Staying competitive in a down market

IMPLICATIONS OF BOOM-BUST CYCLE

As the current depressed commodity prices reveal, the industry has seen its share of boom and bust times, and this will likely be the prevailing norm for many years to come. When the boom times are in, the pace of business moves quickly and the margins are wide enough that many issues find resolution through ramping up staff and contractors, rather than through digital innovation. Oil and gas companies often find it easier and faster to add "bodies" to a problem than to transform to a digital mindset.

The inflection point from boom to bust typically occurs at a sharp transition point where the corporate focus shifts to cost reduction. This typically occurs through selling assets that drag on a company's balance sheet and reducing labor expenses. This prevailing cycle leaves little motivation, and little room, for making drastic changes to the existing cultural norms and ways of working.

SILOED ORGANIZATIONAL STRUCTURES

Additionally, most oil and gas companies were built on operating models that support rigorous engineering processes that follow a more traditional "waterfall" lifecycle model. This has enabled the development of technologies that are deemed safe and reliable to manage operations, but has also created significant siloes within the organizational structure. In many cases, this results in capital projects and technologies being tossed over the fence to an operational organization not ready or equipped to operate them.

In digital, the environment takes on an agile mentality, which provides a striking contrast to the cultural norms designed into many organizations. Figure 2 provides a look at some of the characteristics of an agile environment.

THE HUMAN ELEMENT

Another impediment to digital transformation stems not from the nominal operations that oil and gas companies perform, but the off-nominal situations that occur and require the innate human element and judgment to process and act upon. The oil and gas industry has long relied on individuals building their own personal expertise over the course of their career. Baby-boomers, in particular, possess a great deal of industry "know-how," and companies will need a way to transfer that knowledge to younger generations before the wave of retirements currently in progress is complete.

While massive data streams exist from the component technology that extracts and processes hydrocarbons, a human element still exists that must be ever present in any digital transformation. The immediate value proposition for moving to a digital world comes from being able to move from providing staff not just with data, but with reliable information, presented in a clear and actionable way, that they can take action upon. The significant potential to reduce risk, increase value delivered, and improve competitive advantage exists for those willing to make the leap of understanding required to embrace a digital transformation.

REGULATORY ENVIRONMENT

Additional impediments to undergoing a digital transformation come from fact that the industry must deliver their operations in a manner that complies with many governmental regulations. This has slowed adoption of digital technologies in the past, because of a mindset in the industry that compliance and innovation cannot go hand-in-hand. However, this should not inhibit digital transformation.

By embracing the digital world, it becomes possible to move from a data collection and analysis effort focused on regulation to one focused on achieving the best business results where regulation comprises but one component. As a corollary, companies may find that they have the ability to help shape the regulatory environment by producing insights from their data.

BUSINESS OPTIMIZATION

Finally, the oil and gas industry lags well behind other industries in the adoption of digital for driving business optimization. While many of the challenges ripe for digital innovation may be very unique to the industry, the approaches to come about with those innovations are not. Look to the retail industry and simply replace "customer" with "operator/driller/mechanic/technician/geologist/engineer," and you will see a pattern emerge that centers around the end-user experience that truly drives digital innovation.

GAPS IN OIL AND GAS OPERATIONS WHERE DIGITAL CAN HELP

Making a digital transformation consists of much more than bringing in new technologies and expecting your business to realize a step-change. The complete shift in company mindset, organizational structure, and the way you conduct business makes the human element critical to successful digital transformation (See Figure 3).

Two activities must occur to navigate these shits, identify gaps, and plan for closing those gaps to create a fit-for-purpose digital transformation relevant to an organization's business environment and corporate culture:

1. Define where you are and where you want to be: Assess your organization and its readiness for transforming to a digital mindset.
2. Know how to get where you're going: Map the journey your organization and your stakeholders will undergo to achieve your desired state of digital adoption.

Setting a clear vision through the two activities above may require a look at the current state of your organization today. Major areas to look for gaps that can have the greatest impact to your business and field operations consist of:

• Domains of core data and information that influence the execution of decision making processes.
• Key integrating process that span more than one business function or business unit.
• Processes/Operations where the timeliness of decision or reaction to new information is important to safety and/or business performance.
• Areas where major streams of data are already available, but the ability to understand or react to those data streams requires both a significant investment in labor, and ingrained knowledge that can only be developed through years of experience.

