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/

 

 

 

 

 

 

Industry 4.0 – Are we there yet?

Something’s up. I was reviewing my web-stats for this site and I found that since Jan 2018 one post has been read 1000’s of more times than any other one. This one: Innovation and Productivity with the Fourth Industrial Revolution.

About 3 years ago,  I started to talk about how relevant to the Oil and gas industry were things I had been studying about the 4th Industrial Revolution. At that time no one had a clue what I was talking about. Some thought I may have gone mad. I’m glad to say that things have (mostly) changed.

Who’s talking about it?

Since 2018 I’ve seen the term being used by a number of my peers in Oil and Gas, and when you search on this and combine with the term “Digitalisation” It becomes obvious that there is a major movement underway.

Steve Ashley uses the term in his article: Digital, data and taking control of our own destiny and its also used in this press release from Petrotechnics.

Today this announcement from CapGemini helping Statoil with a 3 year project to create a digital roadmap.

How to assess a digital project

There are still a few fundamental questions that every digitalisation project should be able to answer. Below is your starter for ten, and – yes – you may confer:

Examine the project value:

  • What is the primary business driver;
  • Does this project fulfil the agenda of the CIO or the COO;
  • What is the net cost of this project;
  • When will I see value (hint: the choice is either this year, or 3-5+ years out); and
  • Is this a platform investment or can it ride a set of network effects?

Examine the project risks:

  • What things will prevent me from realising the planned benefits;
  • How much change will be required in the way we work;
  • If I do this, does it prevent me from doing other things;
  • How likely is it to require more money than I’ve budgeted for; and
  • What happens if I wait and do it later?

These criteria (and others) should be considered for every project.

Enterprise level

At the enterprise level there are a couple more  things that need to be considered including:

  • How does this project fit into my portfolio of digitiallisation initiatives;
  • As my business gets more digitalised, how am I addressing digital integrity; and
  • Should my HSSE function be renamed HSSED?

Further reading

I wrote an article for ITProportal for some of this and here is a note on project portfolio prioritisation that I wrote a few years back – Introduction to Prioritisation V 1.0.

The new CIO – Lessons from Salesforce.com

I’m seeing interesting parallels in the Oil and Gas sector that I first encountered when I witnessed Salesforce.com start be adopted by large corporates over a decade ago. Let me explain.

What is Salesforce.com

Salesforce.com is a company started to provide a way for small businesses to access customer relationship management (CRM) in a structured way. This helped them to co-ordinate sales activities and record information about customers, conversations that had been had between different people across the selling organisation.

Salesforce.com did this by using web-pages rather than software and thus required no software to be installed, and because the information was held in the centre, it was automatically up to date and shared among the staff. In 1999 this was a revolutionary approach.

Salesforce.com now does a lot more than just sales, and is – justifiably – used as a more general information processing platform for companies. One of my clients even runs their entire global finance function using the platform.

The Salesforce.com transition to corporates

Before Salesforce.com the problem of co-ordinating diverse sales teams and sharing CRM sales information was one that was addressed with (say) Siebel. This required an on-premise server at each sales-hub, an application on a lap-top and then some form of roll-up to a central IT system so HQ could see what was happening.

The role of the CIO was clear – gather together a cross section of users, design some screens that may (or may not) mirror the sales process, have them programmed up, check they worked like you had asked for, make a standard install and then go around the world trying to get systems to talk to each other and brow-beat the sales guys into using the software (which they hated). On top of this “senior buy-in” was required to persuade the guys on the front line to change the way they worked until it fitted in with the standard IT system.

This was the old way. The focus was all about getting the blinking technology to work in the first place. Once it did, if you were lucky, you could then outsource the management of the whole cluster f*** to a call centre that “followed the sun”.

Well it was little wonder that in 1999 the dream of shared CRM was out of the reach of small sales-teams (who would often use an odd little product called ACT!), that big company sales guys hated their IT departments, and everyone hated Oracle.

