The oil and gas industry is in the midst of a challenging transition: after years of severe cost-cutting caused by the collapse in the oil price, the industry is now rebuilding for the future. In the UK, maximising economic recovery through optimisation of process has become the primary mandate, and organisations are working to transform their business to facilitate this end.

Many analysts predict that oil may never again reach the heights of $150 per barrel witnessed before the downturn, and in this new reality businesses are forced to re-evaluate their approach. Across the industry a wave of digital transformation is underway, with companies turning to new technology to help deliver the modernisation and efficiencies necessary to thrive in a lower-for-longer climate. But while new investment in digital technologies like data analytics, IoT and robotics are a step in the right direction, isolated programmes will not deliver the wholescale transformation which is required.

Chris McManaman, Director of Commodity Trading and Risk at CGI, thinks that for real digital transformation to take place, organisations have to be willing to accelerate their investment and commit to a full-scale programme of coordinated change. He believes the true value of digital transformation is not in the sum of its parts, but the power of the collective benefits applied together effectively in unison:

“For digital transformation to deliver, organisations have to fundamentally change the way they operate. Digital transformation can’t exist in isolation, it must be planned and orchestrated. Organisations must have the willingness to pick up the pace and invest in a broad range of projects. But it isn’t about looking at all these new areas of technology individually, it’s about taking the different elements together and combining them in a way that creates value.

These programmes can’t exist in isolation or be run as add-ons to the business. And this is what we are seeing a lot of people doing. All too often they have all these different programmes running, but they’re not leveraging them together. If you are going to invest in digital transformation effectively, you don’t just have to understand the different areas individually, you have to understand how they can be combined.”

A fundamental shift

McManaman argues that for the digital vision to yield real results, there needs to be a fundamental organisational shift and a coherent business strategy which focuses on the end-goals and mitigates against the inevitable challenges and risks which will be faced along the way:

“For this to work there has to be effective collaboration across the business, we have to break down the silos and essentially create a whole new business model. While across the oil and gas industry there has been investment in different pilots and technologies, the sector is right at the start of the organisational change that is required.”

“You have to quantify where you are going to get the most bang for your buck, and where the real benefits are going to come from. Similarly, you’ve got to mitigate the challenges, because new technologies come with new risk and exposure.

Just look at what we are seeing at the moment with the social media industry, people didn’t envisage the huge challenges of safeguarding and governing all that data. People just threw in all their personal details, they didn’t think about how a data analytics organisation could come along and exploit that information.

We’ve got to apply the right approach to this risk, mitigate against failures and challenges. For oil and gas, we’ve got to question what’s going to happen if a sensor fails, or a network goes down in the supply chain. Then we need to apply a roll out strategy for these new initiatives that works across the organisation.”

Dealing with disruption

Few would argue that the industry has to change; the energy market has undergone a massive shift in recent years, and the tumultuous nature of the landscape shows no sign of abating. Against this backdrop, McManaman thinks the sector has to equip itself to be better able to deal with disruption moving forward:

“For oil and gas, everything is changing: 10 years ago there was no shale revolution, the US wasn’t exporting crude, there was no real LNG market to speak of. Everyone was worrying about peak oil, now we’re worrying about peak demand.

If you look at the change and advancement in fuel efficiencies and the rise of electric vehicles, demand for oil is beginning to tail off for transportation. So now the industry is beginning to look at how it can develop more profitability from petrochemicals. Geographically, the growth areas have shifted as well, with India and China the main market, 10-15 years ago this just wasn’t the case.

Now while that demand is balancing out in terms of growth, it’s still huge. Every year we need to find new reserves of oil and gas equal to the volume of the entire North Sea. So there’s still such a heavy demand that any disruption causes massive shockwaves across global markets. Civilisation and the standard of living we are accustomed to is so heavily dependent on having this availability and consistency of production.

With digital transformation we have to become more agile and adaptable, so we can react more responsively to the constantly changing energy landscape. This will ensure we can cope with disruption and keep the supply flow consistent.”

