Investing in IT

With the BP oil spill successfully capped, at least temporarily, and the completion of a relief well in sight, it's time to look forward and assess the impact this disaster will have on energy regulations and policies and, in turn, how these changes will impact IT investments by oil and gas companies. We expect to see broad regulatory and policy changes as the result of the BP oil spill that will significantly increase regulatory requirements related to health, safety, and environment (HSE) in the oil and gas industry.

These changes are predicted to increase spending by oil and gas companies on a range of technologies including health, safety, and environment systems; enterprise asset management (EAM) systems; application and data integration; and advanced analytics. Ultimately, however, the oil and gas industry must go beyond technology changes and invest in changes to its people and processes to achieve the standards of environmental protection and worker safety demanded by all stakeholders.

Regulatory and Policy Changes

We have already started to see action from Washington, D.C., with respect to regulatory and policy changes as a result of the BP oil spill. As is typical when a government agency is implicated in some disaster, someone associated with the problem is sacrificed to prove that the government is taking action. This happened in May when Elizabeth Birnbaum, director of the Minerals Management Service (MMS), the bureau tasked with managing the offshore oil and gas resources in the US, "resigned." The following month, Michael Bromwich was sworn in as the director of the newly renamed Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE).

However, this bureau is still responsible for both regulating the offshore oil and gas industry and collecting an average of $13.7 billion per year in revenue from federal offshore leases. As stated in a previous IDC Energy Insights blog post titled "Regulation in a Post-BP Oil Spill World," an "expected organisational change is the separation of government regulation into two or more regulatory authorities. One would focus on health, safety, and environment (HSE) regulation and the other would be tasked with hydrocarbon management.

"The HSE regulator, although pressured by the government and the public to ensure that another BP-style disaster doesn't happen, [should] focus more on disaster recovery regulation [in the near term] since this area is lagging and because it is impossible to completely prevent accidents from occurring. [Ultimately, the oil and gas industry should follow the example set by the airline industry, which has a culture and regulations that are aimed at zero errors.] The hydrocarbon management body [should] be tasked with ensuring that exploration and production plans (the way an oil and gas company will develop a field) are consistent with government policy and goals. By splitting these two areas of responsibility, conflicts of interest between the desire to maximise production and the need to protect workers and the environment can be minimised."

In addition to the changes at the former MMS, the Obama administration recently announced the creation of a new National Ocean Policy that, according to a press release by the Pew Environment Group, "provides a way to unify the more than 140 federal laws and dozens of federal agencies that have some jurisdiction over U.S. waters in the Pacific and Atlantic oceans." The executive order also establishes a National Ocean Council to oversee policy implementation. It is expected that establishment of the policy and the council will lead to "more thorough and balanced assessment of the costs and benefits of marine activities, [...] better siting decisions for offshore development, minimisation of risks to fish and wildlife, and better management of unavoidable risks."

Onshore drilling activities will be impacted as well, as evidenced by the increasing interest by government at the federal and state levels in the health, safety, and environmental impact of the chemicals used in hydraulic fracturing or "fracking" associated with natural gas wells. Henry Waxman, chair of the congressional Energy and Commerce Committee, and subcommittee chair Ed Markey have already sent letters to the 10 largest US natural gas producers, asking them to submit "a list of all oil and gas wells for which your company performed or hired another company to perform hydraulic fracturing in 2008 and 2009 and for which that hydraulic fracturing occurred in, near, or above an underground source of drinking water as defined by the Safe Drinking Water Act."

This is only the beginning - we expect to see additional broad federal and state regulatory and policy changes as the result of the BP oil spill that will significantly increase regulatory requirements related to health, safety, and environment in the oil and gas industry. These changes will in turn drive increased investment by oil and gas companies on a range of technologies including health, safety, and environment systems; enterprise asset management systems; application and data integration; and advanced analytics.

