by Geoffrey Cann
It’s been my custom at the start of a new year to set out my forecast for where the world of digital oil and gas is headed. Here’s 3 hearty projections.
My annual predictions are not among my most popular articles, which is a shame since I’m pretty accurate. As proof, check out my article from January 3, 2017, where I forecasted the oil price, the hottest jobs, the biggest disappointments, the biggest investment areas and the biggest payoff. At the end of the year, in my annual performance review, I self-scored an impressive 60%, which was upgraded to 80% based on reader feedback (apparently I was too hard on myself).
Here are the articles…. if you’re skeptical.
1. Hottest Technology Will be Blockchain
2018 will be the year of blockchain. I’m not proclaiming this based on the recent frothy activity in crypto currency (both bitcoin and ether have been appreciating in value like some kind of reverse Zimbabwe Dollar ). Those growth rates, in 1000’s of percent, are just not achievable in the real world of oil and gas investments and engineering change management. But there’s enough activity in blockchain pilot initiatives, in many sectors including oil and gas, that some are going to come on line this year.
Here’s a few of my evidence points.
A HOT ARTICLE TOPIC
My weekly article series is kind of like a canary in a coal mine – the readership stats, engagement levels, shares and likes that I can detect in specific topic areas are early signs of entrepreneurial and innovation interest. The hottest topic of the past year, accounting for 20% of total interest (5 times more than the norm), were the blockchain articles.
Now, to be fair, I’ve published 7 posts on blockchain (perhaps I have a bias), but what was striking to me was the number of blockchain startups that contacted me as a result – almost matching the number of technology companies claiming to have created the Uber for field services.
Most of us have heard of Uber, its extraordinary growth rate, and its outsized market capitalization, so lots of entrepreneurs think that there must be an equivalent Uber solution for field services (and they’re right). But not nearly so many of us have heard of blockchain, yet it’s as hot in the minds of entrepreneurs.
INVESTMENT LEVELS ARE HIGH
I’ve picked up a few illustrative stats of the overall investment level in blockchain areas that give a sense as to the amount of money that blockchain is attracting. These are not oil and gas specific, but more general investment notes:
- IRAP activity. I’ve heard from a chap with a federal government agency that provides early stage services and funding for small technology companies has fielded 200+ applications for blockchain opportunities.
- Stock exchange activity. The TSE Venture Exchange is a great place to raise funds, and there’s said to be a queue of 10+ blockchain capital raises lined up.
- Initial coin offerings. My contacts in the tax world tell me that they think there are 30-50 ICOs cooking in Canada, with more being proposed each week.
ALREADY IN THE MARKET
In case you weren’t aware, there is at least one oil and gas focused blockchain initiative in the public domain. It’s called PetroBloq and you can find it on the web pages of a company called PetroTeq, based in Toronto.
AREAS OF FOCUS
My forecast is that a number of pilot projects in oil and gas blockchain deployments that have been trucking along through 2017 will progress to full production status in 2018. These pilots are in Europe, where blockchain has been much more quickly embraced than in North America. I think the vigorous oversight that financial markets regulators have in the US (and by extension Canada) tends to cause a drag on innovations that impact financials.
The efforts by Mercuria in Europe should come to market this year. At that point, it will become imperative for oil and gas companies to investigate blockchain in the industry.
2. Biggest Investment Area Will be Downstream
There are three big vectors or pressures that digital exerts on oil and gas. First, digital is unlocking reserves by improving the understanding of shale and tight reservoir performance. Second, digital is lowering the cost and improving the productivity of oil and gas infrastructure. Third, digital is changing the demand profile for transportation (a big consumer of petroleum fuel) in a number of ways already.
Digital investments will be prominent in all aspects of the oil and gas industry (upstream, midstream, downstream, services, trading), but the downstream sector is most ready for investment now.
With a supercomputer in virtually every pocket (yes, it’s a smart phone), and in most late model vehicles, the downstream sector is poised to take immediate advantage of all that compute horsepower. The other sub sectors in oil and gas (production, refining, distribution), are constrained by the management of change process in engineering that makes the cost of adopting technology prohibitive.
Where do we see evidence that the downstream sector is likely to be the hot investment playground?
