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Eight Digital Economies and Why Oil and Gas Should Care

 Eight new economies enabled by digital technologies have been on the rise. These have yet to make much of an impact on oil and gas, but they are coming.

Digital: much ado about nothing?

CIOs in oil and gas can be forgiven for wondering if this wave of digital innovation that is engulfing industry after industry will ever reach the fossil fuel sector. On the surface, digital feels like just another shift in computer technology, similar to the shift from mainframes to departmental systems to client server to web enabled.

We will get through this, they say. Been there, done that.

Even the breathless excitement about lights out facilities (mines without operators, gas fields without technicians, trucks without drivers) has that feeling of deja-vu about it. In the 80’s petrochemical facilities and refineries adopted SCADA systems to get people off the plant floor, yielding a mostly lights out environment. And connecting a mobile asset to the grid? We did that years ago when we adopted in vehicle monitoring systems (IVMS) and vessel tracking systems. These were the big assets of the day and they’re already heavily automated.

 

Besides, investors in oil and gas are betting that the commodity molecules of crude oil and natural gas will be in demand for the foreseeable future. All this new digital stuff, unless it’s aimed at getting more fossil fuels out of the ground in greater volume per dollar invested or at a lower unit cost is probably destructive of shareholder value.

 

But I think that’s missing the point. Most people narrowly think of digital as just new solutions aimed at today’s problems. However, for the first time ever, we are seeing the rise of whole new innovative economies that are based on digital technologies, and it’s not clear yet how these new economies will play out. An economy is different from a solution in that it features a collection of market participants and 2nd order participants that operate with their own commercial and contracting models, fresh investment paradigms and competition.

 

Eight digitally enabled new economies

 

In many respects these are not truly “new” economies. There is usually a pre-existing business model that is being upended because an industry newcomer has developed a compelling new offering based on digital technology.

The Sharing Economy

The idea of sharing an asset is a pretty stock concept. Hotels make rooms available for a night’s rent. I could always borrow my neighbour’s lawnmower or ladder. However, the basis of the sharing economy is to increase the usage of new classes of under-utilized assets by making them visible to a very large potential customer base. The best examples are car sharing services (Uber, Lyft), vacant room sharing (airBnB), and car share schemes. PlantMiner is a solution for increasing the utilization of yellow goods in the mining sector (yellow is a euphemism for earth moving equipment).

 

The oil and gas industry has plenty of under utilized assets at the moment – the down turn has idled plenty of drill rigs, service rigs, rental assets, warehouses and office space. Even computer cycles are under utilized. Is there a latent share economy available to the oil and gas sector?

The Service Economy

The idea behind the service economy is the creation of new service delivery models based on digital. Uber and Lyft are services examples from transportation, but the education sector now has the Khan Academy and Phoenix University. The gig economy (for services that must be delivered locally), didn’t exist just a few years ago, but is now growing rapidly (see Taskrabbit, and Airtasker).

The oil and gas industry is a great consumer of gig services, but for the most part, there is little innovation in the service delivery model. Some examples I’ve seen include Payload and Zayfti, but take up is slow and patchy. In the main the oil and gas industry is not yet experimenting with these solutions or driving the services economy to suit its needs.

The Micro Multinational Economy

Some smaller goods and services companies now reach a global market via solutions like Upwork, Ebay, Amazon and Alibaba. Linkedin and Facebook allow specialists to market themselves to the world for free. There’s now an enormous ecosystem of services available for jobs like analysis, brand work, imagery and design.

Oil and gas companies are not shy from purchasing services from best in class organisations, but in the main, far too much work is still done in house with high cost talent. Much more could be done by leveraging the micro multinationals or by creating a qualified micro multinational platform.

The Maker Economy

Supply chains involving the delivery of hard goods are ripe for transformation in many sectors. What’s making such overhauls possible are the digitally enabled developments in make to order. GE now makes some of its turbine components using 3D printing. The US Navy has installed 3D printers on many of its vessels so that its warriors can make utility items while at sea, cutting down on inventory. Eyewear and clothing makers now produce beautifully designed perfect fit items using precise images of the face, body and local 3D printing. No more manufacturing to inventory, stale inventory position, slow delivery response times, and high carbon shipping costs.

The oil and gas industry is highly make to order – much kit is bespoke – but the supply chains are far from adopting maker solutions. The industry isn’t promoting the make to order economy by nurturing key ingredients like open data about its assets, demonstrating preference for make to order, and removing restrictive clauses from procurements.

The Platform Economy

Digital has given rise to a number of public internet-based computing platforms to connect customers, suppliers and users. Examples include Facebook, Instagram, Youtube, WhatsApp, Wechat, Twitter and Amazon.These platforms deliver enormous scope to other industries for reinvention, but oil and gas continues to use these platforms following their original intent and design parameters. There is surprisingly little innovation in rethinking the operating model of an oil and gas company around these platforms.

The Data Economy

Behind the platforms (Twitter, Facebook, WhatsApp, Wechat), is an ecosystem of companies that offer analysis services on the enormously valuable and rich data from social media.

In the energy industry, companies like OpenEE provide analysis of consumer data to help improve the economic performance of negawatt programs (programs that help consumers conserve energy by changing their behaviour, paid for by avoided carbon penalties).

There are some early examples of the oil and gas industry engaging in the data economy. A European oil industry major has provided some of its seismic data to a network community of analysts and mathematicians. So far there’s not been any major moves by the oil and gas industry to open up its data to third party analysis, even though the industry does not carry out any analysis at all on 80% of its data.

The Digital Asset Economy

It’s surprising how assets that exist solely as bits and bytes are suddenly monetisable. It used to be that only physical assets had value because, unlike digital assets, they could not be readily copied. However, that has fundamentally changed with the invention of blockchain. Now, digital assets of all kinds (data, images, sounds, records, documents, analysis, even future value) can be monetised.

Oil and gas companies have enormous quantities of digital assets, and generally operate in an ecosystem of low trust participants, leading to an ideal setting for blockchain to flourish. While there are some important early trials of how blockchain can transform oil and gas, the pace generally lags European trials, and is almost a decade behind the financial services industry.

The Digital Trading Economy

The pure trading function is undergoing change as financial services carries out trials using blockchain platforms and applications. Payment systems are the beginning – trade credit and trade payments are perfect candidates for blockchain innovation. Physical trading in crude oil, petroleum, natural gas and LNG is also something that blockchain can transform, and the value at stake is high. Some $1.5t in crude oil alone is traded annually via tidal shipments, and fully 9% is disputed (reflecting short shipments, incorrect specifications, late delivery, etc). This could be almost entirely eliminated using smart contracts and blockchain to enable trade.

Do we need to act now?

 

The enormous advantages of the incumbents in an industry (customer reach, distributed assets, brand, balance sheet, cash flow),create confidence in the legacy business model. But the business press is full of stories of corporate incumbents that did not grasp the significance of innovations in their own and adjacent sectors, and failed to adapt fast enough.

 

Examples include:

 

  • Anyone in retail, and Amazon
  • The shopping mall industry, and on line shopping
  • The music industry, and Napster, Apple and Spotify
  • The movie distribution business (Blockbuster) and Netflix
  • The book retailing business, and Amazon and Kindle
  • The board game industry, and computer gaming
  • The power industry, and the rise of personal solar
  • The taxi industry, and Uber and Lyft
  • The newspaper industry, and on-line news services

 

The challenge for CIOs, therefore, is both how to take advantage of digital innovation in their current businesses, while also nurturing the industry equivalent new economies.

 

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