Oil & Gas 4.0

KNOWLEDGE IS EVERYTHING...HOW THE INDUSTRY IS TAKING THE NEXT EVOLUTIONARY STEP

The increasing symbiosis between energy producers and technology companies has the prominent expert Daniel Yergin optimistic, with Oil & Gas 4.0 leading to a new world of increased efficiencies and prosperity

A key characteristic of the new digital era for the oil gas sector, is the convergence between the industry and Silicon Valley’s biggest companies, where data increasingly becomes a valuable commodity.

That’s according to Daniel Yergin, the eminent energy expert and economic historian who authored two seminal books about the oil and gas sector; best sellers The Quest and The Prize – the latter winning him a Pulitzer Prize.

“Hydrocarbon molecules are the product of the industry but data is a product too,” says Mr Yergin, who is also vice chairman of IHS Markit, the global information and research company.

“There are companies that produce oil and gas and generate data, the two are wholly inter-dependent.”

Oil and Gas 4.0 which describes the nexus of technology and energy is increasingly palpable with the rise in the number of partnerships between the oil industry and technology giants. Microsoft, for example, has a number of strategic alliances with entities like Chevron and Shell.

Between 2013 and 2018, the proportion of announced partnerships with a digital emphasis, between the oil and gas industry and the supply chain, grew from 22 per cent to 55 per cent, Mr Yergin says. It’s not surprise as the partnerships support the digital transformation of international oil companies.

The push towards incorporating digital tools to improve efficiencies to lower costs and expand production capabilities has triggered the Oil and Gas 4.0 era.

The evolution is linked to the broader Industry 4.0 trend, driven largely by technologies of the Fourth Industrial Revolution; namely artificial intelligence, Big Data, and the internet of things (IoT).

The collapse in oil prices following peaks of more than $110 per barrel in the summer of 2014, to below $30 in January 2016, also accelerated “the push to digitisation that has become very pronounced,” Mr Yergin says, adding, “because companies need to be more efficient…[it’s] part of a survival and prosper strategy.”

With price cycles so extreme, it’s futile to try and be in control, but costs can be managed during such periods. The three-year price slump that began in 2014 magnified this.

“You can manage your cost, be more efficient, be more productive”, Mr Yergin says.

The shift in gears creates greater resilience and in this case, the adoption of new digital tools such as sensors, wearables and automation - all of which have been key to maintaining momentum even as oil prices rebounded to more than $80 per barrel earlier this year.

“About every decade has a shock [for producers] and then people forget and the new normal is back,” Mr Yergin says. “You did have companies in the eighties and nineties that adjusted their cost structure and then costs started going up again. Now a company has tools it didn’t have before.”

Digital tools enable and empower companies to redesign processes across all aspects of the industry – production, refining, drilling – in addition to bringing in new skills, he says.

The trend, in many respects, is like the development curve of autonomous vehicles which were not possible in 2000s because of the absence of data analytics present a decade later, he adds.
The ‘de-manning’ of oil and gas facilities is another example of a trend that was not possible a decade ago.

“[You can] automate a lot of what is done. Capabilities were not there a decade or a decade and a half ago,” he says. “You don’t need a lot people on an oil platform, maybe almost no people but very powerful digital tools to manage it from onshore.”

In marked contrast to the past, companies today are pursuing greater efficiencies and capabilities regardless of the price of oil. That invariably is because technology has empowered them in a way it has not been able to before. That’s very evident with smaller, independent producers, which had been until recently the backbone of shale oil and gas in North America. The application of digitisation has given them the ability to bring down costs “and at the end of the day this is about costs and capabilities,” says Mr Yergin who has been investigating the impact of technology on the industry.

“Shale is growing dramatically again, US production last month reached 11.4 million barrels per day. There are other things involved too – general cost cutting and so forth – but this is a very clear example of what the application of technology means,” Mr Yergin says.
For larger oil and gas companies, wide-encompassing digital strategies are required. Their organisational transformation hinges on harnessing the technology, from drilling and production to safety where sensors can illuminate what’s taking place in a well, he says.
This not only applies to IOCs but also national oil companies (NOCs). Abu Dhabi National Oil Company (Adnoc) is at the forefront of NOCs on Oil and Gas 4.0, with it proactively embracing the digital transformation of the industry.

