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By Geoffrey Cann
Digital transformation has been sweeping across society for over a decade now, and has finally arrived in oil and gas. Our sluggish response so far needs a boost of urgency.
The Digital Phenomenon
Digital has been a thing in our society now for over a decade. Digital businesses and models have so thoroughly permeated our daily personal lives that we are startled when we encounter the odd business that is still operating as if smart phones and websites don’t exist.
It’s hard to pick up the early signs of disruptive business models. For example, Tesla reimagines the car as software on a battery electric platform, while the incumbents still hold to the 1910 concept of a car as a stand alone fossil fuel mechanical marvel. Today Tesla’s market value exceeds that of the next six automakers combined (Ford, GM, VW, Daimler, Toyota and Honda). But when Tesla first started, its early cars barely worked and its market share was negligible. There was no visible ‘digital’. None of the big automakers gave Tesla a thought. Now, VW has now been forced into dismantling itself (by spinning off its best brand Porsche) so as to raise enough capital to devote to the task of replicating Tesla’s now decade-old business model.
This same story line—new business model trumps old—has played out in areas as diverse as telecommunications, entertainment, tourism, financial services, the public sector, security, transportation, space, agriculture, consumer services, advertising, and many others.
But what about oil and gas? Is our industry susceptible to digital’s allure? Yes it is.
However, we often catch ourselves repeating our own now questionable narrative that our industry is different from all those others. We say things like “we operate to the highest execution standard. Our safety protocols mean no compromise on technology. Our continuous operations leave little room for adaptation. We are already highly digital considering our use of Excel. The cyber risks are not manageable”.
A Compelling Business Case
The business case for digital adoption, even in heavy industries like oil and gas, is economically compelling. As far back as November of 2017, the International Energy Agency published a major study outlining the impacts that “digital” would have on the fortunes of the energy industry, encompassing oil, gas, and power.
According to the IEA, digital innovations lower the cost of energy production and distribution by 20% or more. Digital improves the productivity of all assets in the energy production value chains by 20% or more. And digital also reduces carbon emissions by optimizing energy use by energy assets, and energy consumption in building and maintaining energy assets. Those energy companies that have moved to install digital innovations routinely claim benefits far in excess of these already impressive targets.
Also in 2017, the highly influential CERAWeek event declared digital to be the latest must-do in oil and gas. Digital adoption in oil and gas was doubly endorsed.
Digital adoption, however, is now intimately linked to two additional factors. First is energy transition. The Paris Climate Accord of 2015 commits its 196 signatories to peak their carbon emissions as soon as possible so as to limit global warming to 2 degrees or less, based on pre-industrial levels. In effect, we collectively agreed to decarbonise our economies, a task that many companies have concluded cannot be achieved without digital.
Capital markets have taken note and funding for the growth of the industry became constricted, leading up to today’s energy shortages and price inflation. Even insurance became hard to access as few insurers wish to be seen profiting from or investing in an industry that is both set to shrink and is viewed as heating up the planet.
In the interim, capital has now become thoroughly enamoured with digital businesses. The valuations of Amazon, Alphabet, Apple, Microsoft and Facebook are still well ahead of energy, even after considering the recent oil sector stock price improvements.
The second factor is talent. Young people globally were awakened to the consequences of fossil fuel combustion in 2018 with Greta Thunberg’s global student strike. Today, young people are not interested in long term careers in an industry that society claims it wishes to transition from in the short term. The best and brightest engineering talent is attracted to the digital sector, with its promise of an urban lifestyle, good pay, and potential capital upside. The oil and gas industry remains heavily dependent on a vigorous workforce willing to cope with the harsh physical work demands of the industry.
For oil and gas companies, the industrial logic of digital adoption is now both economic and existential. Digital pays for itself in cost, productivity and emissions gains, and without it, industry has little chance to attract the talent and capital it needs to evolve and adopt new business models.
