Digital Transformation practice helps companies assess their digital standing, identify areas for business objective achievement, and establish a long-term digital goal by developing a coherent road map. Our deep industry experience and technical expertise can further support firms in establishing internal capabilities, assessing relevant technologies, and prototyping solutions for both results and scale.
Digital transformation is emerging as a driver of sweeping change in the world around us. Connectivity has shown the potential to empower millions of people, while providing businesses with unparalleled opportunities for value creation and capture. Since the industrial revolution, the Oil & Gas industry has played a pivotal role in the economic transformation of the world, fuelling the need for heat, light and mobility of the world’s population.
Today the Oil and Gas industry has the opportunity to redefine its boundaries through digitalization. After a period of falling crude prices and, frequent budget and schedule overruns, together with greater demands of climate change accountability and difficulties in attracting talent, the Oil & Gas industry can provide practical solutions. Digitalization can act as an enabler to tackle these challenges and provide value to all its stakeholders. While digitalization could be a source of positive change, there are a number of challenges that need to be overcome to realize its full potential for both business and society. In some cases, the gains from digitalization have been inequitable with the benefits not reaching those who need it most. At the same time, the exponential increase in global information flows have created new risks around data privacy and security and businesses across sectors are grappling with challenges related to changing customer expectations, cultural transformation, outdated regulation, and skill shortages – to name a few.
Advancement in technologies, the falling cost of digitalization, and the ever widening connectivity of devices provide a real competition-beating opportunity to upstream oil and gas (O&G) companies who play the digital revolution right. The lower-for-longer downturn and moderating operational gains have provided an extra incentive—or turned the opportunity into a need—for companies to save millions from their operating costs and, most importantly, make their $3.4 trillion asset base smarter and more efficient.
What is holding them back from realizing this opportunity?
More than the technicalities, it is often the digital muddle that’s deterring companies from achieving digital maturity. Companies can benefit from a strategic road map that helps them assess the digital standing of every operation and identify digital leaps for achieving specific business objectives. More importantly, it could push them to embrace a long-term goal of transforming their core assets and, finally, adopting new operating models (the journey from bytes to barrels). This paper, first in the series of digital transformation in oil and gas, presents Digital Operations Transformation (DOT) model—a framework that explains the digital journey through 10 stages of evolution, with cybersecurity and digital culture at the core—and uses it to ascertain the prospective value for seismic exploration, development drilling, and production segments. Although some segments are ahead of others in data-driven analytics—seismic exploration is ahead of development drilling in analyzing and visualizing information while the production segment is still grappling with sensorizing its decade-old wells or making sense of the stored production data—the industry in general can draw lessons from digitally leading capital-intensive industries that are influencing a big change in their physical assets and capital models. The prize is sizeable for the O&G industry—even a 1 percent gain in capital productivity could help offset the cumulative net loss of $35 billion reported by listed upstream, oilfield services, and integrated companies worldwide
Given the diverse starting points and an array of choices, O&G companies could benefit from a coherent framework that helps them achieve their near-term business objectives, measures their digital progression through stages of evolution and, above all, gives them a pathway to ultimately transform the core of their operations, the real assets and the business model itself. The Digital Operations Transformation (DOT) model is such a road map—a digital journey of 10 milestones, where the leap from one stage to another marks the achievement of specific business objectives, and puts cybersecurity and an organization’s digital traits at the core. Although the journey technically completes at stage 10 for a specific asset or operation, it should be broadened and extended into a never-ending loop to include a wider set of assets or business segments, the entire organization and, ultimately, the ecosystem of a company, including supply chain and external stakeholders (figure 2; also refer to table 2 in the appendix). First up in the journey, we have companies mechanizing the process using hydraulic, pneumatic, or electrical control systems. This can allow players to anticipate and prepare for failures and unusual conditions.
