O&G – Exploration and industry 4.0

In an earlier post [LINK] I briefly introduced the four areas of upstream value chain that could benefit from the 4th Industrial Revolution. Here I put forward some potentially controversial points about how this may (or may not) affect Exploration.

First of all my definition: Exploration is concerned with finding and appraising new deposits of Hydrocarbons trapped under the surface of the earth. It’s the identification of these that I am addressing here, not how (or if they can be) exploited.

There have been many advances made in technology in the previous 25 years that have transformed the process of finding deposits. The two most notable have been around the use of remote sensing through Seismic Data, and the accuracy with which deviated wells can be drilled. Seismic acts like an x-ray into the composition of the rocks, while new wells use precision direction control and combine it with analysis of real-time feedback from rock measurements surrounding the drill bit to let operators steer the trajectory in real-time.

Many of the advances that have been harnessed could legitimately be described as pioneering in the technology of sensing, big-data, simulation and automation. These are the key technologies underpinning the 4th industrial revolution. Exploration got there first.

In my work with small companies seeking investment I continue to see a slew of new start-ups with fancy seismic algorithms claiming to be able to spot even more obscure sources of previously unidentified hydrocarbons. Maybe they work. Who cares?

In my view the major gains from the 4th Industrial Revolution have already been captured in exploration. Perhaps we are close to entering an era of more stable oil prices – driven by: elasticity of supply from shale; abundant reserves released from both tight reservoirs and hydrates; and managed demand through smart technology, electric drive-trains, renewable generation and batteries. So the commercial pressure to find obscure resource pools may have gone.

In the North sea there are over 300 pools of hydrocarbons already discovered but not yet developed [LINK]. So the question is: even if the new technologies are successful will they have a significant impact for operators? I suspect the answer is no.

New algorithms and systems may provide marginal gains around the edges of existing fields and provide additional in-fill development opportunities. They may reduce the number of people in G&G dept 10%. Commodification of techniques (as happened for 3D animation) may see the demise of some companies and job-roles. But I don’t think it’s going to provide a revolutionary impact. Of course, I may be wrong.

If I am right, this suggests that there will be two main opportunities for companies providing technology here – either to provide an “add-on” to the main interpretation platforms (Petrel, OpenWorks) and then sell small numbers of seats to operators in special circumstances, or attempt a wholescale assault to replace the platforms already in place. Neither of these are revolutionary for operators and result in minor cost reduction by pitting service company against service company.

I think the 4th industrial revolution is likely to provide only a small impact on the dynamics of this part of the value-chain. There may be a displacement of revenue from one software vendor to another, there may be some marginal in-fill development opportunities that will add more elasticity to oil supply (and help to further stabalise prices) but neither of those are going to be massive nor revolutionary. I think that the 4th Industrial Revolution gains have been captured already – AI, auto-pickers, attribute statistics, simulations, integration, cloud, geolocation, computing power in the hands of individuals – the main technologies are already in place. Gains from here-on-in will be marginal.

There is one thing that may change my view, however. If this happens it will have a profound impact and swing power towards the national resource owners. If these innovations are adopted at the level of the nation state things may change.

National Data Banks were established in the 1990’s (example LINK) to hold archives of seismic and well data and make them publicly available. These may get a boost.  Cloud technology and on-line AI-based mining-algorithms may change the way that license economics work by de-risking exploration and encouraging competition. If this is combined with a stable oil price there is a potential recipe for reduction in the incentives needed for exploration companies. That could change the economics and the structure of the discover, farm-down, refinance, develop and keep carried-interest process that is used today.

Automation Risk

We have recently seen some very high-profile failures of IT systems – whether by Cyber Attack (WannaCry and Varients [LINK]) or by poor operation risk control [LINK]. Something is wrong in the way things are managed

Insurance companies are starting wake up to their potentially unexpected liabilities around this risk [LINK]. They will certainly start to price this risk; this will mean that risk-reduction investment will have an immediate identifiable financial benefit. Perhaps it’s time to take a different approach

For years, I have railed against the distinction between “IT and the Business” [LINK]. I think the time has come for this gap to be finally put to rest. They are now truly inseparable.

Statoil has recently announced its response to the 4th Industrial Revolution (or Digitalisation). [LINK]. The most significant part of this is that the initiative is led by the COO. Of course it is!

If we were to take any other industrial process technology in Oil and Gas (say compressors) the management line looking after these runs up through the COO. There is not a Chief Compressor Officer who reports through the CFO and imposes compressor decisions (or delays) onto operations.

