27 Nov How to save $3 per barrel using digital innovation
How might an oil company reduce costs by $3 or more per barrel through digital innovation?
One of Calgary’s oil sector CEOs expressed this keen question recently. Well actually, what he said was “bring me a $3 saving from digital and you have my attention”. I am a bit miffed, having written 55+ articles on how digital can help the industry, that my carefully selected words have yet to resonate, but I blame my crappy marketing.
With all that the industry has been through to cut costs and ensure survival in the downturn, are there some big nuts still to crack? To find the $3, let’s assume the production cost per barrel is $25 (so we need to find a little better than 10%). This is precisely wrong, but certainly for oil sands, it’s directionally correct, and might well be optimistic. Assume twenty-five percent of that is labour ($6), 20% is energy ($5), 30% is capital ($7.50), and 15% is services ($3.75).
Where can we find $3? It sounds like a challenge, but is it?
Orthodoxies that need to be confronted
The industry operates on a number of founding premises or orthodoxies that digital innovation can now call into question. These orthodoxies provide tight boundaries to innovation in the industry, crowd out other ideas, and create similar patterns of thinking and problem solving that constrain the business models in the sector.
I grew up with the orthodoxy that it was not safe to talk to strangers, and to not get into cars with strangers. Now, I use my phone to summon a stranger and I get in his car. It’s called Uber and it’s great.
I recently went through an exercise with a company to confront the orthodoxies in its industry to see which ones we could challenge using digital innovation. Here are some of the orthodoxies that the courageous and differentiated oil and gas company will seek to reinvent in a quest to change the cost structure of the industry.
One. People control infrastructure
Have you noticed that, throughout the sector, people control the assets and the infrastructure? Everywhere you look you find padded seats and human-centered controls, steering wheels and rear view mirrors, pedals and levers. It doesn’t matter whether it’s a truck, a rig, or a control room – there are always lots of people about, and people are at the center. Oil and gas assets are not self-controlling, self-managing or even self-diagnosing. They are at best self-reporting.
And oil and gas people are expensive. Oil and gas compensation is among the highest in the world in dollars per hour. As skills shortages appear in the sector, all salaries for all jobs drift upwards. Some Australian off shore gas projects paid north of $200k per year for “laundry technicians”. Worse, these high wages lift up the cost of white collar services and the field services too.
On the horizon I can clearly see self driving trucks, self driving trains, and soon, pilot-less helicopters. This is only the start. The idea that only a human can take a seat, read the dials, handle the controls and take action is fast becoming obsolete.
Robots in the house – $0.90 / barrel
Robots can take the place of people in many different roles in the sector. Just in the front office, robots have made great strides – the mining industry began working with robotic trucks some 10 years ago. Oil and gas needs to support innovations that result in the single person drill crew, single operator work over rigs, lights-out plants, automated tank and pipeline inspectors, robotic welding, and drone-based field supervision.
Robots take no breaks, no vacations, no training courses, no rest. They achieve dramatically better productivity of an equivalent human in a well defined task area. It is no surprise that China is the number one buyer of industrial robots in the world – even with their labour cost advantage, they see the value of robots.
Robots could displace 10% of labour cost in the front office, and half as much again in the back office.
Two. Data is an expense
If there’s one thing that big digital companies have taught us, it’s that data is actually an asset, and in fact it might be THE asset. Oil companies still see data as an expense. It doesn’t show up on the balance sheet and isn’t managed as a strategic resource. Data sits in functional silos. Engineers have been trained to view “wet” memory as superior to systems. There are few Chief Data Officers to set data policies, ground rules for data collection and use, and mechanisms for sharing and analysis.
Clean consistent data – $1 / barrel
Woodside Energy of Perth estimates that their engineering team spends 40% of their time just tracking down the correct data for whatever analysis bedevils them at the moment. One of Calgary’s larger oil and gas concerns also recognises this opportunity, and how poor quality data will clog up the robots. Initially aiming at engineering content, they are removing poor quality data, correcting bad tags and linking disparate databases together. Savings show up in streamlined work planning, fewer errors, better health and safety outcomes. They estimate about $1/barrel in savings.