What is Digital Transformation?
Digital transformation is the result of a progressives series of changes that companies undertake to overhaul their business processes and practices leveraging modern digital technologies. To digitally transform, a business challenges its key operating norms and orthodoxies which may be no longer tenable given digital technologies.
For example, prior to the pandemic, virtually all of oil and gas accepted the norm that intellectual work is best accomplished in an office setting. Within two weeks, however, the industry’s intellectual workers were dispatched to their kitchens, bedrooms and garages, and the industry has carried on in this mode for three years, without hiccup. The enablers of the virtualization of intellectual work are home networks, laptops and tablets, collaboration software, meeting solutions, and cloud data storage, much of which had been installed ahead of the pandemic.
For oil and gas companies, any business process or practice that has not been dramatically altered in the past 5 years is likely labouring under a set of dogma, norms, orthodoxies and generally accepted business rules that could be obsolete. As Cisco points out in their book ‘Digital Vortex’, everything that CAN be digitized—from products, to services, to entire value chains—WILL be digitized. There are limitations of course—physical devices are subject to the laws of physics.
However, the rapidly changing cost and performance curves of computer chips (for data storage, computations, and communications) make the addition of digital smarts overwhelmingly compelling. The underlying building blocks of digital (computer chips) behave according to Moore’s Law—a doubling of capability every 18 months along side a 50% reduction in cost. Digital business economics follow Metcalfe’s Law—networks are valued at N squared, where N is the number of nodes in the network. Digitally enabled network businesses aim for valuations according to Metcalfe’s Law while growing according to Moore’s Law (or 40% compounded annually). They are enormously valuable, fast growing, and talent magnets.
To drive this pace of innovation, digital companies also operate differently, using methods such as Agile, design thinking, and the user’s experience working with digital innovations. They are obsessed with things like data, ease of use, rapid innovation cycles, gamification, scalability, and speed of deployment.
A yawning and growing gap is now apparent between the pace of digital change and the pace of change in the energy industry. Energy adopts change slowly, sluggishly, for safety, integrity, and reliability reasons. But to be digital means energy companies must change how work gets done along the same lines as digital companies, with a sense of urgency.
Culture change is actually the greatest challenge, for it is not the technology that is the hard part about digital. Coding, which is short hand for self sufficiency in applying digital to business problems, is being taught in grade school now. Low-code and no-code technologies shorten trial times, accelerate iterative cycles, and reduce the need for high-cost technology specialists.
Changing the culture of the industry is “the heavy lift”, to use an engineering expression. Digital transformation necessarily includes adapting the culture of an organization to embrace change.
Closing Thoughts
I’ve watched this movie many times before. The prices of energy commodities rise as supplies fall short of demand, and capital allocation reverts back to pouring money into resource extraction to the exclusion of all else. It’s completely rational. That’s how markets are supposed to work.
But price gains obscure the risk that young people will avoid staking their careers on an industry that is both hard on the environment and sluggish in embracing powerful new digital innovations.
The case for oil and gas to digitally transform is both economically compelling and existentially required. If oil and gas doesn’t actuate its culture to embrace digital with urgency, it becomes increasingly difficult to attract capital, and impossible to attract talent. Fortunately, capital markets have not declared any energy company yet in a break out from the pack, so there is time. There is no Tesla yet among energy majors. New business models await. But be not like the automakers, who dithered until it was far too late.
You can find my latest book, ‘Carbon, Capital, and the Cloud: A Playbook for Digital Oil and Gas’, on Amazon and other on-line bookshops.
My first book, Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, is also available on Amazon.
Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course on Udemy.
Take the one-hour Digital for the Front Line Worker in Oil and Gas, also on Udemy.
Biz card: Geoffrey Cann on OVOU
Mobile: +1(587)830-6900
email: [email protected]
website: geoffreycann.com
LinkedIn: www.linkedin.com/in/training-digital-oil-gas
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