Going digital in upstream - seizing technology-led structural cost cutting opportunities

Companies need to think differently about their business and how they run it. If the industry is to attract capital, an upstream portfolio has to perform profitably, and be sustainable, at low oil prices as well as high. We explored the thesis of tighter cost control in 'Managing for Margin'. Digital technology has a major part to play in the next stage of structural cost reduction.

Oil and gas production is far removed from the leading edge of the 21st century tech revolution. That's not to say that the industry has stood still. The advent of 3D seismic, horizontal drilling, and fracking low permeability reservoirs are just three examples of technology-based transformation in the last three decades.

Extractive industries may have less scope for a tech-led revolution that has changed, root and branch, the media, banking or retail sectors through e-commerce. Yet with much of the upstream value chain 'unreconstructed', there is a golden opportunity for oil and gas companies to embrace technology. Going digital has a big role to play in three ways.

First, big data. At a basic level, big data and analytics can be used to manage logistics, inventory and spares more effectively. But in a data-rich industry like upstream there are bigger prizes to be had through improving efficiency, maximising production and even increasing reserves.

From shooting seismic, to exploration, development drilling and production, and processing volumes through topside facilities and into the pipeline - there is a vast amount data. Technology can capture the billions of data points, and amalgamate different data streams including real time data from across the value chain.

Tiny changes in vibration, pressure and temperature are among the many metrics that can be analysed and assessed. Predictive monitoring to detect equipment failure or risk of failure before it happens will help operations run more efficiently, reducing downtime and smoothing the processing of crude oil and gas through the production system and pipelines.

Second, automation and robotics. Australian mining companies already use driverless trucks to shift ore around open cast mines. Where are similar opportunities in upstream? The industry can look to unmanned facilities; and robots to carry out processes on platforms, down hole, or in the pipeline. Drones and robotic submarines will enable access to monitor and diagnose in remote locations.

Third, visualisation - to predict system behaviour and quantify and manage risk. A 'virtual dry run' say of maintenance programmes can deliver efficiency gains. Visualisation would use the available data from previous work overs and current well performance. The data can be translated into simulations to improve and optimise the engineering plan for the forthcoming work over. The dry run can reveal potential stress points in the process enabling the operator to identify and anticipate potential problems - raising performance and saving time and money.

Oil and gas companies may not have all the skills or know how to make the most of digital opportunities. Bringing in the right partners – high tech, specialist service providers - will be critical for a successful outcome.

Partnerships with specialists, both in the traditional service sector and new high tech providers, can provide access to a global analytic network to interpret the data and optimise each part of the value chain.

The financial rewards could be significant. Certainly, there is a material opportunity to improve efficiency and safety; and to reduce costs. Since 2014, some operators have reduced employee numbers by 25% to right size for lower prices. The next five years could see the same again – perhaps another third – from going digital.

We calculated US$20 billion or 40% of extra NPV from technology improvements on 10 high profile pre-FID projects globally.

Technology boosted value in two areas: volumes, with earlier production and higher reserves; and costs with both lower capital and operating expenditure.

There are risks in going digital, among them vulnerability to power interruptions, cyber hacking and dependence on the cloud. But these are 21st century BAU risks for all sectors. Going digital may be the only way that the oil and gas industry can stay competitive faced with exploiting resources that are increasingly challenging technically and with the prospect of more modest oil and gas prices than in the past.

Going digital can win the industry more reserves, more cheaply, and more safely – in short more profitably. The bigger risk is not grasping the opportunity, and relying on higher prices to drive growth and returns.