I was recently asked by a client for assistance in examining how their business strategy might be affected by Digitalisation. This company is a mid-tier upstream operator with a mix of assets mostly non-operated but does have some where it is the duty-holder.
So I’ve propose the following five point map to classify where the disruption could occur in the upstream business. This helps to define not how, or when, but where disruption is possible. This framework helped us examine what threats and opportunities are likely to emerge in each area and I thought I’d share.
Please feel free to comment and I will keep this updated for the network.
Demand for Oil and Gas
- Digitalisation in the wider economy may affect the demand for energy through different transport usage, renewable control, demand management and micro-grids.
Access to Resources
- Access to operate resources may change as national owners find different partners to help them monetize geological wealth
- Opportunities to become a non-op partner may change as operators get more certain about their outcomes and require less diversification in their portfolios
- Competition for resources increases as development and production services become purchasable/tradeable activities
- Transparency of operation and methods to extract changes what is required to retain a license to operate
- Better techniques for collecting and interpreting data leads to more resources being found and better development pre-planning (westwood puts the commercial success rate at between 30% and 50% https://www.fircroft.com/blogs/less-drilling-more-success-the-state-of-exploration-drilling-so-far-in-71921114313 )
Development and Operation of Resources
- Digital planning and modelling combined with better logistics and manufacturing/construction techniques reduces the capital requirements for fields meaning lower barriers to entry
- High frequency low-cost drilling reduces the sunk-cost nature of investment, reduces cyclical volatility of supply/demand imbalances and hence expected return on capital
- Better information leads to increased recovery factors and ultimate value of assets. (Currently this is estimated to be below 40% http://www.spe.org/industry/increasing-hydrocarbon-recovery-factors.php )
- Better information, co-ordination and reduced waste leads to lower operating costs per hour of activity (for some bench marks check here https://knoema.com/rqaebad/cost-of-producing-a-barrel-of-crude-oil-by-country )
- Better prediction of failure and real-time optimization of fields leads to higher efficiency and hence accelerated cash-flow (currently 73% in North Sea https://www.ogauthority.co.uk/news-publications/news/2017/uk-oil-and-gas-production-efficiency-rises-to-73/)
Sale and transport of product
- Better information about the crude quality and refinery / other consumer plant configuration leads to higher yield / lower cost processing
- Information about the location of supply and demand enables better optimized transportation and reduced costs
- Better prediction of both future production and future demand enables balancing of both. This leads to changes in the premium available from trading and who captures it
- Automation leads to different models for distribution of wealth among the middle classes (no longer based on work)
- Automation leads to people choosing to add creativity and seek challenges in different environments and under different conditions
- Changes to the working motivation scheme means modernization is required for operating model for Oil and Gas industry to attract talent
Image credit: https://www.pmfias.com/natural-gas-distribution-world-india-petroleum-gas-value-chain-upstream-midstream-downstream-sector