Uncovering these areas and understanding how they work form a large majority of the information used for critical decision making at both the corporate and field operations level. Decision-makers often want information, yet the underlying systems and data management capabilities do not enable this in a timely, accurate, and reliably consistent manner. The gaps that create these issues tend to focus around three areas:

• Poor data management,
• Existing processes/workflows are not integrated,
• The ability to present information in context is not available.

Resolving issues in the critical decision-making path can generate significant return from going digital in a relatively short period of time. Figure 4 summarizes the key areas to assess for gaps when determining readiness for and executing a digital transformation.

These gaps may seem insurmountable to organizations where past initiatives attempted to drive major systems integration and reporting solutions failed to deliver value. However, look further and it may become evident that those initiatives focused on a purely technology-driven solution, without the benefit of a shift in company mindset or organizational culture. While digital transformation at the core consists of bringing technology to bear in order to gain a competitive advantage, the organization that avoids a wider conversation about how the company must change will most likely fail on its journey.

AREAS AND TRENDS WHERE INDUSTRY IS SHIFTING TOWARDS DIGITAL

The leading edge companies, especially in upstream and oilfield services, already have a significant head start in digital transformation from the perspective of drilling and extraction technology. Over the past several years, the industry has worked at improving on existing technologies, which includes the incorporation of sensors into much of the equipment used by the industry. Many companies have dabbled in initiatives to further exploit the data streams and digital technologies, yet many of these never went beyond a pilot-phase, or only resulted in minimal changes to the way things were done.

BUILDING INDUSTRY MOMENTUM

Through the many successful (and failed) digital initiatives and pilot programs, digital technologies have become pervasive in the industry where they find use tackling tough problems that have seemed overwhelming in the past. These include tough questions such as:

• What would happen if the drilling manager were given real-time recommendations to optimize his workover schedule and rig movements?
• How would the industry change if scenarios for pump changes, injection rate modifications, or completion parameters were available with predicted ROI and expected reservoir response?
• What if a reservoir manager were able to accurately predict when sand was going to enter the well and take preventative action to avoid it?
• What if autonomous vehicles were able to detect anomalies along remote sections of pipeline and raise appropriate work orders to drive remediation and avoid a loss of containment?
• What if a pump could monitor its vibration frequency, determine that its bearings were wearing out, and raise a requisition to order additional bearings and a service request to replace them in advance of failure?
• What if an organization could leverage 50 years of well history across multiple corporate divisions to determine if and how to re-enter the well for further production in a more efficient manner than ever before?

These are not science fiction scenarios in the industry; they represent the application of digital technologies in various forms of use today. In fact, there exist a number of areas where digital has found a foothold, as illustrated in Figure 5.

A key question to ask is: why are these digital applications not pervasive and spreading to other processes within the industry? On the upstream side, the risk inherent in the work performed and the want of human interaction/intervention to provide operational assurance remains a very strong driver.

On the downstream side, it has been a numbers game, where the investment in this technology hasn't necessarily been aligned with a clear market or margin potential. For midstream, there hasn't been a significant carrot for advancement. However, recent safety and environmental incidents may change that notion.

COMPETITIVE PRESSURES

Some of the larger oilfield equipment and service companies are driving the digital transformation faster than other areas within the industry. This advance comes from competitive pressures where companies have seen digital technologies as a differentiator when competing, and in some cases, E&P operators have begun choosing to work with the firms that bring a robust digital suite with them. For these companies, they are seeing the direct impact digital has on their bottom line.

Many vendors and service providers across the oil and gas value chain are at work building the equipment, tools, software, and infrastructure necessary to aggregate data for the upstream, midstream, and downstream operators. Massive streams of data available to the industry from drilling and completion activities; production, processing and refining equipment; and inspection work exists without a sound capability to convert this increasingly large volume of data into actionable information.

Capturing this in data structures and systems, with integrity, and transforming it into relevant, timely, and actionable information is the promise of digital. In fact, there is a wave of recent investments in oil and gas digital technologies from a very different area: Silicon Valley. According to Bloomberg, industry startups have attracted over $155 million in investments in the last year alone. Many investors see the slump in oil prices as the time for companies to make an investment in technologies that will improve overall company performance.

