Digital Oil | 2020
The oil sector is facing headwinds. Whether it is criticism from governments and the public about climate change, or being cold shouldered by pension...
Oil & Gas
A guide to leveraging technology to survive the downturn
The oil sector is facing headwinds. Whether rapidly falling oil prices due to geopolitics and demand shocks or criticism from governments and the public about climate change, oil companies have a lot on their mind. The current price volatility brought on by the global response to Covid-19 will likely force oil companies to reduce capital projects and operating expenses in the coming months, if not years.
Against this backdrop, digitalization brings a chance for resiliency and modernization. Investing in artificial intelligence, drones, augmented reality and cloud computing is a positive move for oil companies that want to reduce operating expenses and breakeven costs, and to reflect the care they take in ensuring the safety of employees and limiting greenhouse gas emissions. Automation, training and remote employee work are top of mind for oil companies, responding to Covid-19, and all of these technologies depend on a strong corporate digital foundation.
In the past year there have been a plethora of digitalization strategy launches by the oil and gas sector. Our analysis quantifies the benefits of digital technologies to the oil sector, draws a link between decarbonization and digitalization, and ranks the leading oil companies based on their plans, progress, and IP.
There are both push and pull factors that have spurred companies to digitalize. There are regional factors which contribute, like the number of similar wells or tricky geologic features. In the upstream, unconventional fields in the U.S. have been using analytics to benchmark similar wells, extend their productive lifespan and optimally site wells. New data sources have provided opportunity for collaboration in parallel with the rise of open source platforms, blockchain consortia and marketplaces as companies sort out which of their data creates a competitive edge and which is more valuable when aggregated with competitors’.
- Tightening margins due to unpredictable oil prices have reduced capital expenditures and operating expenses
- Increasing scrutiny over emissions from investors and the public
- Aging downstream infrastructure suffer from downtime and accidents
More certainty around production, asset uptime and market participation given current oil price volatility
Potential to improve production, especially in unconventional fields
Potential for new field discoveries
Technology buzz can be a useful recruiting and PR strategy
Falling cost of sensors and computing power; benefits of cloud computing and software-as-a-service
Where are the benefits?
Digital technologies are used across the oil and gas value chain but in differing degrees. Historically, companies have collected data and analytics on their upstream operations to improve production and benchmark wells. But the falling costs of sensors and computing have strengthened the economics for using IoT technology to reduce costs downstream. Retrofitting project for older plants will lead by European refiners facing collapsing margins, and new megaprojects in Asia and the Middle East will likely have analytics already built in.
"However, the highest potential for digitalization is to use analytics to find and recover more oil. "Upstream, oil companies have owned the largest commercial supercomputers for decades to process enormous amounts of seismic data to discover new reservoirs. Now, oil majors are taking advantage of the flexible and scaling resources of the cloud to lower costs and accelerate their exploration. They are also investing substantial funds – $400 million per year for the Total and Google collaboration – to identify use cases for machine learning to better identify promising projects and optimally site wells within a field.
Oil refinery production cost reduction from digital technologies
Digital technologies can reduce oil refinery operating costs by $0.44/barrel, equivalent to 11.5% of operational costs in the U.S., according to BloombergNEF. However, very few refineries have fully adopted these technologies.
Labor is often the largest operating cost for refiners, except for material inputs like crude. Digital technologies can accelerate knowledge transfer, increase on-site safety, enhance productivity and centralize engineering experts. Predictive maintenance is being applied to aging assets to flag future failures. BNEF expects this can cut unplanned downtime by 25%.
These technologies can reduce the cost of refining oil, increase asset flexibility and serve the oil market better. But they also mean refiners have to adopt cloud computing, invest in talent, and make new partnerships with technology firms.
How much will oil companies invest in the digitalization of oil & gas in 2030 (hint: BloombergNEF calculates legacy software spending of oil companies in 2018 was $12.75bn)?
- $5-10 billion
- $10-50 billion
- $50-100 billion
What are companies up to?
The last year presents several examples of new partnerships and investment commitments. These announcements of illustrate three trends we see as particularly salient in the industry today: the
move to cloud computing, the rise of integrated platform development between unusual partners and a renewed focus on return-on-investment for digital projects.
Tracking oil & gas digital technology adoption
International, integrated oil companies, especially Europeans, are leading the charge to digitalize. Shell, BP, Equinor have all built technology in-house, formed significant partnerships with technology firms, and announced cost saving projects. North American oil companies are more cautious, although we expect Suncor and Exxon to continue launching products and begin publicizing their efforts.
In Asia, there are many state-owned oil companies such as Petronas or Sinopec. They have pressure from their governments to modernize and reduce costs. Middle Eastern oil companies are particularly under the spotlight with Saudi Aramco’s recent IPO, and have plenty of cash in hand. We expect more digital announcements from oil companies the Middle East and North America, while Europeans will remain in the lead.