The journey then progresses to capturing information from the physical world (the physical to digital realm) by sensorizing equipment and transmitting data generated in the field using IT networks.6 By doing this, an O&G company may be able to respond to field conditions and monitor operations remotely. The next set of milestones can be achieved when a company breaks operational silos between disciplines, realizes hidden productivity gains, improves the usability of data, and identifies new areas of value creation. For this, the transformation should progress from integrating diverse data (using cloud-solvers, servers, data standards, etc.), analyzing and visualizing data using new-age computers and platforms (for example, big data analytics, wearables, and interactive workstations) to augmented decision-making (for example, self-learning machines). Typically, in the O&G domain, the digital thinking and narratives stop at data-driven insights. But to become a digital leader, a company should consider making a change in its physical world by modernizing its core assets (in this case, rigs, equipment, platforms, and facilities). In other words, it should complete the last three legs of the journey from bytes to barrels by closing out the physical-digitalphysical loop.
This phase starts with robotizing facilities and progresses to the crafting of new products to improve precision, reliability, and design aspects of physical assets. Ultimately, the phase ends with virtualizing the entire asset base by creating digital twins and the digital thread, to not only extend the life of assets but also to adopt new business and asset models in the long term.7
A digital twin/thread vision would inevitably trigger the thinking and necessity to enable cross-organizational and crossvendor workflows, the biggest bottleneck for many digital transformations. As mentioned earlier, once this physical-digitalphysical loop has covered an asset, the loop can be restarted and widened to include a system of assets in a particular business line or geography, then the organization and, ultimately, the entire supply chain and external stakeholders of a company. A comprehensive cyber risk management program that is secure, vigilant, and resilient, and an organizational culture—or digital DNA—that would enable this transformation remain at the core of the model.8 (For more on safeguarding upstream operations, read our recently published paper, Protecting the connected barrels.) Using this model, the following section maps the current digital standing of the upstream industry, identifies near-term digital leaps that upstream companies can take to meet their both near- and long-term objectives, and offers solutions for major operations in the exploration, development, and production segments.
ALTHOUGH digital maturity varies from company to company, the exploration segment of the industry in general is digitally ahead of development and production. While decades of earth science understanding and advanced imaging technology have helped exploration, a complex ecosystem and a legacy asset base have constrained the digital evolution of the drilling and production segments, respectively. However, not all subsegments within the exploration segment are ahead; similarly, there are a few subsegments within drilling and production that are adapting and getting ready for their digital leaps. Rather than detailing each subsegment, the following section talks about a prime subsegment within each segment—seismic imaging, development drilling, and production operations—where either the digital transformation is most needed or has the highest value creation potential (figure 3). Seismic imaging Seismic imaging—a process the industry has been using for over 80 years in evaluating and imaging new and complex subsurface formations—is largely at an advanced stage of data analysis and visualization in the DOT framework. Standardization of geological data and formats, investment in advanced algorithms by companies, and the evolution toward high-performance computers that can analyze the geoscience data of thousands of wells in a few seconds explain the analytical lead of this segment. ExxonMobil, for instance, is using seismic imaging to even predict the distribution of fractures
The near-term objective of the seismic imaging unit of O&G companies has shifted toward rightsizing their existing resource portfolio, including the identification of sub-commercial, marginal resources that are reducing profitability and locking up significant capital.
in tight reservoirs, helping it to enhance flow and optimize well placement.9 Similarly, on the visualization front, the industry has made solid progress in developing 3D interpretation systems capable of geological and velocity modeling, structural and stratigraphic interpretation, and depth imaging. In fact, some companies have started to use time-lapse, 4D seismic models that integrate production data to track changes in O&G reservoirs.10 And, a few are thinking ahead by adding the elements of virtual reality to seismic imaging for improving the spatial perception of 3D objects. For example, a team of researchers at the University of Calgary is using virtual reality, augmented reality, and advanced visualization techniques to help Canadian producers using steam-assisted gravity drainage (SAGD) better manage their complex reservoirs by interacting with simulations in a real 3D world.11 Should players stop here? The recent oil price downturn has, at least for now, impacted business objectives. More than eyeing new and complex reservoirs in frontier locations, the near-term objective of the seismic imaging unit of O&G companies has shifted toward rightsizing their existing resource portfolio, including the identification of sub-commercial, marginal resources that are reducing profitability and locking up significant capital.