Impact on HSE and EAM Systems

Although the full investigation has only just been completed, safety inspection and maintenance practices were very likely involved in contributing to the Deepwater Horizon blowout and subsequent oil spill. According to an article in The New York Times on July 21, 2010, Transocean "commissioned a 112-page equipment assessment [which] found that many key components - including the blowout preventer rams and failsafe valves - had not been fully inspected since 2000, even though guidelines require its inspection every three to five years. Transocean-commissioned reports obtained by The Times echo the findings of a maintenance audit conducted by BP in September 2009. The 2009 BP audit found that Transocean had left 390 maintenance jobs undone, requiring more than 3500 hours of work. The BP audit also referred to the amount of deferred work as excessive."

HSE systems include a broad set of applications and technologies that cater to the HSE business needs of the oil and gas industry. Primarily, these systems automate the management of structured and unstructured HSE data and facilitate the necessary flow of HSE-related compliance actions, such as inspections and reporting. More sophisticated systems include enterprise operations risk management applications that aid with asset and worker safety. HSE technologies also refer to instrumentation and supporting software that aid with measurement and remediation activities related to ground, water, and atmospheric leaks. GIS and GPS systems, as well as preventive asset management, play an important role in promoting HSE initiatives.

HSE applications are typically considered a subset of governance, risk, and compliance (GRC) applications that automate and document processes pertaining to the definition, assessment, and verification of business controls and operational risk at the company level. Enterprise GRC software includes financial compliance management, audit management, corporate policy and procedure management, risk management, and enterprise continuous controls monitoring.

We expect new regulatory requirements resulting from the BP oil spill to drive increased investment by oil and gas companies in HSE system enhancements, upgrades, and replacements. Worldwide spending by oil and gas companies on HSE software is predicted to top $131 million in 2010. The expected regulatory changes could potentially double the growth rate of spending on these applications during the next two to three years. Software vendors that could benefit from this increased spending include SAP, IHS, Enviance, and Syntex.

Other systems that play a role in supporting health, safety, and environment in the oil and gas industry include EAM applications. While HSE systems track compliance and safety inspections, EAM applications track maintenance and related inspections on individual pieces of equipment. Essentially, EAM systems are used to manage physical assets such as rigs, plants, and pipelines; the work performed on those assets; and the resources required to perform the work. Worldwide spending by oil and gas companies on work and asset management software, which includes EAM, is predicted to be $297 million in 2010. Expected regulatory changes may accelerate the upgrade of work and asset management systems, thus increasing the growth rate in spending. Software vendors that could benefit are IBM, Oracle, SAP,and ABB(via its recent acquisition of Ventyx).

Impact on Application and Data Integration

The oil and gas industry, especially the upstream segment, has historically struggled to overcome "silos" of segregated data and applications that are not integrated and therefore fail to achieve integrity and do not maximise business value. For example, to be truly effective in helping oil and gas companies manage governance, risk, and compliance, HSE applications must be integrated with a variety of other systems including ERP systems, EAM applications, energy trading and risk management (ETRM) applications, supply chain management applications and real-time data historians.

Application integration can be addressed in a number of ways but is typically approached through the use of integration and process automation middleware. This software includes tools used by developers, business analysts, and administrators to automate processes, create and deploy process-centric applications, integrate applications, exchange data among enterprises, and monitor the business and process performance of these applications and automated processes. We believe that oil and gas companies will increase their investments in integration and process automation middleware in response to the application integration issues raised by the BP oil spill. Software vendors that could benefit from this increased spending include IBM, Oracle, SAP, and TIBCO. Consulting and system integration firms are also likely to benefit from this increased spending. The top IT service vendors in the oil and gas industry include Accenture, Capgemini, CSC, Deloitte, IBM, Infosys, Logica, SAIC, Tata Consultancy Services (TCS), and Wipro.

Application integration does not, however, solve all integration problems. Data integration is the other major integration issue facing oil and gas companies. According to Energistics, a global consortium that facilitates the development, management, and adoption of data exchange standards for the upstream oil and gas industry, "Digital oilfield technology is hampered by incompatible data formats, preventing it from being fully implemented and realising the value to solve E&P business challenges. "The use of data exchange standards by all stakeholders in upstream projects, including oil and gas companies like BP and service companies like Transocean and Haliburton, enables the interoperability between various digital oilfield technologies. We believe that adoption of data exchange standards, especially WITSML for drilling data and PRODML for production data, will increase as a result of the BP oil spill. It is even possible that the federal government will mandate the adoption of such standards.