“We are going to see Adnoc emerge as one of the leaders in the global industry and [it] has made this trend a high priority,” he says.
A big advancement for the sector in the 4.0 era, is predictive maintenance. Thanks to a massive increase in the number of sensors being deployed across operations, companies can monitor what’s happening in real time, which markedly improves safety levels.

“Being able to see problems before they become problems, see what is happening with rotating equipment, see what is happening with pipes, this is part two of what we are talking about [with Oil and Gas 4.0],” says Mr Yergin. “Bringing that [scale of] data and information together is extraordinary, [and enables] the industry to operate upscale, efficiently and productively.”

Leveraging data analytics to achieve results within the oil and gas industry mirrors the activities of Silicon Valley’s biggest technology companies. Each has begun borrowing from the other, Mr Yergin says.

“At the CERAWeek [oil and gas conference in Houston] suddenly the big tech companies engaged in a way they have never been so obviously engaged before,” he says.

Essentially its because technology companies have come to the realisation that the oil and gas industry produces large amounts of data that can define and shape processes and bring about efficiencies.

“I went to a dinner with Jeff Bezos and [from him] you understand Amazon is a massive manager of data and the capabilities are constantly improving,” says Mr Yergin. “It is a new frontier of technology and a frontier the oil and gas industry is very much moving into.”

In turn oil and gas companies have begun mimicking tech companies. They’re more venture-led, invest in startups, learn from their innovation in areas such as clean tech, analytics and IoT.

Changes related to the era of Oil and Gas 4.0 are not exclusive to how companies approach their operations. The shifting dynamics also impact how individuals approach their jobs which will bring with it challenges such as reskilling existing employees or bringing in new ones with different capabilities, says Mr Yergin.

“It was already happening but [it] accentuates the need for people that these technologies are a part of their training,” he says. Increasingly the oil and gas industry will compete with the tech industry for human capital. “Computer science is going to be a bigger part of the curriculum of becoming an oil industry professional,” says Mr Yergin.

The challenge now for companies is how to implement new efficiencies, how to manage costs while moving into Oil and Gas 4.0. That’s why strategic discussions are so important. The shift “at this scale and at this intensity, this is new terrain,” says Mr Yergin.

“Execution and strategy and implementation [are risks] that are very much on the mind of the industry; the capabilities are there but how to do it productively and in what timeframe.”

An advantage is that the oil and gas industry is populated by engineers and scientists.

“There is a natural affinity and curiosity but it is also doing what you have done in the past differently and doing new things. It is not just a process of implementation and execution but also a process of learning.”

That the industry has come so far and regularly demonstrates its extraordinary capabilities notwithstanding the ability to drill 10,000 feet under the sea bed makes Mr Yergin optimistic.

“Oil and gas has been at the forefront,” he says, adding “and it is undergoing another step change to ensure it is at the forefront again.”

IMAGINE A FUTURE WHERE COMPANIES WILL HAVE AS MANY DATA SCIENTISTS AS GEOLOGISTS. WITH AI, THAT FUTURE IS HERE

Adnoc's technology-led Thamama and Panorama centres are leading the way in the use of analytics

At Adnoc’s Thamama subsurface collaboration centre, large screens flash with three-dimensional models of reservoirs under layers of rock in in Al Dhafra’s desert.

The flashing screens display data and chart graphs, so that the geologists, engineers and scientists there can work out the optimal location to drill a well or install a rig, and thereby generate billions in cost savings.

Thamama, the nerve centre behind the new generation of upstream activity at Abu Dhabi’s state producer, is at the heart of a drive for efficiency that Big Oil and regional national oil companies are determined to chase.

Adnoc, which opened the centre last year, hopes that incorporating artificial intelligence into the way it spuds wells and gets oil to market could reduce drilling time by 30 per cent next year and generate efficiency savings of up to $1 billion from last year.

It is not alone in expanding exploration to include optimal use of Big Data to respond in a leaner, quicker and more resilient manner to the vagaries of the oil markets.

Occidental Petroleum, which generates 45 per cent of its business from the Middle East and is one of Adnoc’s long-term partners in gas has already begun to lower costs by integrating AI and automation into its systems.

