high, interesting to re-read this in the light of the current prices.

Oil prices will be volatile but your business may not be directly driven by them, you might be driven by the response of your customers – their response may be driven by technical or revenue-maximisation considerations – or, quite likely, financial constraints which drive decisions that do not maximise economic recovery, but do protect equity value in the face of debt covenants.

Watch out though – Mike Paterson alerted us to the correlation between grain prices and the Arab Spring. Perhaps low petroleum-state revenues will lead to reduced public spending which might lead to popular uprisings and increased instability. Unstable times ahead.

Category: Projects

4IR Implications Part 3: Energy Transition

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