As oil prices continue falling like a knife because of sentiment shift owing to the structural changes in supply caused by shale revolution, operators are laser focused in reducing costs. This has translated to a sharp cutback in supply chain spending .
In this low price and high supply environment, which puts a premium on cost cutting, service companies are looking towards digitalization to not only disrupt the industry but also to differentiate themselves . World Economic Forum estimates the industry could generate 1 trillion dollars in added value over the next decade by embracing digitalization . According to the consulting firm McKinsey, the oil and gas supply chain stands to gain $50 billion in savings and increased profit by adopting AI .
The oil patch is entering a second digital age, and companies at the forefront of the digitalization effort stand to gain a significant competitive advantage. The ‘holy grail’ of breakthroughs for the industry is in oil drilling. Coupling big data analytics with drilling rigs has the potential of significantly reducing costs for operators, while at the same time establishing a robust competitive advantage for the service company that gets it right.
GE spent 32 billion dollars to take over Baker Hughes largely because it saw an untapped opportunity of bringing digitalization to the oil patch . Because of GE’s domain expertise on digitalization of industrial goods, the entry of GE has ringed alarm bells in the oilfield services sector. Traditionally, Halliburton has relied on its size to weather oil industry downturns. Given the acquisition of Baker Hughes by GE, Halliburton stands as a distant 3rd in terms of revenue. To remain competitive in this post acquisition environment, Halliburton has to move towards innovation. Innovation that can lead to reduction in cost per barrel for its many clients. In the short term, Halliburton’s Landmark has introduced the DecisionSpace Platform that enables large-scale collaboration on large quantities (terabytes) of legacy data and real-time information in upstream operations . In the next two years, Halliburton looks to transform this platform to the cloud under the name of DecisionSpace365.
In the medium term, Halliburton has partnered with digital powerhouse Microsoft with the hopes of capitalizing on each company’s skillsets to enable for optimization of drilling and production . The collaboration with Microsoft allows for the company to harness the vast amounts of data collected from each well. This can help drillers optimize everything from the location of their wells to the speed of drilling to the type of sand, water and chemicals being used in fracking operation. At the same time, Halliburton is also exploring automation and robotics technologies, which have the potential of taking over many of the drilling operations that have previously been done by roustabouts and petroleum engineers, including steering the drill bit and laying down pipes. This allows for faster and more efficient drilling with fewer people. All of these innovations would result in significant cost improvement for the operators, and if executed correctly would allow Halliburton to establish a competitive advantage.
The roll out of digital technologies has been hampered by a scattershot approach, with discrete systems deployed to solve narrow problems . With a scattershot approach companies, particularly large service companies such as Halliburton, risk not realizing the full potential of digitalization. I would recommend for the organization’s management to develop a strategic road-map that helps them asses the digital standing of every operation and identify deficiencies. The goal should be to integrate the various database systems deployed by the different product service lines across a common digital platform. This would allow the company to fully leverage the massive data collected by the different product service lines.
I would also encourage the management to consider rapid prototyping (“fail early, fail fast, learn faster”) of new technologies. The oil industry has traditionally been a slow-moving industry. Rapid deployment of technology would allow Halliburton to capitalize on this urgency and establish a competitive advantage that would not only allow it to survive but also thrive in this new low price, high supply environment.
The need and advantages of digitalization in the oilfield is clear, but the question remains as to whether the change will come from the traditional, large service companies or will a new incumbent, such as GE, bring about the change? Unlike capital intensive physical tools market in which the market allows for more than one player, software as a service (SAAS) is a winner takes all market. Will an industry giant like Halliburton be able to uproot and replace its legacy systems with inter-connected cross disciplinary systems, which allow for it to fully leverage the vast amounts of data it collects on every well or will it find the task too daunting? In this new climate the cost, for Halliburton, of missing the boat on digitalization can very quickly turn into a question of survival.
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