Long-term vision will build permanent returns

By Matthew Owen, Head of Marketing, Oil & Gas, BT Global Services

A Cold Climate for Investment

Quote from IDC (Energy Insights, Nov 2008):
Despite the impact of the financial crisis on the global economy, the fundamentals of the oil and gas business have not changed and neither have the business challenges for the industry.

.. Which is easy to say, but right now, as the chill wind of recession blasts into the furthest corner of every business, and the Wall Street analysts are sounding more like prophets of doom, it takes a visionary to invest for the long-term, to commit already safely banked profits to IT projects with the aim of “possibly” making long term structural improvements to the operational cost base.

But, oil people have always been visionaries, prepared to take an objective view of data and make massive long-term investment risk decisions in search of future profits. This time it’s a subtle and far-reaching investment decision that is required, for the upstream operator to start to classify IT as investment in future profitability, rather than a short term cost.

The Digital Oilfield – a shelter from the gathering storm

For half a decade the potential benefits of large scale adoption of digital technologies in the exploration and production environment have been well known across the industry including:

• Lower limits to technical and economic recovery rates
• Increased production rates
• Lower operating costs

CERA’s (Cambridge Energy Research Associates) now famous “DOFF” (Digital Oilfields of the Future) study in 2005 suggested that the sum of these could be an additional 125 billion barrels of accessible reserves – enough to keep the whole world running for four years.

Given the size of the prize, and recognition of the potential, widespread adoption of Digital Oilfield technology as “business as usual” has been slower than many would have anticipated. This is attributed by some to price instability, but since this is truly a market where “change is the only constant” that can only be part of the story.

Whatever the underlying reasons for reticence, and regardless of what market conditions are coming our way, two unavoidable facts; familiar to the point of being clichés, will increasingly drive the need for ICT investment:

The “Big Crew Change” – the aging, diminishing E&P workforce.
The global shortage of experienced engineers and scientists will not get better anytime soon, far from it. As we enter the second decade of this millennium we will see the rate of retirements really begin to accelerate as around 25% of the workforce enters the 50 – 55 age group from 2011.

Recruiting, retaining and re-training the workforce are the oil company’s objectives, and achievement of these can be greatly aided by improving the E&P working environment. The intelligent deployment of ICT can greatly enhance not only the productivity of the E&P workforce, but by enabling them to work remotely, overseeing multiple operations from a comfortable workplace, it massively improves their working life.

Experience in other industries suggests that flexible working environments make a highly significant contribution to staff retention and morale, there’s no reason to suppose this will be any different.

The end of “Easy Oil” – new E&P operations are in ever more remote locations
As if it wasn’t tough enough trying to persuade 55 year old E&P workers to stay out in the oilfield, the industry is increasingly asking them to spend weeks away in “challenging” locations. New discoveries always seem to be in places that are colder or hotter, deeper and more remote, and often more politically hostile than anywhere previously developed.

Quite apart from the massive E&P project cost inflation this has brought (which continues even in the recession) the company has a duty of care to staff working in ultra-deepwater fields 200km offshore in the Gulf of Benin, or in disputed territories in northern Iraq etc. The additional risk exposure and HSE compliance costs are prohibitive.

This then is another major driver for oil & gas companies to automate production processes and de-populate the oilfields.

Building the business case for the Digital Oilfield

In current economic conditions there is no easy to get money (if there ever has been!) for investment in major projects such as a field-scale DOF implementation.

In many of the major IOCs the Digital Oilfield initiatives are run as a “special project”, owned by an internal consortium culled from various departments, often reporting through group IT. As a result, in some cases there has been friction between the objectives of the DOF project team and those of the asset managers where they hope to pilot the initiatives.

As the realities of the Big Crew Change and the End of Easy Oil bite harder, and are exacerbated by recession, it is beholden on the asset team faced with these challenges to drive the business case for DOF through their company.

This may be the time when wider adoption starts to become a necessity driven by the pincer movement put on upstream by lower prices and moderating demand versus scarce human resources, tougher production environments and longer supply chains.

In theory the case is watertight, open & shut… simple. As an example, ConocoPhillips are quoted as having achieved up to 8% increased production from the Ekofisk asset in collaboration with their partner ecosystem by deploying a remote operations centre and re-engineered processes and team structures.

Using that example as a rule for an asset producing around 200k bpd, this would equate to an ongoing annual incremental volume of over 5.5 million barrels, currently worth around $290 million, which would pay back the investment inside year 1, making a very strong ROI case, even in a post “Credit Crunch” world.

Technology investments to de-risk E&P

In all aspects of E&P, better intelligence from the Digital Oilfield technology helps to reduce corporate exposure to risk by increasing the accuracy of decision making, from improved bloc leasing, drilling campaign efficiency to production optimisation.

Geoscientists and petroleum engineers can have a far better, more detailed, real-time view of what is happening below the surface and throughout the production processes, improving the speed and quality of their decision making.

The improved risk profile therefore strongly supports the argument for investment in tightly focused breakthrough technologies such as 3D/4D seismic, flowline & downhole acoustic sensors, DTS, real-time monitoring and scenario modelling,

What must not be overlooked in this investment planning is the need for more collaboration to aid team decision making. With the maturing convergence of IT and Communications technologies around IP based standards, it is now not only safe, but cost effective to look at deploying collaboration tools such as Unified Communications and high-end conferencing such as Telepresence.

In conclusion

IT investment will deliver long term and medium term benefits to all Oil & Gas companies, from NOCs to Supermajors and their Oilfield Services partner base.

With the trends in global macroeconomic fundamentals unchanged, the companies that take the long view on investment will emerge from this recession stronger, and better placed to exploit the market opportunity over the next few decades:

• Lower structural costs
• Lower risk profile
• Greater “corporate agility”
• Better recruitment & retention of critical staff

Oil & Gas companies should now be selecting their partners for the journey ahead on the basis of the added value they bring, plus their openness and ability to innovate together to exploit the unique strengths of each partner.