Barriers to change

But achieving greater agility is easier said than done, and when it comes to embracing digital transformation to change and modernise the way the operation functions, McManaman points to several key challenges which stifle efforts:

“The most difficult barrier to surmount, is an underlying organisational resistance to change. If you’ve got an organisation that’s very entrenched in its current approach then the chance of a digital transformation programme being successful are very low.

If you’re married to your legacy business model, and you think you can’t do any better than you are now then that is going to be a major roadblock. If people can’t look beyond the way things are and they can’t think outside the box and see the potential for change and improvement then this will stifle innovation and transformation.

You need a lot more agile thinking, and this is all too often an area presumed to be reserved for IT. But the rest of the business is going to need to become a lot more able to embrace the opportunities coming from an agile approach. Because innovation isn’t going to work if you do anything in a waterfall fashion, it’s just too slow and cumbersome; you have to be able to fail fast and rethink, it requires rapid iteration to keep up and succeed.

The second key barrier I see are the budgetary issues, because for CIOs the budgets have been slashed so much in recent years that innovation has just had to take a back seat to cost cutting. So it’s not really been possible in any material sense to invest in the wholescale change that is required.”

Making progress

That isn’t to say that the picture is bleak, McManaman is adamant that the appetite for change is there and that there are green shoots of innovation emerging:

“There is an urgency in the industry to transform. People really do know we have a lot of catching up to do, so there is an appreciation that digital transformation has to pick up. Organisations have started investing in new projects and pieces of technology that can deliver improvement. We’re seeing analytics programmes; RPA, mobile, robotics, drone inspection, blockchain pilots and all these individual areas making some progress.

But it’s still early days and by and large they are being run as digital add-ons at the moment. There’s lots of little pilots and proof of concept projects but there isn’t that coherent vision in place. For many of the different areas they are still at the stage of proving the value coming from each of the respective technologies, so there is still a lot of guesswork in predicting the value or the savings. This needs time to mature but at the moment it’s just not easily quantifiable.

I do think that over the next five years as these programmes mature and people get more comfortable and develop greater expertise in each of these areas, that we will see people looking at how they can tie these initiatives together and marry these up.”

Collaboration required

But while McManaman thinks that the convergence of these technologies is the natural course of maturity, he believes there is going to be a need for a lot of collaboration across the business to facilitate this shift:

“Oil and gas does have a lot of technical skills and expertise across different areas of the business. The primary challenge I see is having all these experts from production, refining and exploration all engaging cohesively to make the best possible decisions based on the objectives, needs and constraints across the entire workflow. This will require a fundamentally different business model because most of these people have worked in silos since the inception of the industry. They don’t know what each other have been doing.

We need to break these barriers down so that the intelligence, expertise and data can flow and influence and assist one another. This will have other positive side effects across the business as well, like reducing the level of duplication, and the amount of inventory required.”

Trailing other industries

Large siloed business models are often perceived to be a debilitating factor in implementing change, and one of the common reasons cited for the sector being behind the curve when it comes to innovation. When asked how he thinks the oil and gas sector compares with other industries, McManaman is unequivocal that it is trailing:

“The oil and gas sector is lagging behind many other industries when it comes to innovation. Often it is using the same type of technologies it’s just at a much less advanced stage. So if we take a specific example like prescriptive analytics, oil and gas have been doing linear analytics in refining since the 70s and 80s, but in many respects it hasn’t moved on much.

If we look at how this compares with other industries then it’s way behind. If you look at online retailers, they run all their logistics on prescriptive analytics, right across their entire supply chain.

Without the intelligence born from prescriptive analytics they wouldn’t be in the position to look at new methods like incorporating drone delivery. This is how they will tell the drones what to do, they won’t be individually controlled or using some Excel spreadsheet. They are going to be run using advanced analytics.

Healthcare is the same, they optimise staff and equipment in a similar way using prescriptive analytics. The facilities and equipment are so expensive that they use analytics to optimise their operations and avoid these costly facilities sitting idle.

Aviation is another industry that’s well ahead. There is so much certification and training needed in this industry and they use prescriptive analytics to help determine the training patterns – looking at the calendars, deciding who needs to be trained and paring that up with where they need to go, when is best to go, and how they can be accommodated. And then this whole process is optimised and updated in real time.”

