26 Jun If Toyota Was an Oil and Gas Company, It Would Create a Virtual Assembly Line
Upstream oil and gas companies routinely talk about becoming more like manufacturers, but what does that mean, and why is this so hard to achieve?
The oil and gas industry has been searching for the ways and means whereby the upstream industry would behave more like manufacturing operations. For example, the sector has sunk a lot of money into technologies like digital oil field that promised to unlock manufacturing efficiencies in oil and gas. Creating a centralised production function is one way, and getting accurate and real time data about operations, back hauled to production supervision for interpretation and action, is one means. Production volumes are higher and more predictable as a result.
However, costs in the industry have been frustratingly sticky. They tend to rise in lockstep with commodity prices. They come down only under the most difficult of circumstances such as when there is a major market correction like the collapse of oil prices we are now experiencing.
This is not how manufacturing costs behave. Manufacturers watch their costs very carefully, and constantly invest in ways that expand their margins (the delta between their input costs and the price they can command for their products). High variability in controllable costs are a sign of poor manufacturing management.
If oil and gas companies want to get their costs to behave the way costs behave for manufacturers, they will need to do more than just harangue their suppliers for cost reductions. They will need to adopt at least one other key technique that has been the hallmark of the manufacturing industry since the days of Henry Ford – the assembly line.
The early auto industry
Back in the early days of the auto industry, cars were built the same way that oil and gas wells are built today, by craftsmen. The car, like an oil well, didn’t move in the shop. The craftsmen came to the car with their tools and parts, and slowly assembled the vehicle over time.
It was hard for the craftsman to cut their costs. Most of their value was in their experienced labour. Parts were built by hand. Expanding production was a problem because experience takes time to accrue and experienced labour was scarce. Labour rates would therefore escalate dramatically when demand grew. Since their tools had to be portable and human scale, they were small and hard to finance (portable assets tend to walk away). Substituting machines for people had limited impact.
Production volumes were small, and making the assembly more efficient over time was hard. Even today, high end sports cars with limited production volumes are made mostly by craftsmen in assembly shops. Other products, like bespoke suits, buildings and art are built in this craftsman model.
Oil and gas wells are the same today. The assembly shop is effectively the well site. We might call it a well pad, and it might have a water handling facility, a lay down area, parking for vehicles, tanks for production. The craftsmen are the services companies who go to the well site with their teams of people and their equipment (rigs, pumpers, frac spreads) and carry out a service on the well, either to build it in the first instance, or to repair or service it later.
Like all craftsmen, services companies struggle to do much with their costs. Labour rates are sticky and don’t easily retract when the market tightens. When the market expands, suppliers have to pay more for labour and their costs go up. They also raise prices quickly because they can, since oil and gas companies don’t sweat their costs the way manufacturers do. Their assets are, for the most part, financed by bank lending, which require regular payments, and with demand uncertainty suppliers charge what they can when times are good to make up for the pain when times are not.
They can innovate a little with their rigs and kit, but those efficiencies are at best incremental to their specific tasks and not transformative to the overall asset life cycle.
Henry Ford changed manufacturing forever with the invention of the assembly line. The assembly line helped drive down costs by replacing the craftsmen with less skilled labour, simplifying tasks and speeding up production. But the big investment by Ford was in creating the mechanical conveyor system that moved the vehicle past assembly workers who were arrayed in workstations. The forward work queue for the assembly worker was defined by what the conveyor system delivered to them. Delays caused by missing parts and missing workers could be eliminated. The line could be sped up or slowed down, or run round the clock, to match production to demand.
The production volumes achievable in today’s auto plants (200,000 units per year per plant) are simply not possible in a plant whose basic operating model is craftsman-based assembly.
The oil and gas assembly line
Unfortunately for oil and gas, the well, the flow lines, the batteries, do not move and will not ever move. They’re stuck in place because that’s where the hydrocarbons are located. So the industry cannot simply copy Henry Ford’s innovation by locking the services companies in place and bringing the well to them on a conveyor belt. We’re kind of stuck with this basic physical limitation and have no option but to bring the craftsmen to the well.
But at least there is a physical conveyor system in place: the road and highway system. It’s infinitely configurable and it’s free (as we all pay for it through our tax dollars). And the services companies are already on the conveyor system in that they already drive to the well sites. Unfortunately, the road system is much too flexible relative to a fixed conveyor system, and oil and gas companies take full advantage by dispatching services companies anytime, in any order and to any site. It’s flexible, but costly and inefficient.
What the industry needs, therefore, is to convert the work to be done on wells and facilities into a virtual assembly line rather than a physical assembly line.
Digital technologies (cloud computing, mobile devices, analytics) offer a partial solution to this challenge. By adopting a cloud solution that service companies and well owners both access, a digital system can provide the kind of visibility to work to be done in a way that mimics a physical assembly line.
Service companies could see a work queue stretching out in front of them in the same way that an assembly line worker can see the vehicles coming at them in a factory, instead of the one-at-a-time purchase orders they have today. They could access the work queue while on the road on a smart device. Well owners could see a sequence of services to be carried out on their assets. Working together, service companies and asset owners can optimise the performance of the virtual assembly line.
What other changes are necessary?
While there are a few new solutions using digital technologies that help improve work management in the field, most do not offer a comprehensive and fundamentally new business model of the virtual assembly line. That’s because digital is only a partial answer. Other changes to the operating model are necessary.
- The relationship between oil and gas company and the service company needs to change. Toyota, for example, does not treat its just-in-time suppliers the way oil and gas companies treat their on-call suppliers. There needs to be more open and joint business volume planning and different contracting.
- The design of well infrastructure would benefit greatly from some further standardisation, which I believe is more achievable in the unconventional shale world than in the conventional world. Standardisation helps capture service efficiency and cost reductions.
- Oil and gas companies need to think of the data about their assets as powerful enablers and not their closed proprietary advantage. This is more of a mindset shift than a technology question.
- Different skills will be needed, including more manufacturing process expertise, from the likes of Toyota, Boeing and IKEA.
- Performance measures need to adapt to reflect a manufacturing mindset. Expect to see greater emphasis on economic margins and less on production volume at any cost.
- Technology choices would need to be more enterprise in nature and less field specific, asset centric and driven by narrow business unit agendas. Manufacturers might let the paint shop toy with new spray nozzles, but they still need to be part of the assembly line.
- Oil and gas companies would need to reorganise to create more of a controlling function that looks for ways to optimise assembly activities, based on demand for services, constraints in delivery (such as inclement weather) and travel distances.
These are hard changes for oil and gas companies to stomach because they get at the very basis for how oil and gas has traditionally organised itself. But if the high cost western oil and gas producers are to survive, the incrementalism that defines the improvement pathways of today must give way to a more transformative agenda.
If you’re interested in learning more about how the assembly line can be delivered using digital technology, and for insight into how other oil and gas companies have embraced these ideas, drop me a line.