The greatest challenge my company has faced in digitalization is:
- Building teams and recruiting
- Scaling from pilot to enterprise-wide projects
- Getting buy in from the C-suite
- Proving value and calculating project ROI
Oil companies are piloting the use of artificial intelligence across the value chain. From finding new oil fields months faster than otherwise possible to predicting failure of multi-million dollar pieces of equipment, oil companies are very excited about its prospects.
While there are many pilots, machine learning (a subset of AI) has few mature use cases in the oil sector relative to the consumer or financial sectors. Predictive maintenance of equipment is a key use in oil, where techniques such as clustering and natural language processing have allowed companies to integrate machine datasets with maintenance records. Predictive maintenance for some assets like pumps and compressors is offered as ‘off-the-shelf’ technology.
Yet it has been difficult to scale these algorithms to predict potential failures at the site level. More promising for its ability to affect top-line revenue is the use of AI in reservoir discovery and optimization. AI can indicate the presence of oil reserves in relation to other geologic features like salt domes. However, use cases are more mature
for its ability to efficiently integrate and manage datasets.
In well siting in unconventional shale fields, BNEF believes that AI could lead to a 12% increase in production.
Examples of AI in practice
- Shell saved $2 million using artificial intelligence and predictive maintenance at its Pernis refinery in Rotterdam in 2019. The refinery avoided two potential outages within two weeks of launching a pilot with analytics company C3.ai.
- BP is developing AI for mature use cases, such as predictive maintenance, in-house. However, its ambitions extend to developing cognitive computing – where an AI algorithm mimics human decision making and can explain its conclusion. For this advanced application of AI, BP has partnered with startup Beyond Limits.
- Meanwhile Microsoft has swept the board, working with many oil companies in the U.S. and Europe on AI in the cloud.
How digital tools will help reduce greenhouse gas emissions
Oil companies have also turned to digital technology to track and reduce their
environmental impact. We believe that energy efficiency and emissions monitoring are the two most promising and developed use cases for digital technology.
- Energy efficiency
- We estimate that digital tools in refineries can reduce power and utility consumption by 7.8%, saving the industry almost $1 billion per year.
- AI algorithms can disaggregate assets using energy and provide recommendations for companies to improve efficiency.
Emissions monitoring and reduction
- New technologies like drones, nanosatellites and image recognition could help the industry better monitor and reduce emissions from upstream projects through pipelines and transport through to refining.
- BP has promised to monitor all its methane emissions using gas-cloud imaging and other technologies on all new major projects globally. It hopes to reduce its methane intensity – the percentage of leaked gas to its total gas sales – below 0.2%.
- The unconventional oil production company EOG has used leak detection including through drone inspections to reduce its emissions intensity rate over the last several years.
- The OGCI – a consortium of the largest oil companies – invests in promising technology for climate change reduction and mitigation. Five of the 12 investments have been in emissions monitoring from sensors, satellites and reporting.
- Has deployed applications using artificial intelligence in pilots
- Has deployed applications using artificial intelligence in production
- Will deploy AI applications in the future
- Doesn't believe that AI will be useful for oil and gas assets
U.S. integrated oil companies have been slow to adopt broad digital strategies but see high potential for analytics in unconventionals.
The U.S. now consumes a majority of domestic oil and gas. It has been a decade of well productivity improvement generally attributed to better models and knowledge of fracture spacing. Software supports productivity and well-siting decisions, which can significantly improve oil recovery by limiting pressure loss.
Additionally, analytics can help operators make decisions to stimulate or abandon underperforming wells.
U.S. oil companies have benefited from internet-connected equipment, cheaper communication costs, and many partners to work with, including domestic cloud computing companies Amazon, Google, and Microsoft.
The Middle East
Middle Eastern national oil companies extend relationships with traditional service providers for efficiency and transparency.
National oil companies in the Middle East are continuing to develop new fields, especially in gas, while new refining and petrochemical plants are scheduled to come online in the coming decade.
Saudi Aramco, the world’s largest oil company, is now partially public. It has an increased focus in attracting international investors, releasing financials to their investors for the very first time. This will increase scrutiny on operating expenses and emissions, leading to a need for better data which can be provided by digital tools.
Few local providers of analytics mean that Middle Eastern national oil companies continue to rely on international service providers like Schneider and consultants like IBM. There are few local startups tackling industrial automation and limited regional venture capital.
The focus so far for digital has been on developing new fields, such as faster drilling at Saudi Aramco, and bringing together disparate and remote operations, like at Adnoc.
Europeans pursue emissions reduction and positive PR stories.
European companies have been the most keen to share results from digitalization projects. BP Plc has used digital technologies to improve onshore production volumes and reduce inspection costs by $200 million since 2016. Unlike its peers, BP aims to own its digital strategy in-house, instead of using vendors or consultants.