“Occidental have already said they’re looking at saving somewhere in the region of $325,000 a rig, where they can actually start using analytics to more accurately predict drill locations,” says Gareth Kirkwood, managing director Middle East and India at Lloyd’s Register.
The company specialises in digital and automation solutions for the industry.

“Certainly from the Middle East perspective, we have clients who have avoided costs of around $7 million thanks to implementing analytics,” Mr Kirkwood says.

The methods used to generate such cost savings are called predictive analytics, which is the ability to predict the future of an asset and its performance based on the evidence from data gathered by sensors.
Gathering such a high amount of data requires enough expertise to interpret its findings, leading some consultancies such McKinsey to predict that as many data scientists as geologists would be required to run operations in the future.

“We have a headline of 57 out of the world’s 100 largest oil and gas companies are using or have plans to use predictive analytics, so I think the industry is now moving in that direction,” Mr Kirkwood says.

“And out of that 57, 34 have already reported positive impact in terms of using predictive analytics for cost savings.”

Apart from operational cost savings, which have become a priority for oil companies particularly during the three-year price downturn in the market, the firms are also wary of catastrophic costs that could badly affect their bottom lines.

A case in point was BP’s disastrous 2010 Deepwater Horizon oil spill, which caused the loss of 11 lives and cost the firm more than $20bn in fines and penalties.

The spill, which led to the loss of about five million barrels of oil, was caused by defective cement on a well, implicating BP, rig operator Transocean and contractor Halliburton.

“When you have a bad connection in a well and it leaks, it can lead to huge, huge remedial costs,” says Dean Bell, president of the well construction global business unit at oilfield services operator Weatherford.

“You’re talking about numbers of $15m to $14m and up to $300m in costs to go back and intervene in those wells.

“And so this technology prevents that from happening, because humans will never be infallible.”

At Adnoc’s Panorama control centre, data scientists carefully pore over real-time feedback on the company’s assets across upstream – both onshore and offshore – midstream, referring to transport of crude and product, and downstream, which refers to chemicals and refining.

Mr Kirkwood says that while AI sensors are beginning to monitor upstream activity, mid and downstream still lag in terms of adoption.
Woodside, an Australian energy company, “has already begun to implement sensors across their network”, Mr Kirkwood says.

“That’s when you start to see a real shift from that point of view,” he says. “Midstream I think is still a challenge.

“The intended adoption of tools as opposed to actual implementation is, I would say, split.”

While he remains coy on the costs of implementing AI across an energy company’s value chain, Mr Kirkwood says that companies such as his introduce pilots on a project-by-project basis, and then manage a full rollout of their analytics solutions based on need.

AI technical capabilities are now being developed in-house and outsourced, with interpretation of Big Data largely done by independent outsiders.

“We develop everything we can and we also know that we don’t have a monopoly on good ideas or brain power,” Mr Bell says.

“So we’re always searching the world for good ideas and good technologies and that makes sense to either acquire or work in joint ventures.”

The future, he says, is moving towards a world where rigs will become unmanned.

Oil and gas professionals who get their hands dirty onsite will be gradually moved into control rooms and poring over collated data instead.

“I think eventually, yes. You need some innovation to put it all together and get it working in concert, but more and you’re seeing more automated tasks on the rigs,” Mr Bell says.

A NEW BLUEPRINT FOR A NATIONAL OIL COMPANY

Adnoc’s transformation of its culture and structure has positioned it well for the future

With the oil and gas industry moving into a technology-led phase driven by the Fourth Industrial Revolution, the nature of how national oil companies (NOCs) should operate becomes a critical issue if they are to not be left behind in this new era.

In the Arabian Gulf, many of the NOCs have acknowledged that their traditionally more passive roles as custodian of their nations’ hydrocarbon resources will no longer be effective enough to provide the same level of revenues as in previous decades, regardless of the market price of crude.

Oil and Gas 4.0 is as much about evolving mindsets - from top to bottom - as it is about incorporating AI, Big Data or other technologies.

In this vein, by the end of this year it is expected that six oil and gas concessions in the emirate of Abu Dhabi - the first time ever major onshore and offshore blocks were offered in a competitive round – will be awarded.