In that case, why would computerised operations technology report through the CFO via the CIO as is the case in many organisations. This should be part of the COO role. This recognises that IT is now central to operations. This is how it should be, because it is now at the heart of the current automation of operations [LINK].

In line with this I propose that the COO needs to own a new risk – Automation Risk. One of the advisors to the COO would be an Automation function – responsible for assessing and managing benefits and risks as well as defining policy across the organisation. Operational assets should comply with policy and work with Automation function around standards, risks and controls. Assurance functions can then audit compliance via the Chief Risk Officer – the right checks and balances would have saved a few hundred million dollars across the airlines in the last 12 months, perhaps a billion dollars across the industries hit by the WannaCry virus.

Automation risk planning means that the COO knows what risk sources there are that cause automation systems failure and what is the consequences of that failure would be. Importantly, he also knows what actions could be taken to reduce the likelihood and impact of a failure.

Then he can approve a business decision to choose which reduction measures are implemented. The COO must then know the real-time status of the mitigation measures – are they ready to work in case they are called upon and what is the current risk status of the organisation, is it acceptable and – if not – what is being done about it?

Contact me if you want to know about planning using Bow-Tie models and how you might be able to monitor current compliance in real-time, set-up alerts and manage your automation risk.

[Image credit: https://smlrgroup.com/universal-cyber-risk-model-part-1/ ]

Levels of Automation in Oil and Gas

One of the aspects of the 4th Industrial Revolution [LINK] is automation.

I am often asked if automation could ever add value to oil and gas? I contend that there is a good reason to think it will because benefits could come from:

  • accurate control and adjustment leading to higher throughput;
  • self-repairing (or self-scheduled repair) leading to higher uptime;
  • more accurate execution of plans by reducing manual error; and
  • less distracted management leading to higher-value decisions;

Many people are sceptical that we can ever “automate” an upstream oil and gas production facility.  I agree that “full” automation is unlikely, but I would argue that partial automation is already present. What we need then is a way to describe “levels of automation” so we can define what we are talking about and reach agreement about what to do.

Autonomous cars are in the news for good reason right now, and are making great progress. Perhaps we can create a common language for “level of automation”. The SAE introduces itself as:

SAE International is a global association of more than 128,000 engineers and related technical experts in the aerospace, automotive and commercial-vehicle industries

It has defined 5 levels of automation that has now been adopted by the US Department of Transport. Here’s an explanation from wired magazine [LINK].

What dimensions could be used to classify degrees of oil and gas production automation? My definition of the process of automating is: “Reducing the friction between sensing what is going on and taking the right action”. This can be used to underpin a maturity matrix.

If we can sense what’s happening, reduce the friction before acting to zero and be exactly right in the actions we take – then this achieves perfect automation. Of course this then leads to the need to define in more detail: sense, friction and right.

Some of the steps that can lead to more automation are:

  • Improved sensing of the environment;
  • Distribution of sensing data;
  • Transformation of data into information (e.g. production vs. target);
  • Exploring related information, history and context (e.g. maintenance records)
  • Understanding the consequences of the information presented (prediction);
  • Checking possible actions and their impact (simulation);
  • Delegating decisions to reduce management delay; and
  • Feeding back observed results to scientifically tune future predictions (learn)

Contact me for more information about how it is possible to incorporate the above into an assessment of your organisation’s automation maturity and readiness for change.

 

 

 

 

 

BA IT and my Eggs Florentine

So it happened again yesterday. This time BA cannot handle luggage. A bit of an issue for an airline. No word yet as to the cause [Link] but it did mean that checked baggage did not travel with BA passengers.

I took a risk and travelled BA this last weekend (I was using air-miles for a trip to Romania where I was helping out a friend with a project in the hinterlands there) and the experience was pretty reasonable but even I had problems. This time my probelms came from catering.

I flew in the business class cabin  (or as BA call it Club Class – hopefully not a reference to how they will quell any dissent).  In any case there was all this pomp and ceremony involving hot towels and a menu for breakfast as we took off. I was given the choice of Full English or Eggs Florentine. Printed on some stout card in a very grand font. Sounded lovely. There were only 8 passengers in the cabin. But they packed only 4 of each menu item. Zero redundancy. So as I was the last to be served, I didn’t have a choice. The menu should have read – you’ll get what’s left over out the two possibilities or go hungry, good luck. People only got a choice until 4 people had chosen one option, and then there is no longer a choice. So, as my Texan friends would say, that fancy menu was all “Hat and No Cattle”

It seems that catering, like IT, didn’t use risk management and uncertainty when designing their systems. This highlights the danger of over-assuming and the consequences of running at minimum cost with no redundancy. Redundancy, like insurance, can be seen in hind-sight as wasteful. Sometimes it’s called “over engineering” – but only if it wasn’t needed. If the laws of probability catch up with you, it is really a prudent investment.

