November 2018

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Roundtable: Digital transformation in oil and gas: Is the hype justified and is the industry going far enough?

Digital transformation in oil and gas: Is the hype justified and is the industry going far enough?

Lehmann, S., Petrotechnics; Malladi, M., Reliance Industries Ltd.; Marx, J., Airswift; Ward, R., McKinsey Energy Insights

For this roundtable session, senior industry executives gathered to discuss digital transformation in the oil and gas sector. The roundtable participants included Scott Lehmann (SL) of Petrotechnics, Mat Malladi (MM) of Reliance Industries Ltd., Janette Marx (JM) of Airswift and Richard Ward (RW) of McKinsey Energy Insights. The roundtable participants discussed the implementation of digital technologies, how digitalization is impacting operations, barriers to digitalization, if companies are taking digitalization far enough and the roles that people and organizational culture will play in the effectiveness of digital transformation efforts.

FIG. 1. Utilizing additional digital operations can dramatically increase an operator’s efficiency, reliability and safety.
FIG. 1. Utilizing additional digital operations can dramatically increase an operator’s efficiency, reliability and safety.

Do you think the hype and promise around digitalization in the oil and gas sector are justified?

JM: Yes, I do. The future holds big enhancements and breakthroughs when it comes to productivity and safety, which is why the [oil and gas] industry focused on it even during the downturn. It will lead to more gratifying high-level roles that take analytical and problem-solving skills to a new level.

RW: Certainly, if you judge by the amount of marketing going on. Is it real? Yes. Nearly every oil major, along with many independents, are looking at the technology stack and evaluating their options. The financial sector has gone over to the cloud, which has pretty much convinced other industries to do the same.

SL: The promise and the potential are justified. However, I would add a caveat. New technology is a tool; it is not the solution. For example, just expecting analytics to magically provide insight and connect the dots is a first-class ticket to disillusionment.

MM: I think it is a bit like a hammer looking for a nail. In downstream manufacturing, a lot of hardware and software investments have already been made and interconnected. If you bring artificial intelligence (AI) or the Internet of Things (IoT) into the picture, you must really define the challenge that it can solve.

SL: Any time there is hype like this, you must keep a level head. Digitalization is not a sure-fire salvation. You cannot just spend money, plug it in and expect results. It is not going to change your business fundamentals by itself.

RW: These things are not overnight projects. However, the time is right. Organizations are ready for it; they have not done any real technology projects for a long time. They are tired of cost cutting, and this could dramatically transform their business.

Is digitalization impacting traditional business models in the sector?

SL: It is already having an impact on operating models and market supply chains. However, for many larger companies, there are layers of decentralized processes, technologies and systems. Those aspects come with a sort of inertia and hierarchy. Add in all the vendor hype and marketing claims and general confusion about what to do, and progress is very difficult.

RW: I think we are going to see big impacts on vendors. At present, they are selling a physical product or providing a service. Once you can fully capture the location and status of those two things, you can re-jig the business model, but location and status are the key. Track those items and you can start to get responsive with real-time demand pricing for services, among other items.

JM: It is certainly going to impact talent acquisition business models. Recruiters will focus on strengthening their deep networks and relationships, since that human touch will always be needed. Yet, digital technology will shape the way we engage with candidates throughout the hiring process. Embracing new technologies in the recruitment cycle can give tech-savvy companies the edge.

What are the biggest opportunities presented by digitalization for the hydrocarbon sector, and what will they be in the next three years?

SL: In some ways, we have too much data, but not enough context and not enough insight. The biggest opportunities are making data work for us to create meaningful insight. If we have that, we can start to arm people with the right information at the right time.

RW: Our analysis shows very clearly that the biggest opportunity is with advanced analytics and machine learning. We calculated that if operators in the North Sea implemented the full digital stack—IoT, soft automation, machine learning and advanced analytics—it could be worth $11/bbl. Approximately 60% of that comes from advanced analytics. That is simply a case of being able to forecast better and analyze more options when making decisions.

MM: I would say that trying to get more out of the existing architecture and any applications will have a higher probability of success than anything else.

JM: I think it is giving people a chance to use more skills and to be more fulfilled at work. Our Global Energy Talent Index (GETI), which measured industry attitudes toward digitalization, shows that 33% of professionals in the sector are happier now than three years ago. The primary reasons are due to digitally enabled trends such as flexible working, which ranked as the second top factor influencing happiness. Not only does that aid recruitment and retention, but it also increases productivity, with two-thirds of workers seeing this as a leading benefit of digitalization. With centers of excellence and larger groups doing remote work already established, in the next three years I can see it going even further. The sky is the limit.