Once Saleforce.com came along everything changed. The application was not installed but was delivered over the web. Because all the data was hosted in the middle, it was naturally synchronised and could be shared. Because it ran on Salesforce.com’s servers there was nothing for the CIO, IT department and the outsource guys to maintain. It was also very easy to use and quick to customise it to tune it to your business.

Small businesses took to Salesforce immediately. It was so much better than what they had before and, function for function, much cheaper. Costs scaled with the number of users and you didn’t have to buy or maintain all manner of servers and network links. It took a while for the big companies to start to “get” Salesforce because the sales pitch had been around the cost of the solution which was very clear cut for small businesses. For big companies however, the benefits when measured with traditional business-cases and the commercial logic of the procurement department did not seem as clear-cut. Add to this that traditional “IT Departments” weren’t set up to contribute to a conversation that didn’t involve “keeping the lights on” IT – it was quite difficult to generate momentum to start with.

The ten-year pause

I worked with Salesforce.com technology and was in the middle of the transition from a world of small companies and independents to major company roll-outs using the help of big consulting firms. It was about 10 years after the SME’s started to jump on the bandwagon that the corporates started to understand and deal with a compelling business case around CRM.

Around the same time that CRM was making inroads to large companies, new technologies were emerging in various “cloud” guises. This included companies like SAP, Microsoft, Oracle or others. Enterprise on-demand platforms were becoming available. But the business case for adopting them was not clear. That was about a decade ago. Now I’m seeing the big-company adoption in oil and gas starting to address the same types of problem I saw Salesforce.com overcome. Perhaps there are lessons that can be drawn?

Make cloud work in 3 areas

In the last decade, the on-demand technology, infrastructure, bandwidth have all improved dramatically. This has made some of the lazy performance objections invalid. Now the centralisation of the technology in cloud and the provision of on-demand pay-as-you use applications, compute, storage and bandwidth just works, and works better than anything a company could do for themselves. And that applies to almost every area of activity.

The three main driving forces then were: a change in structuring budgets, capturing cost of ownership benefits and understanding where value is created within the system; the enablement of entirely new ways of organising core operations; and the role of the CIO.

What’s happend at Salesforce since I last looked?

I tabled these ideas with a senior strategist at Salesforce.com to see what he’d seen in the decade since I sold my SFDC partner business and, to paraphrase, this is what he said:

Well Gareth, in my world I see that CEO’s are very concerned about the potential from disruption led by start-ups who can establish market share quickly. I see this in many industries and in oil and gas you have innovators such as Lord Browne combining smaller companies and driving innovation. CEOs like this need Agility, Flexibility and Speed to enable their business to react. They have tasked their CIO’s to provide tools that their people can use to innovate. The CIO has to find budget for innovation and the only way to do this is to remove legacy run cost from the existing landscape.

Platform’s like Salesforce also lower the cost of innovation by enabling point and click  / low code prototyping etc. However that innovation must be aimed at retiring legacy systems rather than add to the IT stack (and cost). Here, integration is the key. Meta-data driven API’s mean it’s easier to make changes and flex with the business needs across multiple systems.

I’ve also noticed that, since you left, we encountered a new generation of employees who are used to looking out across the web to find information. They are very surprised by how backward many of the corporate IT systems are, and how isolated information is between functions. CIOs who are deploying on-demand platforms simplify IT run and therefore reduce costs. They also have the opportunity to consolidate applications onto a single platform to ease support / dev teams and create a consistent user experience. This saves money, frees information access and makes technology help rather than hinder.

