In the face of significant challenges, the oil & gas sector needs to embrace digitalisation and increase the pace of change to survive the decade ahead.
The oil & gas industry is currently grappling with three major crises – continued low oil prices, coronavirus, and the energy transition.
The past seven years have proved to be one of the most difficult operating periods in the sector’s history. Margins have been squeezed since the 2014 price crash, and this has been further compounded by the recent pandemic.
In 2020 alone, more than 100 oil and gas companies declared bankruptcy, while the share prices of all five international oil majors are still below their pre-pandemic level.
As the industry is left reeling, it has found itself struggling to deal with the looming energy transition. And with the costs of renewable energy falling and increasing pressure to move away from fossil fuels, the competition is stacked against the sector.
To respond to these challenges, oil & gas companies need to adapt.
Digital technology is one of the key tools that can help the industry change and improve. Wood Mackenzie estimated digitalisation could save the energy industry over $70 billion a year in operating costs if existing technology were leveraged effectively.
Technologies like AI, digital twinning, and robotics can help make operations smarter and more efficient. Whilst advancements in remote working are far more than a temporary solution for Covid-19, they can reduce the numbers of personnel in physical environments long-term, saving millions on transportation and insurance.
However, oil & gas has not been quick to adopt digital technology. The industry has traditionally been a slow-moving beast, planning projects and profits over years and decades, and deviating little from its core operating model.
It has also been more sheltered from competition and new market entrants than many other sectors, and as a result, change and disruption have not been forced in the same manner as industries such as finance.
Over the last 20 years, the financial services sector has been revolutionised by a wave of ‘Fintech’ startups. These small, agile, tech-centric companies created new products and
solutions, lowering costs while enhancing user experience. This forced incumbent companies to innovate and improve.
Whereas for oil & gas, even in the days of $100 oil, investing in efficiency and innovation were simply not critical so long as operations were profitable. This meant organisations were slow to modernise and invest in wholescale digital transformation, and this has left a damaging legacy.
According to Deloitte’s Digital Maturity Index, the digital maturity of the oil & gas sector is low, scoring 1.3 on the scale, this puts it towards the bottom of the index, lagging behind most other large industry verticals.
Whilst the industry has been investing in data and digitisation programmes for years, it has remained focussed on existing process and failed to drive new innovation, new revenue streams or significant operational change.
The industry has long captured vast quantities of data, but too much of this data is siloed and has not being leveraged productively. In 2015, a McKinsey report cited that under 1% of data gathered was being made available to decision makers, and recent reports suggest that little has been done to redress this crucial problem.
The pandemic has forced all organisations to adapt, and many industries are struggling to cope with the challenging business landscape. But with the additional socio-economic factors at play, many oil & gas companies face a genuine existential threat.
Organisations need to modernise, adapt and leverage digital technologies more effectively if they are going to survive. But digitalisation is a process, not an add-on solution that can be applied in isolation. The technology needs to be supported by a wider organisational shift in order to yield the required results.
Empowering Technology Leaders
A recent survey of oil & gas executives from the IBM Institute for Business Value (IBV) found that 82% believe innovation will be critical to their organisations’ success in the next three years.
However, many companies have cut back their technology budgets. McKinsey warned in 2019 that the oil crash drove companies to strip CIOs of between a third and a half of their capital expenditures. This is severely restricting their ability to deliver the kind of projects the industry needs simply to keep up, let alone innovate effectively.
Companies need to resource their CIOs properly to effect meaningful wholescale change. Too many companies use IT to maintain the status quo, or invest in innovation through small pilot projects that never achieve the scope and scale required to make an impact.
There needs to be a realisation and mindset shift across the business to see digital technology as driver of improvement, competitive edge and new revenue streams, alongside an understanding that continuing to under-invest will ultimately result in greater long-term costs.
With CIOs and CTOs stuck balancing day-to-day needs with shrinking budgets, they lack the resources to invest in the types of projects and wholescale change needed to help their business to adapt and navigate the challenges ahead.
‘All companies need to become tech companies’
There has been a growing consensus among business leaders that in our digital age ‘all companies need to become tech companies’. For oil & gas, this transformation is a vital one, and one which may prove critical to ensuring long-term viability.
Before the pandemic, green and sustainable policies were already at the forefront of the agenda. The pandemic has provided further momentum, with governments and policy-makers vowing to ‘build back better’ and use this period of reconstruction to prioritise socio-environmental outcomes.
The industry is already responding to the changing landscape, and the last 18 months have seen a wave of pledges from energy majors, with Shell, BP and Total all committing to net-zero carbon ambitions by 2050.
While many energy companies have begun to diversify their focus and increase investment in renewable energy, there is also mounting pressure on ensuring that the remaining oil & gas components of the business become as clean and efficient as possible.
The clock is already ticking. Organisations need to fundamentally change if they are going to be able to adapt to these new demands and commitments. And this transformation is simply not possible without leveraging new tools and technology and embracing wholescale digitalisation.
The energy industry has been waiting for oil prices to return to their previous highs for the best part of a decade. Within this challenging backdrop there has never been an ideal time to make the required investment. But organisations that leave it too long, and kick innovation and investment down the road are likely to find themselves too late.
It’s time to adapt or fail.
Join the Debate
Overcoming the barriers to digital innovation in oil & gas will be the central theme of the upcoming Digital Energy 2021 Virtual Summit on April 22nd.
Join leading experts from across the energy industry to discuss how companies can leverage emerging technologies to improve, adapt and navigate the energy transition.
Register your free place online at https://www.digitalenergysummit.com/