HOW TO IMPLEMENT A MORE ROBUST DIGITAL PLATFORM

Making the decision to embrace a digital transformation is difficult. However, operators across the industry must embrace digital. Those that do will gain more than a tactical advantage, and those that don't may begin to lose out.

For example, imagine the competitive advantage you would have over other operators if you knew the complete history of a well that you were considering re-investing in within hours instead of weeks or even longer, and individuals from the geologist to the production revenue accountant could have access to that information in perpetuity.

Imagine a world in which your organization was able to harness and apply even a subset of the capabilities described earlier across your planning, investment, engineering, and field operations. Digital provides a true game-changer, but, the organization must be ready to adapt in order to truly make a digital transformation. Figure 6 describes two basic approaches to putting a digital transformation in motion.

THE DYNAMIC PROCESS

The prospect of ushering your company into the digital age can seem overwhelming. Companies must realize that you will not overhaul your entire organization within a few months. Instead, try to view digital transformation as a dynamic process in which you make iterative changes that require a smaller investment (and produce faster results) each time that build upon one another much like compound interest builds slowly at first and then faster over time.

When implementing changes across an organization, starting with a simple digital foundation that allows you to do something basic on the digital platform, and then expand, provides a good starting point. Then, you can make smaller, iterative changes. Existing models of delivering technology at many companies in the industry will not work. Taking two years to roll out a new platform and then discovering that it doesn't work will devastate any digital transformation. But when you release small changes every few weeks, the occasional failure is tolerable and provides unparalleled learning opportunities.

THE GREENFIELD APPROACH

Other organizations may need to look to a Greenfield approach. Rather than retrofit the organization for digital with piecemeal projects, the goal of a Greenfield exercise is to start from ground zero. Set up a new company with separate governance and procedures; build autonomous, cross-functional teams; and allow them to reinvent the stakeholder experience from the ground up by asking, "If we could start fresh, without any of the baggage of our current organization, what would that look like?"

EXECUTING YOUR DIGITAL TRANSFORMATION

So, how do you make digital transformation a reality for your organization? This process of transformation should follow a proven roadmap with dedicated program membership. Figure 7 provides a high-level process for charting the digital waters.

DELIVERING VALUE

The digital shift will fundamentally change how your organization views and processes information. Users will access information from any device with a consistent user experience. They will view content aggregated from a variety of sources, ensuring that the information is complete and accurate. This creates a significant change challenge for any organization, however, the benefits of this transition far outweigh the costs in terms of:

• Higher quality information leading to better decision making,
• Better information transparency where and when it is needed,
• Creation of a seamless experience for business users,
• Decreased cycle times for business process execution,
• Greater knowledge capture and sharing to support employees,
• More accurate and effective communications with stakeholders.

These outcomes all create value and enable faster attainment of business, operational, and safety excellence throughout an organization.

MAKING THE TRANSITION

Making the leap to digital represents a significant change for the oil and gas industry in general. The capture, integration, and dissemination of data to users empowered to make complex decisions in real time presents a daunting challenge. The volumes of data for newer systems and monitoring tools can often seem too complex and difficult to work with unless there are strong data management practices in place that extend to the technology used and how the data is aggregated into actionable information. Additionally, the challenges of moving an organization to a posture that is ready for digital transformation presents a significant challenge that can create difficulty in gaining buy-in within the leadership of an organization. For this reason, digital must be a transformation drive with backing from the highest levels of the organization.

As technology adoption and the transition to a digital world begins to take form, the operators that take advantage of the efficiencies provided by digital transformation can work to stabilize their workforce, solidify their capital base through each industry cycle, and better position themselves to make informed decisions on how to best navigate the economic environment. We predict that those companies that choose to operate in alignment with a digital world will come out on top over organizations that eschew digital transformation over the course of the many cycles that will follow in the industry.

ABOUT THE AUTHORS

Josh Arceneaux is an expert practitioner with North Highland. He has over 13 years' experience solving large scale business, technology, and integration problems within the aerospace and oil and gas industries. Specific areas of expertise include strategy, enterprise architecture, enterprise data management, business process management, systems engineering, program and project management, and training and operations.

Jeff Gilley is a principal at North Highland. He has over 13 years' experience in complex business transformation projects across a range of industries, including oil and gas, computer hardware, national security, media, and healthcare. Specific areas of expertise include project management, change management, business process management, business analysis, data management, and business architecture.