Three. Manage the business like a project
In the beginning, oil and gas wells were rightly treated as projects, having little in common with each other. Methods of oversight, funding, reporting and execution followed practices from the project management industry. Flexibility was king. When geology was more uncertain than today, and commodity prices were more robust, the higher costs associated with project execution were more than tolerable– they were immaterial. No longer.
The interface between an oil and gas company and the army of service companies that they employ hasn’t materially changed in decades. With a supercomputer in everyone’s pocket (yes, a smartphone), ubiquitous networks, slick math, cloud computing and instantaneous communications, the ability to bring manufacturing thinking to basic practices like well delivery and asset maintenance is here.
Optimise the supply chain – $0.40 / barrel
Many early adopters have already exploited this opportunity and report 15% savingsthrough reductions in operator unit and task pricing, optimised operators, improved quality of field services, improved production levels, fewer road miles driven, higher productivity of workers, and on and on. Think Uber for oil and gas.
Four. Energy use is already optimal
Energy inputs in oil and gas are managed in much the same way as other industries. Contracts and Procurement might negotiate supply contracts, but the management of energy consumption is highly fragmented. Each business unit manager has their energy cost budget, and few pay much attention to it. Few companies, including oil and gas, even know how much energy they buy, or bother to make the trade offs between different energy inputs and costs across the whole of business.
Diesel is still the fuel of choice for engines, and natural gas is the fuel of choice for plants, but how can this logic hold up when the price of carbon keeps going up while the cost of renewable energy keeps falling?
Optimise energy – $0.50 / barrel
Google provides a graphic illustration. Their engineers were certain that energy use in their data centers was optimal. After all, they operate the world’s biggest data centers. Who could possibly do it better?
Artificial intelligence, that’s who.
By feeding all of the temperature, power generation and consumption data from each individual server and switch in the data centers into an AI engine, this digital technology found another 20% energy reduction. Savings were from insights that were impossible for humans to detect using limited modelling tools like Excel.
Oil and gas producers, with their thousands of producing assets, have similar potential. AI enables the optimisation of energy consumption across the fleet. Digital sensors can turn individual assets into both consumers and producers of energy, allowing more flexibility in energy management. The most edgy players substitute solar panels and batteries on their production wells to drive pumps and facilities, and use digital tools to manage their network.
Five. Trust the paperwork
The amount of paperwork that flows between players in the industry is immense. RFPs, purchase orders, requisitions, packing slips, specifications, warranties, contracts, invoices, agreements, field tickets, compliance reports. Most of these artefacts have pride of place in the finance, production accounting, supply chain and engineering functions, enacted over the years to assure good business controls.
There’s a cost to all of this paper handling. I am aware of at least one oil and gas company who employs more people to comply with water regulations than they employ in the exploration department. Deloitte calculated the cost of red tape to be as much as 25% of the entire Australian economy, most of it self imposed by business.
Deploy Blockchain with business partners – $0.50 / barrel
At the root of this approach to business is the lack of trust between parties. The new digital technology called blockchain is starting to demonstrate just how much cost could be eliminated by using technology to create high trust systems. Two global super majors deployed blockchain in the part of the business where they sell, ship, store and buy petroleum products among each other. They reckon that between 30% and 50% of back office processing costs could be eliminated. Not automated. Eliminated. Some cherished business documents like invoices become utterly superfluous.
There it is – $3.30 / barrel, and I think I’m just scratching the surface. We haven’t talked about the construction cycle and how backward it is, or how digital twin technologies could optimise plant production, or the use of augmented reality and visual analytics.
The real problem facing oil and gas is actually one other orthodoxy – that the industry needs single big solutions to yield big savings, rather than a whole series of small improvements. This orthodoxy needs to be booted to the curb, along with all the others.