Mood music changes

So BP have gone back to the future. Beyond Petroleum all over again.

When I started the Bestem Network 7 years ago I focussed it on issues surrounding the Oil and Gas industry – specifically how to use technology and reconfigure operations to develop and produce projects at lower cost and risk.

Last drop or leave it in the ground?

The Wood report was flavour of the month and much of my work centred around MER-UK (Maximum Economic Recovery). One of the categories of posts on this site was (and still is) labelled “Last Drop”; it focussed around the changes that would be required to make it possible to cooperate economically to achieve the maximum aggregate profit for the industry. It tackled things like tying together infrastructure, developing small pools and draining the basin over the long-haul and not to optimise short-term or locally.

While I never expected that the industry would return to 2012 levels, I did expect that it would come back and stabilise at a more “normal level”. I was concerned that the “big-crew-change” would mean that young people would not have the knowledge to operate our much-needed oil and gas infrastructure. I had no idea that they would reject oil and gas completely. That thought occurred to me in 2019 when I visited London Tech Week.

In 2017 I wrote that exploration was really of waning interest [Link] but I didn’t expect one of the primary reasons was that we didn’t want any more hydrocarbons.

Contrast this recommendation from Wood in 2014: “Government and Industry to commit to a new strategy for maximising the recovery [of oil reserves] in UK Continental Shelf] with the growing idea that we might leave reserves in the ground.

I wonder what the report on maximising the economic recovery from the whaling industry said.

Could the oil industry just disappear?

Despite sounding the drum for the 4th Industrial Revolution and arguing (nicely) with Patrick Von Pattay ( I was the more conservative because I thought that oil and gas really wouldn’t change fundamentally). It appears I may have underestimated things.

A very successful (and foresighted) businessman recently told me that the plastic-straw industry had simply ceased to exist within six months of the revelations of the damage it did to the oceans in the TV programme the Blue Planet. This chap now takes into account environmental position before bidding for work from a company – not for ecological reasons. He wants to direct effort to customers that will remain in business!

Surely we can’t do without oil?

Of course, there are oilmen who will tell you that the world economy cannot work without hydrocarbons – their case has always been that growth will come from renewables, and that demand would be flat. I tend to agree. But what if we’re wrong?

Here are a couple of thoughts for this (exceptionally) rainy Feb morning.

  • Solar is the cheapest form of energy production already. It’s getting cheaper and more efficient at a blistering rate.
  • Petroleum products might become classified as a dangerous substance – think asbestos or CFCs, what would that do to demand and price when supply, licensing, permitted uses and public perception of the product changes.
  • Microeconomics – which is what many businessmen optimise for – operates within Macro economic boundaries. Macro economics are formed by policy, are political and by nature are ideological. Think about: Soviet Russia, China, Thomas Pickety, Trade Wars, Sanctions. Things you think are “real” business decisions can be usurped by political will in an instant.
  • The IPCC report on climate change was issued in 2007, the Paris agreement was 2015 we seem likely to go beyond this and as a world embrace Net Zero sooner rather than later. For insight listen to Myles Allen on the life scientific (BBC https://www.bbc.co.uk/programmes/m000fgcn )

Engineering will still be important

With all this doom and gloom around it’s easy to get despondent. But, here’s the good news: if the world decides it wants to change then this will call for difficult and complex engineering, delivered in remote locations across political divides on an unprecedented scale over a mulit-decade period.

Not only will we need to invent all sorts of new technology for carbon reduction, energy efficiency, generation, storage etc. etc. We will need to deploy them all and decommission all the legacy assets.

There are not many companies that can muster the amount of engineering talent, capital control processes, large scale international project management, logistics construction that will be required. In fact, I can think of two that could – Energy and Shipping. And of course, if the world doesn’t change, oil and gas will have a renaissance.

Under all circumstances the people inside the oil industry will have skills that are needed and which are hard to replicated at scale. The only loss of value will come from those who can no longer exploit their control of underground deposits of oil in the future, and those that must pay for legacy assets and impact from the past.

Fundamental engineering practice still matters

With all the digital wizz (which I fully support) it is important not to lose sight of the practical situational requirements, human organisation and civil society that we need to enable the “platform” in which the innovative start-ups, electric cars and energy transition can happen.

Basic engineering discipline still matters, and is sometimes overlooked by hand-waving innovators and wet-behind-the ears management consultants.

You probably know about the 737-Max flight-stability software and instrumentation scandal. Recently, I read an article on Boeing where it says they are now re-inspecting new plane fuel tanks because they have found rags and tools left in them by construction workers: https://www.flightglobal.com/air-transport/boeing-orders-737-max-inspections-after-fuel-tank-fod/136819.article

It’s a sobering thought when flying :- if the wrong culture takes hold and introspective and solid processes are overtaken by gregarious and extroverted leadership.