This landmark move illustrates how Adnoc - over the past two and half years – has successfully pursued a strategy designed to transform itself from a traditional national oil company (NOC) into a dynamic, innovative international energy company, capable of creating new revenue streams and maximising profit in the era of Oil and Gas 4.0.

In July last year, Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces said: “Adnoc’s initiative will expand strategic partnership opportunities, deliver strong financial returns, and support the UAE’s future growth”.

“Expanding strategic partnership opportunities of our national companies enhances their competitiveness and leadership regionally and globally,” said Sheikh Mohammed.

Much of the rationale for the timing of this effort came in the aftermath of the drop in oil prices from their summer-2014 peaks of over $110 a barrel. Brent crude fell below $30 a barrel in January 2016. The next month, Dr Sultan Al Jaber was appointed group chief executive of Adnoc – itself a new role created to lead a new kind of company in an era in which profitability would become harder to grow.

The drop in prices had been instigated by rising production – particularly in the United States – helped by a drilling revolution that has made exploring for unconventional oil and gas more profitable.
Consultancy EY’s global oil and gas leader Adi Karev wrote in a blog in August this year that “the dramatic fall in prices unleashed a chain reaction with far-reaching consequences on government budgets, sovereign investment, economic development incentives, and critically on subsidy support and social welfare programmes”.

State-owned oil companies across the Middle East and North Africa have, as a result, been seeking to extract greater value from existing assets in what had been a persistently low oil price environment.

“We are improving operational efficiency, optimising resources and adapting the mindset of our people to focus on our strategic objectives and on maintaining our competitive edge,” Mr Al Jaber, who is also UAE Minister of State, said in April 2016. “We are being proactive and looking across the entire group to find ways to improve and optimise operational efficiency.”

There was an example of this that same month, when Adnoc awarded its first “mega tender” – for 100,000 tonnes of steel tubing over three years, to the French company Vallourec – as part of the company’s drive to streamline its procurement process.

Adnoc says it is accelerating the rate of new discoveries, increasing recovery rates, maximizing efficiencies, driving down costs, and increasing value across the full integrated value chain.

Part of the strategy has been to highlight Abu Dhabi’s status as a global energy centre – across the chain and not just in terms of upstream. In May, Adnoc said it will invest Dh165 billion in partnership with global energy companies over the next five years to develop the world’s largest integrated refining and petrochemicals facility in Ruwais, in Al Dhafra. By 2025, the expansion of Ruwais will have added 1 per cent to the UAE’s economic output annually and created 15,000 jobs, according to Adnoc.

“The expansion plans for Ruwais will also support Abu Dhabi and the UAE’s economic development and diversification, create high-skilled jobs and enhance the country’s status as a globally attractive destination for energy investments,” said Dr Al Jaber in May.

Adnoc has also found creative strategies and more dynamic business models, that bring together people, partnerships and technology, to drive growth and make it more resilient.

The BP onshore concession agreement was a prime example of Adnoc’s ambitions to structure new types of partnerships. In an unusual move, BP paid for its 10 per cent share with a 2 per cent stake in itself, the shares to be held on behalf of the Abu Dhabi Government. The IPO of service station operator Adnoc Distribution in December last year was another.

Adnoc is also working with Saudi Aramco to jointly invest in a $44 billion refinery on the west coast of India. Last month, US oil services provider Baker Hughes said it will pay $550 million for a 5 per cent stake in Adnoc’s drilling subsidiary as part of a partnership aimed at capitalising on the efficiencies that can be achieved from the GE company’s expertise and on growing the business including expansion into other markets in the Middle East.

Adnoc has also identified and brought along the next generation of the company’s leadership. Abdulmunim Al Kindy is running exploration and production for the group. Abdulla Salem Al Dhaheri is in charge of marketing, sales and trading. Abdulaziz Abdulla Alhajri is responsible for downstream.

“The manner in which these NOCs are operating…It’s a transformation so profound that it stands next to the nationalisations of decades past as the most defining moments of their respective histories,” EY’s Mr Karev wrote.

For those NOCs that are able to successfully change their corporate cultures, strategies and ambitions, the future should be a very rewarding place.