Impact on Advanced Analytics

Advanced analytics software includes data mining and statistical software. It uses technologies such as neural networks, rule induction, and clustering, among others, to discover relationships in data and make predictions that are hidden, not apparent, or too complex to be extracted using query, reporting, and multidimensional analysis software. This market also includes a specialised form of statistical software focused on functional areas such as the industrial design of experiments, clinical trial testing, exploratory data analysis, and high-volume and real-time statistical analysis.

Due to the tremendous complexity of deepwater offshore drilling, it is becoming increasingly difficult for human operators to predict and respond to problems as they occur. Advanced analytics, especially predictive analytics and real-time or streaming analytics, can help address this issue.

For example, in an article in Issue 24 of the Digital Energy Journal, CSC and Oracle discuss the development of a petroleum enterprise intelligence system that "provides dashboards, KPIs, performance metrics,and statistical analytics. Future releases will include predictive analytics, business process management, and data mining."

Another example is provided in a paper presented by C. Piovesan of APO Offshore and J. Kozman of CLTech Consulting at the 2009 SPE Annual Technical Conference, which describes the use of advanced technologies to manage offshore assets with goals to "reduce equipment downtime and personnel-on-board requirements while increasing reliability, safety, regulatory compliance, and environmental responsibility." The technologies include advanced analytics such as neural networks, self-organising maps, data mining, and predictive analytics.

A third leading indicator is provided by work being conducted by HP Labs as part of its "big bet" on analytics for operations. As part of this work, HP Labs has been developing and testing a live business intelligence platform using data from downhole oil well sensors. The platform mines historical data to identify patterns and discover root causes of problems. It then compares streaming data against the mined data in realtime to generate alerts for operators.

In 2008, BP completed a fiber-optic cable that links seven platforms in the Gulf of Mexico with onshore staff. The fiber-optic cable has the ability to deliver up to 10Gbps of connectivity to BP platforms with a latency of less than 20ms, and BP indicated that the system showed an 80 percent reduction in application response time versus the existing satellite communications. This level of connectivity could support the use of real-time analytics and potentially the ability to manage an asset from an onshore location. We believe that regulators and policy makers will at least explore the possibility for oil and gas companies to manage their offshore assets from onshore locations.

We also expect that lessons learned from the BP oil spill will drive increased investment by oil and gas companies in advanced analytics. Enterprise software vendors that could benefit from this increased spending include SAS, IBM, TIBCO, and Teradata. Certain specialty vendors that focus on the oil and gas industry such as SmartSignal and Tessella may also benefit.

Although regulatory change is important, will be imminent, and will increase the level of industry oversight, it also needs to ensure that critical decisions and actions are captured and monitored to help prevent future disasters. A significant factor in this catastrophe has been operational decisions. There needs to be a fundamental shift in the approach to drilling that allows for a more holistic view of operations and greater transparency regarding the impact of decisions across the value chain. In our opinion, HSE has been an organisational function that has been focused almost exclusively on compliance versus prevention.

IDC Energy Insights believes that the following three areas should not be overlooked by the industry: operations, best practices, and industry culture. A more transparent as well as more holistic view of operational decision-making supports a better view on how multiple inputs impact a final outcome. This end-to-end view may include the integration of operational decisions with aspects of HSE. A single decision by an engineer or operator may not violate any safety conditions, but the aggregation of decisions may elevate the risk of safety violations.

The holistic view could ensure that human decisions don't override potentially dangerous conditions. Second, the oil and gas industry already has experience operating in areas that are highly regulated such as the North Slope of Alaska, where environmental conditions drive heavy regulation. Tight regulations are in place for construction of facilities, tank farms, and pipelines, and most actions steps need approval from an inspector before proceeding to the next stage. Incorporating what we the industry has already learned to other areas such as operational decisions could mitigate risk and reduce the opportunity for human error. Finally, the culture of the industry needs to move to zero tolerance from highest levels to throughout operations.

Worldwide spending by oil and gas companies on HSE software is predicted to top $131 million in 2010.

Worldwide spending by oil and gas companies on work and asset management software, which includes EAM, is predicted to be $297 million in 2010.