The world still needs good engineering.

Ubique & Quo Fas Et Gloria Ducunt

Where’s the Delta?

On Sunday August 7th 2016 Delta airlines suffered an IT outage. Earlier in the summer SouthWest airlines suffered similar.

Delta cancelled at least 740 flights by Monday (I am sure there will be more) and Southwest cancelled 2,300 flights.  (Reference link , BBC link)

My calculation, at the bottom of the post, suggests that this cost DELTA at least 60 Million USD in lost capacity –  not counting the damage to the brand and additional costs associated with handling customer enquiries.

IT and the business are inseparable in the 4th industrial revolution. For many years there have been moves to outsource IT, drive down its cost and to make it standard and commoditised.  For utility IT this made sense. It was a cost of doing business. It was a necessary qualifier attribute but conveyed no competitive advantage.  If your copy of Microsoft Word was slightly faster than mine, it was unlikely that you’d capture more business or be able to charge more.

The outsourcing movement was used to drive this process, often awarding contracts to low-cost service centres in Eastern Europe or India.

In my view cloud based services – such as Microsoft 365 and Salesforce.com will become the norm for utility IT services and remove most of this responsibility from the IT department which will, as a consequence, go the way of the typing pool. In 25 years new entrants to the workforce will scratch their heads wondering what the point of the IT department was.

The world is, however, changing and changing rapidly. IT is becoming embedded into the core operational process of business. And executives that don’t understand IT will not succeed for long. Any company that perpetuates the phrase “IT and the Business” or any IT department that talks of “The Business” as if it were something separate from the IT function will go the way of the dinosaurs.

I don’t know if Delta outsourced its IT, or what the cause of the issue was. But it is clear that the situation was mismanaged before the outage (Reliability and resilience: no hot-backup, or hot disaster recovery ). This calls into question either the competence of those charged with planning operations or the business decision to not invest in technology and systems. Either way this is a failure of management to grasp the importance of IT in the primary operations of the business. Just because you don’t understand it doesn’t make it simple, or mean the problem can be ignored. Airlines are pretty good at maintaining aircraft, there are international standards for how it should be done and inspection audits making sure it is. Perhaps we need something similar for IT?

On this occasion it was a risk management failure where the loss of IT functionality impacted availability and utilisation of assets. My guess would be though that there are many areas where IT could be applied to the primary business to drive increases in efficiency and reliability. If management is unable to understand the business case or appoint competent management for IT resilience it is unlikely that they are exploring these more nuanced applications of IT.

The airline industry is not alone.

Put this into business context

In 2015 Delta operated an average of 5,400 flights per day, so about 15% of flights were grounded on Monday. Assuming that these planes were now in the wrong position some of them would have to reposition empty (let’s say 50%). Passengers rebooked who were scheduled to fly on a grounded flight (and Delta allowed all passengers to rebook any flight scheduled for Monday). Let’s say 30% of all Monday’s passengers (those on grounded flights and a similar number who took the precaution) took the place of fare paying passengers on later days.

Then we have a utilisation impact on aircraft of:

15% of one day capacity for cancellations

7.5% of one day capacity for repositioning

30% of one day capacity for rebooking.

52.5% of one-day’s capacity utilisation (in the height of busy season) was lost due to a systems outage.

Assuming 350 flying days this is then 0.525/350 = 0.15% capacity hit for this outage.

Last year’s revenue for Delta was 40Bln USD.

My “back of the envelope” calculation suggests that this systems outage cost DELTA $60Million USD in lost utilisation.

The brand has been impaired so future passenger numbers are likely to be lower than they would have been (at least for a while, especially as they could not even take bookings on Monday). Add to this the additional cost of media relations and customer complaint handling and we’re looking at a $100m problem.

Oh and if you are a European Union passenger you are entitled to 600 Euro’s in compensation too.

image credit Link

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.

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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.

 

Digitally disrupted operations

I have already said that I believe the time is now for O&G operations to become digital. Radically different cost models are going to be needed and digital is one way they will be achieved.

“When assessing the implications, consider the fact that that new digital business models are the principal reason why just over half of the names of companies on the Fortune 500 have disappeared since the year 2000. And yet, we are only at the beginning of what the World Economic Forum calls the “Fourth Industrial Revolution,” characterized not only by mass adoption of digital technologies but by innovations in everything from energy to biosciences.” Pierre Nanterme – Accenture CEO [Link]

For me this revolution started with a computer programme called Mosaic, the first internet browser – which I discovered in 1993 while goofing around using Kermit, WAIS, Gopher, FTP and downloading cool stuff from GNU. I was being paid to generally muck-about and call it work. Since that moment I have witnessed a massive rise in computing power, information storage and interconnectivity that has left me gawping in awe. The chart below, from The New Machine Age, illustrates the trend.