VEHICLE MARKET SHIFTS
The six largest car companies, who account for 50% of the global industry, have all announced plans to overhaul their vehicle offerings. Their customers are demanding more innovative vehicles, cleaner fuels and new business models (such as car sharing). They have to respond to these pressures, and they are moving very quickly. The media tends to focus on the electrification of vehicles, but more immediately impactful are the digital enablements that will come along for the ride, specifically shared cars (lots of digital here), connected cars (to enable platooning) and autonomous cars (that optimise fuel usage).
EARLY MOVER ACTIVITY
Shell has been particularly aggressive in driving (pun intended) to a different transportation future. They intend to open their first Shell station that does not sell fuel. They purchased a European outfit that owns electric car plug in stations. They have launched a Fitbit-type device and app that lets a car’s digital innards talk to a customer’s smart phone to share car health details (such as your coolant level is low and it’s time for an oil change). You can imagine that app directing the customer to a Shell station for service.
There have been a few media stories already of power utilities contemplating entry into the electric vehicle charging market. Utilities have significant advantages in a digital and electric car world – they know the customer already (oil companies generally do not have a relationship with their transportation fuel customers), they know the customers’ current power profile, and utilities are already investing in smart meters and batteries.
NEW ENTRANTS AND SERVICES
The combination of smart phones, digital cars, and cloud computing enables new services that threaten the entire downstream sector. Among these services are fuel delivery to the car (which basically renders the gas station obsolete) and mobility as a service (which eliminates the need for a mobility consumer to own their transportation asset).
My forecast is that this area will become the most important battleground for innovation in oil and gas. Expect to see lots of projects, investments and studies in the downstream as oil and gas companies struggle to figure out what do with their huge downstream footprint.
3. Biggest Digital Projects Will be ERP Upgrades
For those of you not that close to the ERP market, it’s set to explode in demand for the next several years. The main driver is SAP’s shift to its new design which is based on the key features of digital – in memory computing, mobile device interface, blockchain enabled, modernized user experience, improved reporting, powerful analytics (and all the other marketing buzzwords you can think of).
The key difference with this release is that SAP will stop supporting older versions of its enterprise software past the middle of the next decade, creating a built in pressure for companies to get moving on the transition to avoid cost escalation and talent shortages. Experienced SAP consultants can command double their normal rate when the market gets tight.
Here’s some supporting evidence for the ERP outlook.
A RECENT DOWN MARKET
Starting in 2015, the budgets for IT in oil and gas have been trimmed back reflecting industry revenues, and the consultancies that deliver SAP projects also scaled down their teams or redirected them to growth markets. Project work vanished, and it became uneconomic for oil companies to keep high cost SAP experts on staff. The result is a market that is relatively thin in terms of capacity and availability to take on new work specifically in oil and gas.
OIL AND GAS DEPENDENT ON SAP
The global oil and gas industry is highly dependent on SAP. It’s the de facto standard for the industry and has been for the past 15 years. Virtually all large oil and gas companies rely on it, and they have learned that ERP projects tend to alter company agendas for years. The largest companies are not going to take a wait and see approach.
MIGRATION PROJECTS ARE ALREADY UNDERWAY
A number of large oil and gas companies have either started their SAP transition already, or have announced plans to do so. I can’t be clear who exactly, but ask around – the SAP consulting community knows.
To add to the demand, all industries need to upgrade at the same time, and there are industries far bigger than oil and gas (banking? retailing? manufacturing?)
Shortages of experienced teams are already starting to appear in the market, which means that cost increases are on the horizon.
My forecast is that the biggest digital projects will be in the ERP market place, in terms of number of initiatives, the size of project teams and the scale of budgets. Shrewd CIOs will work to embed as much digital innovationas they can inside the ERP wave.
Yes, the coming year should be a big one for anyone in blockchain, the downstream sector and working in SAP.
About Geoffrey Cann
Geoffrey Cann is a consulting Partner with Deloitte in Calgary, Alberta, Canada. He is deeply passionate about the impacts that digital innovation will have on the oil and gas industry. His 30 year career has taken him to oil and gas companies in the far corners of the globe seeking out digital innovation. You can follow him on Twitter (@geoffreycann and @digitaloilgas), subscribe to his blog, listen to his podcast (on iTunes entitled “Digital Oil and Gas”), or simply connect with him on LinkedIn.
The views expressed herein are those of the author and not of the publisher or Deloitte. Readers should not rely on any predictions and should ensure that before they make any decisions they obtain their own independent professional advice.