I’ve seen the role of the CIO change in the last decade. It is now to bring technology ideas and options to the table as a business partner for digital. The CIO needs to be aware of what competitors, the market and other parts of the business are doing. However, there is no-such thing as self-adopting application. It is laziness to assume that changing technology will be enough. Some companies still think that if they create a new system then if people use it then that’s great and if they don’t it’s the fault of IT for not delivering a great experience. There is no time for mistakes and we’re just accelerating the rate of change. We need to get it right first time. This means that the COO must lead the change enabled by an IT project and be accountable for its success and responsible for changing the business processes and management around it. The CIO is there to support the business change, not to foist unwanted technology on an unwilling operation.

image credit: http://www.iacloud.com/

Five Digital Vectors

Frameworks for Digitalisation – Part 1

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

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

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

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

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

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

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

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

Vector 1: Pure Digital

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

Vector 2: Digitally Enhanced Products and Services

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

Vector 3: Digitally Efficient Operations

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

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

Vector 4: Digitally Effective Supply Chain

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

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

Vector 5: Digital License to Operate

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

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

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

Summary

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

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

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

 

Interview with Patrick von Pattay

I was introduced to Patrick [Link] by our mutual friend Short Allerton [Link]. We both worked with Short in Schlumberger days, but our paths had not crossed until recently. Patrick is an exciting individual who has worked on very interesting projects pushing the boundaries of future oil and gas practice in Upstream. We got on well and he shares many of my views on digitalization, and – importantly – our opinions differ about how things may develop in some areas. It was a genuine pleasure to speak with him and he has agreed that I may publish this interview on the blog.

GD: Good Morning Patrick, thank you for agreeing to talk to me about Industry 4.0. It sounds like you are very interested in the topic.

PVP: As you might have recognized I am very passionate about the idea of a disruptive change in the oil and gas industry.  Currently I am looking into the strategic implications of digital revolution that is surrounding us and what is likely to be a time of disruption and step-changes in productivity.

GD: I agree with you Patrick digital technologies will make a big difference in upstream oil and gas, I expect to see this most pronounced in operations of existing and new plant. In my view, some fundamentals won’t experience much change – such as how resource licenses are issued by countries and used as security in the capital markets.

PVP: Just because we have not yet identified the potential disruption does not mean to me that there cannot be any.  It just means  that we haven’t thought hard enough. If it were an obvious change then it wouldn’t be so disruptive as we’d all have the ability to respond. A disruptive completive threat, by its very nature, is likely to come from left field.

GD: I’m not convinced, but interested to hear what you think the changes will be in operations?

PVP:  Leaving aside access to resources, I think there will be three main effects of the digital revolution in upstream:

Increase in efficiency:

Automatisation will be key here and I expect that activities will include predictive maintenance, artificial intelligence based auto modeling, augmented reality supported operations, automated manufacturing, Internet of things, etc.

Increasing effectiveness.

This will result mostly from faster and smarter decisions. Advanced, more complex, more integrated and holistic modeling will enable us to make more educated choices.

Improved uncertainty / risk management.

The advanced and integrated modeling will enable us to model (and therefore manage) uncertainties all the way from the reservoir to the marketing of finished products and the trading of field percentages.

GD: Yes, I agree with you on those three for sure, though it’s a bit mother-hood-and-apple pie. That’s what we’ve always tried to do, and gradually we’ve been improving there over the years. What’s going to change?

PVP: Well of course we’ve been doing that! But, things are about to accelerate and we’ll see enablers for step changes – super and cloud computing is key to holistic asset modelling – but, beyond that especially in the way we contract and co-ordinate the supply chain I expect great changes.

GD: What trends are you seeing there?

PVP: Services of all kind are becoming a commodity. Initially, this is focusing only on basic oilfield services such as cementing.  I expect that this will lead to more choice for me as an operator.

Maybe I will not buy such services through classic service contract models any more, but through a web-based and horizontally integrated retail platform. This will increase my flexibility, control and drive down costs. Perhaps drill bits will become a line-item on Alibaba? And maybe this is the domain where we will see most disruptions in the coming years.

GD: I see how that can work. There have been automated purchasing databases before, mainly for supplier pre-qualification and compliance checking. Services like the Achilles system, but they’ve been directed towards procurement departments and not putting the power of supply-chain optimization directly with the end-user of products and services.

PVP: Yes, as time progresses and digitalization evolves, commoditisation will include more and more complex services. Already the service companies and EPCIC contractors are integrating their services and offering me solutions.