Risk management has three elements:

  1. Identification of the Risk, what can cause them and what the consequences will be
  2. Taking prudent steps to reduce the probability that the risk will materialise
  3. Making preparations so that if the worst does happen the effects are mitigated

Giving BA the benefit of the doubt and assuming that they knew that their IT systems may fail, the baggage system may halt, and that they may run out of eggs florentine, then I have to assume that BA management now hate their passengers.

The consequence failure seems to be  inconveniencing passengers.

Probability of Failure: At no time did they take steps to reduce the likelihood of tripping their whole IT system by pulling out a plug [link] (perhaps they might have double ported UPS, or Duct Tape over the plug!) or running out of my choice of breakfast (by perhaps packing say 6 of each choice, rather than 4).

Consequence of Failure: Let’s just inconvenience everyone – was not mitigated either, it was just accepted with a shrug. Though to be fair baggage was re-routed and couriered and people were re-booked on flights. I got an extra Bloody Mary. But still feel that it would have been better to reduce the likelihood of failure, as the mitigation seemed to be the minimum anyone could expect – and may be a legal requirement (except the bloody Mary of course, which probably the EU would not mandate)

Good luck with preserving the premium pricing for your Brand BA.

In a future post, I’m going to argue that as operations now rely on IT to deliver (and even more so in the 4th Industrial Revolution) it’s quite wrong that much of IT comes under the purview of the CIO rather it should now be part of the remit of the COO. Risk management of operational IT should focus on putting barriers in place to interrupt the cause and consequence routes, using an operational function lens, not an IT one. I Bet that is going to cause some organisational “team work” issues when it comes to budget time.

 

 

BA – Blinking Awful?

I haven’t posted for a while as I’ve been very busy working with clients on industry 4 projects, but the recent IT outage for British Airways (BA) requires a response. (for more information on the BA IT outage follow this [link])

In August 2016, I examined the cost of the IT outage to DELTA airlines [link]. I calculated that this must have cost DELTA at least $60m [correction:  with related costs the post says it would be $100m]. In the wake of the BA story the FT published an article over the weekend [link] looking at the top 5 IT outages. They tell us that DELTA believed that it cost them at least $100m.

We’ll wait and see what effect that BA outage has on their revenues – but IAG (the owner for BA) declared a profit of about £2Bln for 2016, so there is a chance that this will have the possibility to knock 10% off the earnings for 2017.

Now – in an eerily similar set of circumstances to Delta – the company had recently outsourced their IT and they experienced a “power surge” and the back-up system didn’t work.

The following seem likely to me:

  1. The digitisation of business has happened and is accelerating, IT systems are not peripheral to operations they are now crucial.
  2. The creation, management and care of these systems are critical, but it appears that there is no-one on the senior leadership team who is on the case.
  3. The focus on “business cases” for IT investment don’t consider the transformation of current business operations, nor the risk of “not investing”

This posts talks about the need to prepare non-linear business cases [link].

The Oil and Gas industry (and others) are becoming rapidly digitised and will require different investment decisions around IT. It is no longer appropriate to concentrate on cutting costs, driving standardisation and outsourcing the activities. In operations “IT” is now critical to business success. This means good investment decisions drive competitive advantage and loss of IT capability can cripple the business.

It’s just an analogy

I’ve recently been working on analogies designed to let me talk about Industry 4.0 concepts. In short I’ve been trying to find ways to explain what’s almost unexplainable, and often to a sceptical audience. This is my current favourite:

Here’s what happened lasttime

In 1993 the Internet was explained in terms of bits, bytes, modems and tunnels. Most people had no idea why this geeky stuff would be important or what it could possibly be used for in everyday life. By 2003 it was explained in terms of Amazon and Facebook. Now my mum can order shopping on-line but has no idea how the Internet works. That’s how it should be, invisible to the application. My niece uses Facebook, WhatsApp and ASOS and can’t really imagine not using them – it’s woven into the fabric of how she does things, she’s never done it any other way. Why would she? In the mean-time those that had no idea what the geeky stuff could do ignored Amazon and are now closing their retail space [link]

Here’s what’s happening now

Industry 4.0 is now explained in terms like sensors, internet-of-things, and security. There is little understanding of how to retrofit this into existing ways of working, or why all this geeky stuff is relevant. In short people think this is a nice to have but really changes nothing. In ten years I will be explaining this in terms of its application and not how it is implemented. Industry 4.0 will be a forgotten concept and we’ll be talking about its various applications – like operating and maintaining according to equipment condition. In 20 years time a maintenance engineer (like my niece does with Facebook) will have no concept of why you would (or even could) operate equipment without on-line condition monitoring, system level surveillance, and connected “helper applications” that learn from global failure modes. Why would she?