Five Phases of Disruption

I model this disruption in 4 overlapping phases that are well established (each relying on the ones before it to progress) – and we’re about to see the fifth phase make itself felt.

Phase 1: Pure Information Industries

This was the first to be disrupted. It started with libraries, newspapers and advertising. As technology progressed this then disrupted industries requiring higher information capacity (bandwidth & storage) such as music and radio, and is now doing the same for television and cable companies. Bi-directional communication led to the X-Factor, the Huffington Post and any number of citizen journalists and bloggers.

Phase 2: Customer Engagement

As more people started to have access to and use the internet it was a small extension to make commercial transactions and shopping. As this ramped up customer experience of retail, customer-service departments and opened up access to a vast array of diverse products that could never be held in stock on the high-street. Now there are very few consumer engagements that do not have to integrate a digital channel into their offerings. Coffee and haircuts can’t be online – just about everything else can. Even there Starbucks is integrating a digital offering into their coffee order-to-pay process.

Phase 3: Co-ordination and logistics

It started with on-line parcel tracking, cross-docking and behind-the-scenes scheduling algorithms. Adding mobile GPS and mobile data allowed supply chain and logistics to start its transformation. Firstly on the containerisation and automatic freight and now down to warehouse location, stock control and soon perhaps delivery by dedicated drones [Link]. Phases 1, 2 & 3 have combined to give me my Occado delivery today at 12:30 (sharp).

Phase 4: Asset and resource sharing

This phase is still young and we’re seeing it play out in the consumer space first – a reversal I’ll elaborate on later. Companies like AirBNB, Uber, ZIPCar and others. In general this is the idea that Assets are not fully utilised by their owners all the time, and spare capacity can be made available through a brokering and booking service – and then scheduled and delivered.

Phase 5: Machine-optimised operations

Remote sensing, predictive algorithms, human-machine teaming – integrated with maintenance planning (plus all the attributes in phases 1-3) should lead to more reliable plant constantly optimised and operated by fewer people. This phase is being referred to as The Internet of Things.

“The Internet of Things (IoT) is changing manufacturing as we know it. Factories and plants that are connected to the Internet are more efficient, productive and smarter than their non-connected counterparts. In a marketplace where companies increasingly need to do whatever they can to survive, those that don’t take advantage of connectivity are lagging behind.”  Forbes Magazine [Link]

The reversing order of adoption

Sometime between 1992 and now a reversal in adoption sequence occurred. Prior to Mosaic the sequence of adoption was: Military, Big Business, Small Business, and Consumer. There was also a geographic sequence that meant technologies emerging in California took a few years (5+?) to make it to Europe and the same again to make it to Asia. The order has now reversed and the spread of ideas is both bi-directional and super-fast. For instance we’re going to see individuals install HIVE before most plant install remote operations. So I think we can already see the new technologies and ways-of working being successfully deployed for consumers – the question is how will the Oil and Gas industry adapt them for its use?

How could real-time sharing of Oil and Gas assets and equipment be made to work? How could we create an “Oil-Uber” for self-employed drilling engineers? How can we scale-up technology like HIVE, algorithms for maintenance diagnostics, combined with the GPS on a tag like that in my £100 Garmin watch attached to and despatch the most available uber-spare-part.

Of course, innovations will sneak up on us through lots, and lots, of small changes but the effect will dramatic – looking back we will see the change, but it will happen gradually with the companies that use more efficient technologies buying assets from those that don’t – or, more accurately, buying assets from their officially appointed receivers.

Working Hours Vary by Country

An interesting update came my way today courtesy of the Deloitte Monday briefing from Ian Stewart.  In my post about starting your own consultancy  [Link] I said that a consultancy would normally expect you to account for 2000 hours a year.  Below are some of the average worker stats by country. Just interesting I thought, I must work too hard !

In 2014 the average Mexican worker put in 2,228 hours, equivalent to a 43-hour working week with no holidays. The average German worked 1,371 hours in 2014, 39% less than the average Mexican. French workers worked 1,473 hours. Contrary to popular perceptions, Greece features among the countries where people work long hours (2,042 hours). By-and-large people in nations with higher levels of productivity work fewer hours, enabling Germans – who have among the highest productivity in the world – to produce more in a relatively short working week.