So in relation to prescriptive analytics, people in the oil and gas industry are still trying to do more with less and still trying to optimise process. But they are doing it in Excel because they don’t have the new tools to be able to do it better.”

Why is oil and gas lagging?

McManaman thinks that in many respects the innovation gap between other industries is due to the rapid swing in profit margins from one extreme to another. But he also suggests that the lack of a dominant disruptor distinguishes oil & gas from other sectors that have seen more rapid innovation:

“A period of high oil prices led to complacency across the industry, because when oil is over a $100 a barrel you can afford to leave money on the table. But then conversely, when the oil price crashed there was no appetite for investing to innovate. Everyone was just concerned with reducing costs and cutting staff.

So for the last 5-10 years we’ve had really high oil prices and then really low oil prices, and neither has really lent itself to an environment which supports measured investment and innovation like there had been in other industries. It had just been a lurch from one extreme to another.

One of the other factors which has really been lacking in oil and gas which has distinguished it from other sectors is the lack of a dominant disruptor. If you look at Amazon in retail, Uber in transport, AirBnB in accommodation. These are all companies that have come in and been able to get an edge over the incumbent players in the market by optimising the process or changing the business model. There’s just not been that distinctive new entrant in oil and gas.

Now it will happen, someone will come along that can take a new technology or approach to give them an edge and blow away the competition. We are working with a number of players that are working towards changing the oil and gas business model – but its incremental because the first steps are getting a handle on the different technologies and how they can be applied to benefit the business. It’s hard to predict where the disruption is going to come from but it will reach critical mass to which someone breaks through.”

Playing catch-up

Emulating these other sectors in innovation or agility will be no easy undertaking. The oil and gas industry has spent decades building up their operations, expanding their infrastructure and working to a completely different business model. These large, complex operations are inherently difficult to change. But McManaman is adamant that this change is possible, it’s just a question of prioritisation. When asked where organisations should be focusing their efforts to kickstart wholescale digital change, he is clear that it all starts with the data:

“Getting a handle on the data is the most important thing. Getting it in the right place, understanding what you have, categorising the structured and unstructured data, then getting it into a form and location that it can be used.

Cloud is really the foundation for this, so we need to be getting those services in place to pave the way – but it’s the prescriptive analytics that you need to get to. This allows you to draw together all the different data from across your operation and start looking at outcomes. And once you start doing that you have a coherent process and an engine to feed, you can start considering what specific data will help improve the insights or outcomes.

Machine learning and predictive analytics helps look for patterns and see why something happens so you can predict something more accurately. There can be value in this but often it’s just another data point to consider. Whereas with prescriptive analytics it pools all the data together and actually tells you what to do. This provides a really good platform for digital transformation. It can actually form the baseline to incorporate lots of other technologies from sensors to wearables etc. It will help cut through all the variables and actually make tangible decisions.”

Bright light at the end of the tunnel

While the scale of the challenges faced by the industry are inescapable, McManaman does think there are the right people in and around the UK oil and gas sector to create a really bright and promising future. And while the last 10 years have not provided the best climate to embrace the digital age, he believes that sometimes adverse conditions can work in your favour by helping to fuel creativity and innovation:

“I’m really positive about the future. I think in many respects the North Sea industry is already ahead of the other geographies because it’s had so many challenges to surmount. It is probably one of the most extreme environments in the world out there, with comparatively high costs to overcome.

So it’s always had to be resourceful and creative in finding ways to operate effectively and get the job done. But the UK is well equipped to deal with that, it’s got a really talented workforce and skills base, so I think in many respects the North Sea leads the industry and will continue to do so for many years to come.

There is a real opportunity for the UK oil and gas sector to build on this foundation; embrace the digital opportunities from predictive analytics, cloud and robotics, thereby realising the efficiencies, competitive advantage and synergies that these can bring.  By adopting a clear digital strategy now it will allow our industry to cement that vision, to remain competitive and secure a viable future for the North Sea.”

Chris McManaman is Director of Commodity Trading and Risk at CGI – christopher.mcmanaman@cgi.com