But surely we’ve already been here?

I normally get an objection at this point along the lines of this:

“We’ve had digital oilfield for years, and it’s promised a lot, cost a lot and not delivered much – why will this be different, why should I think there will be a change.”

In my view, things no longer change incrementally when platforms become ubiquitous and costs tumble 1,000 times. They “take off”. That’s what’s occurring now. Add to these exponential technologies such as machine learning (which self-improve with time and experience) and t the stage is set for big breakthroughs.

Four companies: Facebook, Google (Maps +Waze), Uber, Amazon would be impossible without the widespread adoption of horizontal general technologies. They’re interdependent and co-ordinated rollouts enabled cross-platform co-innovation at the application level.

By the way – If you think these companies are just fluff : Google is worth 356Bln, Facebook 350Bln, Uber 62Bln and Amazon 250Bln. In total over a trillion dollars. For comparison Exxon is valued at 360 Bln.

Adoption Curve is reversed

Here’s another thought – In the 1960’s Military and Space applications were modified for business use before finding their way into the hands of rich consumers a couple of decades later. Facebook-like platforms and messaging applications such as Skype emerged first in the consumer space before being adapted for corporate deployment.

I think this mode of adoption is now true for application level innovation generally. If this is so for our next wave application innovation for industry 4.0, I expect to see it emerge first in the consumer space, deploy rapidly at scale and be ready to find ways to adapt and deploy in industry. It will be people like my niece that will know how to leverage these applications with no need to have any knowledge of how the underlying infrastructure works.

Keep your millennials close at hand; you’ll need their insights.

Image Credit http://parterre.com/2011/12/01/interrrupted-analogy/

 

 

Let’s party like it’s 1993

It’s been a long time since I felt like I do now. 1993 to be precise.

In 1993 I was working in Paris with a ‘386 LCD screened laptop and had just loaded 40 3.5” diskettes to get Microsoft Visual C installed. Computing was difficult, slow and expensive then. Few people knew how things worked or what it could do.  Many of my bosses couldn’t work their email and none used spreadsheets. We may have used computers to desk-top publish but we still printed slides onto acetate to project them.

I was writing software for Schlumberger at the time. I was in Paris and working on Sun Microsystems boxes running X-Windows.

So why 1993 precisely?

I installed a programme called Mosaic. It was available on PC’s, Mac’s and Unix and you could download it from CERN in Switzerland using FTP, if you knew how. You could compile it using Gnu C, if you knew how. It connected to the network and let you do all sorts of clever things through WAIS, Gopher and HTTP, if you knew how.

My fellow engineers and I were blown away by the potential. It was obvious to us. When we showed this to our bosses back then they had no idea what the point of it was, how to use it or why it was important. And I couldn’t find the words to explain – there was such a gulf of understanding and so little time to fill in the blanks.

By 1997 Mosaic was Netscape and the internet boom got underway, I could buy a book from Amazon and have them send it to me in Norway and I had opened a US Brokerage account with a company called Etrade that you could access over a telnet connection to Compuserve. Now my bosses were intrigued, but still not investing. Investment in Linux version of our software and internet browsing didn’t start until 1999. Looking back that was quick, but at the time is seemed like an age.

I think about the changes that happened between 1993-2003  (just before the iPhone was launched), and the difference between 2003 and 2013 – how social media, location services and mobile internet have taken off. Life is very different now than it was 25 years ago, and it’s all driven from that set of technologies that Mosaic brought together.

Look at the difference at the productivity levels of geoscientist and data analysis with in Oil companies. That has tracked the changes in wider technology and information processing.

Now look at how little has changed in the operations of an oilfield since 1993.

Industry 4.0 feels like Mosaic did. It’s big, it’s going to be rapid and it’s going to change everything. Yet I still can’t find the words to explain it to the people I meet who are still struggling with their email. But I’m working on it.

Read this primer and perhaps you can help me explain to operations management:  https://bestemnetwork.com/2016/03/29/innovation-and-productivity-with-4th-industrial-revolution/