Development drilling is at the embryonic stage of data integration in the DOT framework as many sought-after analytical platforms are still incapable of aggregating and standardizing cross-vendor data.19 Distinct objectives of over 15 services required in drilling; hundreds of proprietary tools, software, and technologies of over 300 oilfield service firms; and the lack of standardized data formats explain the data integration issue.20 The result: petabytes of data not put to best use. “If we can’t get data to move smoothly across all of these areas, from the rig control system to the electronic digital records to third-party supplies that come on site with a logging system or cement units, it fails right away,” says Michael Behounek, senior drilling adviser at Apache Corp.21 Breaking data silos is key for the industry to continue to report efficiency gains and cost savings. Over the past five years or so, advancements in operational technologies, such as multi-well pad drilling, has helped the industry lower average drilling time in shales from 35 days in 2012 to about 15 days at present.22 But these operational gains are showing signs of moderation (indicated by flatness in drill days and new-well production per rig in US shales), calling for digital technologies to take up the baton now.23
Similar to the way upstream and oilfield service companies worked together to achieve drilling gains through operational technologies in this lower-forlonger environment, they should consider joining forces on the digital front as well. Both have to find an acceptable return on investment in digital solutions, without which hackers may exploit the disintegrated workflows, margins will likely keep migrating between the two, and the industry’s pace of innovation can suffer a setback. Justin Rounce, senior vice president of Schlumberger, puts it rightly when he says, “It’s hard to continue to invest in technology when you’re not getting the value associated with that investment.” 24 Attaining this balance likely requires industry participants to collaborate and develop common data standards. However, knowing the complexity of the task at hand and the long lead time associated with standardizing all data formats—it took nearly four years for the Standards Leadership Council to complete the pilot project on integrating PPDM (Professional Petroleum Data Management) and WITSML (wellsite information transfer standard markup language) data models—the near-term aggregation strategy of an upstream company must be tied around third-party solutions that can securely layer integration frameworks on diverse drilling data.25 Apache Corp., for example, is deploying data integration boxes on 21 North American rig sites that allow monitoring and linear analysis on assimilated data from drilling control systems, logging while drilling systems, cement units, etc.26 Once this bottleneck is cleared, the digital leap toward advanced analytics could be much faster. When achieved, this leap could potentially deliver annualized well cost savings of about $30 billion27 to upstream players, while oilfield service players can potentially create multibillion-dollar high-margin revenue streams.28 Knowing there are several areas of value creation in drilling—optimization of trajectory, rate of penetration, frictional drag, drill string vibrations, equipment performance, etc.—traditional companies could prioritize and pilot a few things, while digital leaders can focus on maximum value realization through integrated advanced analytics at a company level.29 Noble and Baker Hughes, a GE company (BHGE), for instance, are targeting a 20 percent reduction in offshore drilling cost by jointly developing an advanced data analytics system. The companies plan to optimize the drilling process through performance analytics, which includes establishing new key performance indicators, analyzing highfrequency signatures on drive systems, and assessing usage intensity on key assets. These capabilities will be housed on the rig site, while the data would be sent to onshore centers where predictive algorithms would identify potential vibration issues, temperature issues, etc., weeks before they are identified by conventional automation systems.30 Although there is a significant buzz in the market to augment drilling operations or move toward autonomous drilling by developing linear and nonlinear solutions such as automated weight on bit adjustments, the industry should consider focusing on setting things right at the integrate and analyze stages. Clearing these bottlenecks is necessary for building automated rigs in the future. Schlumberger’s Rig of the Future program, for instance, primarily rests on integrating diverse drilling systems by working with third-party contractors using open source architecture.31