Its new Launchpad unit is tasked with scaling technology and commercializing products to sell externally. In May, BP created its first outward-facing startup, Lytt, using fiber-optic sensors and acoustic profiles to label conditions in oil wells.
Other oil majors such as Shell also offer their digital products externally, though many like Exxon, Chevron use software mostly for internal operations.
Equinor is the furthest ahead in digitalizing
upstream operations, hoping to reduce operating costs for wells by 50% due to digital.
National Asian oil companies stress cost reduction and leveraging domestic technology partners.
With predictive maintenance and asset optimization, Sinopec in China and Petronas in Malaysia have each reaped benefits of more than
$7 million per year, BNEF research shows. These technologies rely on operational data such as pressure, temperature and vibration to help refiners improve energy efficiency, align maintenance schedules to market conditions and optimize output.
Oil companies are seeking to commercialize some of these digital systems and are building teams to do so. For example, Sinopec is hoping to sell its digital manufacturing platform, ProMACE, developed in partnership with Huawei, to one million users.
Picking a digitalization strategy
A successful digital transformation is achievable through various routes, but a plan is essential. These decisions include:
- The scale at which digitalization will be undertaken and the perceived benefits
- Whether or not to collaborate with others in the industry
- Whether technology will be used to reduce cost centers or develop new revenue streams
Leading digital oil companies tend to have answers to each of these questions and a plan to digitalize upstream, midstream and downstream operations. They deploy projects across a range of sites, ensure the operators on the ground are well-trained and centralize data collection and management procedures. They also have a senior steering committee and senior C-suite buy-in. Most oil companies will need a Chief Digital Officer and a digital budget.
We judge oil companies on how broad their scope of ambition is, the range and type of partnerships and the business opportunity they are looking to build.
Scope of ambition
Companies decide the scope of their ambition by determining the extent to which they want digital technologies to affect the whole enterprise, connecting upstream and downstream operations, and the significance of investment. Companies with broad digital ambitions often centralize decision making and budget within a core team. Often, these come from executive-level mandates and investment levels of over $200 million per year.
But having a broad vision for the company is not the only path to success. Operators such as Indian Oil and Suncor have succeeded by identifying pain points in their operations and deploying targeted software solutions. While these projects may have more limited impact than enterprise-wide strategies, they often produce results more quickly.
Looking inward or outward?
All oil companies want to reduce cost of operation and enhance safety. For them, digital is a tool to reduce asset downtime and automate processes. But digitalization can also mean new IP creation and new revenue streams. For example, Sinopec has launched an IoT platform to sell to its oil and chemical refining peers, with Huawei. Shell has spun out a technology startup that reduces leaks in refineries through connected wrenches.
Oil companies do this in a few different ways. Some, like BP, have set up specific business units to commercialize promising technology. BP’s internal incubator, Launchpad, spun out a company that uses artificial intelligence to interpret acoustic signals within wells. Others are going to market with peers. For example, Schlumberger and Rockwell Automation have established a joint venture, Sensia, to sell end-to-end automation for upstream. Sensia is estimated to earn $200 million in incremental sales in 2020.
It remains to be seen if oil companies will want to buy software products from their peers and competitors, when they have the alternative of buying from OFS, EPC and industrial providers, or startups.
Choosing a partner
The range of potential technology partners for oil companies has expanded rapidly. These include traditional service providers like oilfield services and industrials who have invested in building IoT platforms as well as process-specific analytics.
As well as cloud computing companies, oil majors are becoming familiar with startups by using their VC arms to invest or even launching their own software startups, such as Shell and BP have done. Lead software startups in the oil and gas industry include C3.ai, Spark Cognition, Akeselos, Dataiku, Tachyus and Bluware.
In choosing a partner, oil companies are weighing domain expertise against technical capability. Partners that can bring both are likely to be the most successful. Many companies – like Total and Shell – are taking a multicompany approach to partnerships and completing pilot projects with a range of providers.
Which describes your relationships with partners best:
- We are buying off-the-shelf software
- We are using consultants to build custom solutions
- We are co-developing software with our vendors
- We are building entirely in-house
The role of partnerships
Leading European oil companies have formed dozens of partnerships with large and small technology firms, while those in the Middle East and North America tend to pick one or two partners, often consultants.
BNEF's research shows that oil companies are turning to big data analytics in the cloud, challenging traditional oil field service providers and industrials to deliver new IoT platforms and applications. Both Chevron and Equinor have also partnered with Microsoft – Chevron has sold its private data center back to Microsoft to manage. Total is working with Google Cloud to develop and commercialize a product in machine-learning for seismic studies. Exxon and Suncor are the two latest oil majors to shift from on-premise data centers to the cloud.