18 Dec How Accurate Were My 2017 Digital Oil and Gas Predictions
Back at the dawn of 2017, I wrote up a set of predictions for the year. Let’s see how well I did in forecasting the digital oil world.
As Yogi Berra once said, “it’s tough to make predictions, especially about the future”. I’ve personally never shied away from taking a stand on the future, largely because so little is at stake, but also because no one remembers what you predicted in the first place.
However, I actually wrote down my predictions in an earlier blog, making it very easy to revisit my outlook. You can find my forecast for 2017 at a post I wrote early in the year.
Prediction 1 – Oil Price – No Material Change
My belief is that the price of oil is a big driver governing the deployment of digital technologies into oil and gas. The higher the price, the less likely that digital innovation will be funded because high commodity prices motivate investments that drive production (ie, drill baby drill). The longer that oil prices stay depressed, the more that industry will be motivated to find new ways to cut costs and improve productivity, which is where digital shines.
At the start of 2017, all eyes were on OPEC and whether the coalition of the willing would hang together, curtail production and hopefully move the prices of oil north. My forecast was that prices would not move up in 2017, but might in 2018 or 2019. I’m largely correct in this position.
Indeed, other industry watchers also zeroed in on the huge and mostly undocumented inventory of produced crude tucked away in floating storage (loaded tankers moored at various ports), and inshore storage facilities. With prices up just a tick in the year, the owners of this oil elected to bleed crude slowly into the market, and in the process, kept the market largely balanced.
Storage accounts for a lot of oil. If markets had been oversupplied for 30 months by 1 million barrels a day (OPEC thinks the market went long in June of 2014), and that oil had gone into storage, some 900 million barrels went into storage. Of course, some of that is into strategic petroleum reserves, but not all.
There are other drivers of price that are worth a quick review. First, demand for oil has stayed strong, despite the warning signs of advancing transportation shifts. Second, the Trump administration has repealed regulations that were blocking resource development in continental US. Third, producers have been hacking away at costs, putting the international majors on much stronger financial footing, and unlocking some capital.
Of greatest surprise to me has been that OPEC has largely held it together during a tumultuous year. Consider the steady stream of events in the Middle East – a war with Yemen, broken down relationships with Qatar, on-going noisy rhetoric between Sunni and Shia Islam, a young regime in Saudi Arabia that is loosening its domestic society, the war against ISIS, and the ongoing economic recoveries in Iraq and Libya.
Low oil prices have been good for the adoption of digital technologies this year.
Prediction 2 – Biggest Investment Area – Data
My forecast was that efforts to adopt digital would be hampered by the generally poor quality of the underlying data. Until the data is cleaner, digital can’t progress very far. This has not changed. The industry needs to boost the level of investment in assuring the ruthless cleanliness and reliability of its data.
I believe that digital analytics, robotic process automation tools and artificial intelligence can help overcome crappy data by making educated guesses about what the data should be. That is certainly the case in other industries (namely healthcare and financial services), where there are some use cases worth copying.
At the end of 2016, I was sensing a strong level of interest from big oil and gas concerns about leading practices in improving information quality. The areas of greatest interest were in fixing the reliability and accuracy of existing asset data. At least one large Canadian oil and gas concern has completed a large scale proof of the merits of data clean up and has extended their program to the rest of their business, from pipelines, plants, refineries, right down to the retail sites.
However, I’m not yet seeing many other oil and gas concerns follow this path. It’s not clear to me why that is. Perhaps data quality is not as poor as I suspect. Perhaps the cost to clean up the data is still too daunting. Perhaps management and boards still don’t get the importance of data to digital. Perhaps costs in the industry are now sufficiently low that new investment is drawn back to drilling.
Regardless, crappy data is bad for digital, but 2017 did not mark the start of the big data clean up.
Prediction 3 – Biggest Payoff – Analytics
I believed that the biggest payoff for digital in 2017 would have been in analytics. Upstream oil and gas companies have an abundance of data assets already, and with a little investment, that data could be put to work.
Two items this year make me think that I was (again) largely correct. First, the International Energy Agency (IEA) published a major study into the impacts of digital on energy (I was a modest contributor to this endeavour), and they believe that analytics is helping expand global reserves by 5%. It doesn’t sound like much, but 5% is 75 billion tons of oil, which is about 500 billion barrels.
That growth in reserves will come mostly from improvements in understanding via analytics on how to improve the yields from unconventional resources (shales and other tight geologies). Yields of conventional gas reserves, for example, are in the 90% range, whereas in unconventional, it’s 15-25%.
The value of analytics applied to reserves in the upstream could be $25 trillion (500 billion barrels at $50/barrel). A big payoff.
Second, a large European oil and gas company issued an RFP to the market to find out how it might monetize its data assets. The company concluded that its data from its many business units (refining, wholesale, terminal, shipping, logistics and retailing) held great analytical promise, and sought outside help to figure it out.
Many other companies from industries like transportation, insurance and financial services have been prosecuting similar data initiatives.
Related to the adoption of analytics is the rise in cloud computing. While not yet at the level in the technology industries (who start their businesses as cloud solutions), many companies in the oil and gas industry either have a cloud strategy or are giving serious thought to how they move to the cloud.
Analytics is the big winner this year, and it’s just getting started.
Prediction 4 – Hottest Careers
I thought, with the emphasis on the need for cleaner data, that the hottest careers would be in information management, data, taxonomies and information standards. I expected demand would be greatest for individuals with titles and training as data scientists, information engineers, data wranglers, bit doctors, analytics engineers, information analysts, data structure designers, information standard specialists, data conversion experts.
The hot jobs in digital are for anyone with a background in distributed ledger technology (DLT), otherwise known as blockchain. These jobs go to those in their early 20’s and command handsome 6 figure salaries. This past year saw a ton of initial coin offerings, the extraordinary rise of bitcoin value, and the weekly announcement of new crypto currencies. I don’t watch TV all day, but business professionals who do (investment bankers) tell me that every other media story has something to do with blockchain.
The oil and gas industry is ripe for overhaul using blockchain technology. Check out the blockchain category on this blog to see the dozen or so articles and podcasts that I’ve written about to get a sense about how hot this area is.
That doesn’t mean that oil and gas digital jobs are going unfilled, but it does mean that the brightest digital talents are likely heading to blockchain plays because that’s where the money is.
Prediction 5 – Biggest Letdown – No Viral Take Offs
As I forecast, there hasn’t been any new technologies launched this year that achieve the kinds of rapid viral adoption that you see in other industries. Sadly, I’m 100% on this one.
The Silicon Valley model for digital advancement (run small pilots, pivot rapidly, leverage smart capital) doesn’t get you very far in oil and gas. Petroleum is dangerous and it takes an extraordinary level of investment to operate technology safely and reliably under all possible conditions. Digital technology trials work best in a company with a different philosophy and risk tolerance to the norm. These companies are few and far between in the industry. Rapid shifts in direction (the pivot) are hard to pull off at scale. Traditional capital in the industry still prefers to measure success in barrels produced and reserves grown, every quarter.
As more technologists are exposed to the industry, I do expect to see a sharpening of the business models. The number of accelerators and incubators active in the sector is very encouraging, but until the ultimate customer (oil companies) change their views on risk and trial, adoption will still be very slow.
I give myself a 60% overall accuracy score in forecasting the year in digital, which isn’t that great, frankly. I gave the oil industry more credit than I should have on data and data careers. I could have seen the blockchain and bitcoin bubble building.
Early in January of 2018, look for my predictions for the upcoming year.