Production operations Unlike exploration and development, the production segment of a company mostly consists of brownfield wells, platforms, instruments, and control systems. About 40 percent of global crude oil and natural gas production comes from fields that have been in operation for more than 25 years—in fact, there are about 175 fields that have been producing for more than 100 years.33 Considering that the continuity of production, and thus the cash flows, is key, the industry always finds itself in a never-ending cycle of upgrading and retrofitting. Put simply, the industry always has a large portfolio of producing assets that are less sensorized, digitally behind, and even prone to cyberattacks.34 Joint venture structures in many fields, the dispersion of wells and assets along the life cycle, and the cost associated with upgrading the entire infrastructure can complicate and delay the modernization of legacy assets further. “Monitoring production data is nothing new for operators, but it’s only been something the supermajors and major companies could afford to do . . . and even then, they had to pick and choose, only able to monitor maybe 60% to 70% of their wells,” says an executive with WellAware.35 Addressing this problem has never been more important than it is today. Weak cash flows and uncertain cost inflation in new projects have led to a change in the business objective of many producers—from chasing growth in greenfield projects to optimizing production from existing fields without spending much. ConocoPhillips CEO Ryan M. Lance rightly framed the current situation when he said, “Low capital intensity is a CFO’s best friend.”36 But what should be the digital strategy of a company for its legacy assets? A blanket digital investment for all or a digital prototyping on just a few producing wells? Neither, as the former is impractical and the latter would only yield marginal gains. Then? Just as every operational solution (for example, enhanced oil recovery) and business strategy (for example, acquisition of a nearby field to leverage existing infrastructure) is specific to a field, a digital investment should be prioritized and customized for each field or well. A high-potential field, for instance, might merit installation of advanced distributed sensors and “smart” OEM equipment to provide new insights on the operating conditions of a well both above and below the surface. A field with moderate potential could benefit from pervasive sensors (to monitor temperature, vibration, rotation, etc.) on pumps, valves, and equipment so as to develop a conditionbased maintenance schedule. A field with low potential, on the other hand, may require standard automation and monitoring solutions to keep the well running at optimal levels. Such digital segmentation would likely cover the entire asset base and optimize the overall production portfolio without taking up much capital. Once this layered strategy of sensorizing equipment is in place, a digital leap toward advanced analytics could start creating new value on the optimization and maintenance fronts. Prominent legacy field issues, such as gas interference, equipment choking, damaged fluid pound due to overpumping, and inefficient recovery due to under pumping, could be addressed by integrating automation protocols with cloud-based analytical platforms in a secure environment.37 Although the benefits would vary from field to field, as per some estimates, optimizing production in a 100-well project can generate annualized cash flows of $20 millionn (approximately $20 billion at an industry level), leaving aside the cost avoidance for equipment failure and repair.38 The rate of value creation would likely increase exponentially when the analysis extends to a reservoir level. An operator in Kazakhstan, for example, was facing poor pump pressure and production deferment in several mature gas condensate wells. Apart from installing new electrical submersible pumps (ESPs), the operator used real-time analytics to make proactive adjustments to ESP trips and modifications to the motor amps to better suit the changing reservoir condition encountered for each well. This reservoir-level intelligence reduced downtime by an additional 27 percent, over and above the benefits from new ESPs
Calculating the value of digital transformation in Oil and Gas
Our value-at-stake methodology aims to assess the impact of digital transformation initiatives on industry, customers, society and the environment. It provides likely value estimates of global industry operating profits that are at stake from 2016 to 2025, and the contribution that digital transformation can make to customers, society and the environment within that time frame. Value-at-stake for industry comprises two elements: first, value addition, or the potential impact generated by digital initiatives on an industry’s operating profits; and second, value migration, or the operating profits that will shift between different industry players. Value-at-stake for society measures the value impact of digital transformation for customers, society and the environment. The value of digitalization estimated here is based on existing constraints. The potential values could be amplified if Oil and Gas
operators were to go beyond the digital initiatives highlighted in this White Paper, and if the impact of digital on the following were considered: – How work gets done today – Digital could fundamentally change the way operations are conducted (e.g. by changing workflows).5 – How Oil and Gas operators manage their portfolio – Operators should decide in what way real-time data, decision-making and collaboration will shift how they manage their portfolio of operations and future investment considerations.6 For the purpose here, the above questions have not been quantified in depth. If those questions are considered thoroughly, however, value could potentially be magnified by three to five times.