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What Could Big Oil Learn from Big Digital

A gigantic digital outfit is on the hunt for a second home and Calgary fancies itself in the running. What could Big Oil gain by having Big Digital on oil’s home turf?

Digital Rising 

In 2017, 4 of the top 10 largest companies in the world by revenue were oil and gas companies (Sinopec, China National Petroleum, Royal Dutch Shell and ExxonMobil made the list). But the most profitable company in the world is a digital company (Apple), and the top 5 largest companies in the world by market capitalization are also digital (Amazon, Apple, Facebook, Google and Microsoft). Facebook is only 393 largest in revenue!

 

The potential arrival of one of these big digital companies in Calgary would alter the social and political dynamic forever. This one digital outfit will be larger in headcount (50,000) than the total workforce in Calgary of all mining and oil and gas companies combined (44,000). They will have a very big (and in my view, welcome) voice in the City, its politics, and its decision making.

 

Meanwhile, the opportunity for oil and gas to benefit from learning how digital companies operate is without a doubt the biggest potential unstated benefit to the industry.

 

Clock speeds

 

Digital is faster than oil and gas.

 

Digital outfits operate on a dramatically different clock speed than oil and gas. The cycle times of digital products and services is measured in months. Companies can start up and go global within a couple of years from launch. The latest digital solutions only exist in the cloud, and are updated with new features and security patches on what feels like a biweekly cycle. Media stories report on some of Silicon Valley’s novel ideas like the stand up meeting, the 6-page brief, the elevator pitch. Digital even has its own language, like Round A financing, Minimum Viable Product and User Experience.

 

Compare this to oil and gas, who operate in the annual capital budgeting cycle. Large oil sands investments take years to get off the ground. Once oil and gas technology goes into operation, that’s it. They’re pretty much frozen in time. Most distressing, the productivity of the engineering, procurement and construction activities involved in building new oil and gas assets has actually declined for the past 20 years. A recent study noted that the stand around time on a big construction project is as much as 35%. The industry is losing ground and slowing down.

 

More than a couple of oil and gas executives have lamented that they would like to operate their businesses on faster cycle times than they achieve now, but find it very difficult to do so.

 

The arrival of Big Digital could create opportunities for oil and gas to learn to replicate the clock speed of Silicon Valley, which could be vitally useful in what is going to be a carbon constrained world.

 

Value creation

 

Digital creates value differently.

 

Calgarians are highly productive, in an economic sense. That is, the GDP value of the employees in the City is very high, reflecting the highly skilled workforce in oil and gas, professional services, engineering, technical, information systems and science fields (STEM as it is known). A fair portion of that value, however, is actually tied to the price of the main product produced (fossil fuels, principally oil and gas, with some coal mixed in), and not to rapidly growing volumes of production.

 

As the price of oil has fallen, oil and gas companies have dusted off the classic “how to hold on during a downturn in the commodity cycle” playbook, and have executed the playbook perfectly. Cancel projects, squeeze suppliers, trim dividend, lay off workers. GDP per employee has stayed high. But the underlying business models have barely changed at all. Productivity has improved but oil executives worry about the sustainability of those tactics.

 

Digital outfits do not have the advantage of a rapidly rising commodity price to lift the value of their products and services. They must satisfy a customer somewhere who is willing to pay for what is on offer. They must figure out how to extract a margin based on the value that they create and not just rely on price increases driven by commodity markets.

 

At least one European oil and gas company is taking note of how digital makes money. They have requested professional help with figuring out how to monetize their immense data holdings in their refining, pipeline, chemicals and retail businesses. To my knowledge, one in Calgary is thinking on these lines yet.

 

Oil and gas could learn how digital companies measure and create value, particularly through such digital strengths as analytics, data science, artificial intelligence and automation.

 

Customer orientation

 

Digital understands customers better.

 

Digital outfits devote an enormous amount of energy trying to understand their customers. Of course, they collect troves of useful data to assist with that task, but they have built the analytic tools to track in real time the visitors to their services, and the customer behaviors at a super granular level. They have to – getting someone to stay on a web site for more than 15 seconds is a challenge.

 

Oil and gas companies in Calgary basically have no customers (except for the retail end of the business, and the majority of oil and gas are not into retail). They sell into commodity markets. As a result, almost the entirety of investment in innovation goes into very narrow technical areas such as better seismic interpretation, better handling of water and gases, and advances in hard technologies like drill bits and tools. Compared to technical investments, not much goes to understanding how the general community, First Nations and other stakeholders perceive the industry.

 

This investment deficit shows up in Supreme Court decisions about the oil and gas sector’s engagement with First Nations, in activists opposing pipelines, and in governments blocking industry activity to produce something as fundamental as our sole fuel for transportation.

 

Oil and gas could really gain from understanding how digital companies deepen their understanding of their customers, and use that understanding to help work better with key stakeholders.

 

Cloud thinking

 

Digital companies embrace the cloud.

 

Not only do they embrace the cloud, the five biggest digital outfits operate very large cloud computing businesses. Their products and services are also entirely cloud based. The essence of their business models is to embrace this new computing construct as fully as possible, and to think entirely about how to do what they do through a cloud model. Cloud has allowed them to grow exceptionally rapidly.

 

Oil and gas has yet to embrace the cloud as a viable computing platform. Cloud does not appear to offer any great cost savings (it doesn’t), and the software suppliers to oil and gas haven’t had the sales volume recently to pay for migration to the cloud.

 

Some are coming around, however. A large European oil company recently conducted an experiment to test how robust cloud computing was, and loaded a sizable dataset of seismic data to one of the commercial cloud outfits. It worked satisfactorily. Not only that, they crowdsourced the interpretation of the data and discovered that math and data science generalists were as good as their internal experts in data interpretation.

 

Oil and gas could really benefit from greater exposure to how digital companies manage their businesses in a cloud setting.

 

What should oil and gas companies do?

 

In my view, oil and gas companies stand to benefit much more from the arrival of Big Digital than they will lose. Sure, there will be pressure on labour markets. But in the main, Big Oil can learn to move faster, make more money differently, solve some of the social challenges and transform its business models with Big Digital in the downtown core.

 

Calgary’s oil industry leaders should place calls to Seattle and tell Jeff his team would be very welcome in Cow Town.

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