Combining this trend with digital technologies could make even the development of a complete oil field a commodity one day (as much as building an airport would be a commodity by then).

GD: How do you see this changing the industry for project owner operators?

PVP: We must expect new players to enter the market. To thrive in this situation means we need to find new differentiators, perhaps even re-invent our business model. This will mean perhaps developing even more complex projects and integrating services/solutions along the horizontal and vertical value chain.

GD: That’s very interesting. What I think you are saying is that the low-end easy returns from deploying capital to safe projects will be competed down to the cost of capital, so you you’ll need to do more difficult things where there is less competition. Can you expand on that a little, how can you use digitalization to achieve that?

PVP: Well of course, there’s the nub of the issue. I can’t tell you everything I’m working on of course, but let me give you three areas where I think we are likely to see disruption: The Value of Data, the use of Cloud Computing and What I call “Buying a Result”.

The value of data

Artificial intelligence is a key technology in digitalization. It will allow us to assist humans in many places and to achieve results significantly quicker / with higher accuracy. In any case the key will be to train the artificial intelligence based on distinct high-quality data sets. Considering such data sets as training material makes them an asset. Trading such data against trained models will be a part of the new business world. Like Google is the best search engine because of its accumulated experience, so it will be with oil fields. Once this is cracked, experience may result in enduring competitive advantages which can be monetized by turning data into decisions in minimum time.

Cloud computing

The cloud will be the only place to store and process data in the future.  It is the most secure and cost-effective way.  A whole new landscape of solution providers will arise from this.  The classic service and software providers are establishing their cloud solutions today.

The operators I talk to are concerned about locking up with one of them and being chained to their choice forever. Their data may become trapped. This is going to drive standardisation and open platforms.  These will allow plug and play of any software in the cloud.  The availability of such a platform and the guarantee of the provider to support the integration of any service / software will provide small solution providers with a new platform to offer their products and reduce the market entry hurdle for them greatly.  We can imagine this a bit like the different APP stores.

Buying a result

Today we still buy compressors and then maintain them. In aviation, some airlines buy only accident-free-human-miles-transported from an airplane manufacturer. They focus on planning routes, marketing seats and ensuring client loyalty.  Similar things may happen in our industry. Augmented reality allowing to scale the know-how of a single expert, Internet of things, big data analytics, predictive maintenance, etc. will allow various solution providers to offer services to us like the way airplane manufactures do today.  The E&P companies will transform into managing and providing more complex solutions and business models. This will include more and more gain share models.

GD: You do paint an interesting view. In your scenario data and machines look like they will take over. That’s bad news for any young engineers surely. Why on earth would you need any people? Are operators going to be run by hedge funds and lawyers?

PVP: Some people think that many oil companies already are! But, seriously, I believe customer focus, personal interaction, social competencies, and creativity will become more valuable. As more and more complex tasks are fulfilled by machines the role of the human will shift towards creativity and social interaction.  I am convinced we will be very busy thinking about things that we do not even imagine today as we are busy with the groundwork.  It will be great fun!

Look, we know that even after all the money spent on, and focus applied, creating an Amazon a web page, it is still not the key to providing the best possible service. It’s efficient for somethings, but sterile and not very interesting for others. Even Amazon is opening physical stores and Apple has the most valuable retail operation in the world. Human contact and empathy is still important.

The key will be to hook up with the client immediately and to ensure that he/she can’t live without your service ever again. The client has choices, so this must be done through excellence not through lock-in. In the domain of super-mega projects this might simply boil down to the ease of doing business with you.

GD: Thank you for your thoughts on this, it’s very insightful. Where do you think, we go from here?

PVP: Reflecting on our conversation, I might even agree that the oil & gas industry will not change in the fundamentals of exploration – development – production – abandonment.  But the landscape of players will shift due to digitalisation and this might be the disruptive change for us all.

GD: Thank you, and good luck. Will you please come back and tell me and my readers how you get on?

PVP: Sure, I’ll keep in touch, and I’d I love to have feedback on my thoughts