SL: Building a digital business is not just throwing a bunch of technologies together—it is about what you are trying to do with the business. In three years, you should have a clear direction and a solid digital foundation from which you can build out AI, machine learning and predictive analytics to add real value. Firms need to get started. They cannot play catch up, since things will change very quickly.

Are organizations taking digitalization far enough?

JM: Judging by the conversations I have had, they are very focused on it. Perhaps the industry needs to go further in the way it promotes culture and brand. A perception exists—right or wrong—that the oil and gas sector is not as tech savvy as others. They are going to compete for some of the same IT talent. The more they [companies in the oil and gas sector] increase awareness about the culture of innovation, the more they will be able to recruit.

RW: It is too early to tell. After we get 2 yr–3 yr into some of these programs, we will find out if firms think they have done enough—whether they want to dig in further and reach more of their original objectives, or whether they have discovered a whole new horizon of things they want to do. We will be in a better position to see where firms are going this time next year.

MM: I would say most companies are tweaking round edges now, not knowing exactly the long-term utility of digitalization. Companies that integrate new technologies with existing architecture with less pain will succeed.

SL: A recent Gartner survey showed that only 9% felt their company was doing digital transformation at scale. The majority are optimizing around the edges, looking over their shoulders and doing just enough without making any big bets. Of course, the hype does not help. Among all the confused messages, many believe it might seem safer to digitize the status quo.

What are the biggest barriers to digitizing at scale?

RW: It is the uncertainty of the economic value case. The direct reduction of IT costs, such as cutting data costs by 30% by moving to the cloud, is very appealing. However, we have seen situations where the potential value for moving to predictive maintenance is as much as 20%–30% of total maintenance budgets. This is a much harder sell, since it requires diligence, persistence and change.

MM: There is no shortage of interest in anything that improves profitability, safety and productivity. Any resistance comes from not knowing how it will help various aspects of people’s day-to-day experience, the total impact of the technology or the value-to-cost aspects. Most companies do not have a testing lab where they can pilot new technologies to verify its benefits before making an investment. That process of taking new technology to commercialization is missing.

SL: People are probably one of the most recognizable barriers. It is also the most difficult, since AI, robots and automation can be dehumanizing. Then, there are people in leadership. Without early buy-in from employee representatives, you are setting yourself up for difficulty, since people may see digitalization as a threat rather than as a tool for empowering them to do their jobs better, safer and more efficiently.

JM: Some lingering scepticism still exists after the downturn. In addition, there is a skills gap and an outdated market perception to overcome. However, I agree that it boils down to people. If people embrace it, they will see great advancements. When people are open to change, great things can happen.

What role will people and organizational culture play in the effectiveness of digital transformation efforts?

SL: People will probably be the biggest determining factor of how fast and how successful digitalization is implemented. It is not going to be successful unless the workforce adopts it. It needs to be made usable, tangible and practical. People must see what it can do for them. It also must be driven and backed by top management; otherwise, it can end up as a digital sideshow for innovation directors.

JM: I agree. People and organizational culture play a vital role in the effectiveness of any digital transformation project. It needs to be paced so people remain enthusiastic and do not feel left behind.

RW: At its core, this is all about people and the organization. We are going to require almost every layer of the organization to become more numerically and statistically literate. They need to know what to do when the model says there is an 87.2% chance of something happening within the next 15 d. That is very different from a straight key performance indicator (KPI) or a yes/no decision.

MM: It is very important that there are champions that study emerging trends and technologies and determine what is needed in the organization to understand, assimilate and apply the benefits.

SL: Leadership is critically important, and it is more than just setting a digital strategy. If you are going about it the right way, leadership needs to be there at every step to help the organization adapt and transform. Throwing technology at the business without understanding how it enables the strategy is just another project that is set up for failure.

How is your company digitalizing, and what challenges and successes have you had?

SL: We have been looking at our entire business model—processes, structure and reporting have all changed. We have leveraged more than 25 yr of industry experience to implement an agile and intuitive approach to project management. We have improved intuitiveness and usability of user interfaces into our software and set up tooling to provide rapid configuration that everyone can use. It is a small-scale version of what we are encouraging and empowering our customers to do.

MM: Our company is looking very carefully at what we need to do. Translating that into real operations requires middle management to educate themselves, organize themselves, follow the industry and do the necessary pilot projects for implementation.

RW: Approximately 20 yr ago, our company would be perfectly equipped with an Excel spreadsheet, gathering data and working through problems—but not now. Our team is doing things like plugging into very large data sets and using advanced analytics to help our clients in a meaningful way. We have really made this big transition over the past few years.

JM: Our company has been consolidating platforms to make it easier to work from front to back throughout the company. We are investing in automated software and machine learning for our finance department. In nearly every section of the company, we are reviewing technology to enhance our own productivity. For example, we are looking at ways of using data to drive more candidates to us and to pair them with the roles they are best suited for.  HP

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