Oil Companies Need to Go Digital to Survive

Many industries have implemented the use of digital technologies to improve their operating models, but one industry has lagged in that adaptation: oil and gas. The oil and gas industry lost motivation for continual improvements and application of new technologies, and instead, became lazy during the time of high margins. The crash of crude oil price in November, 2014 set shock waves through an industry that had become very comfortable operating in a $100+ barrel environment and now needed to focus on squeezing a profit out of productions. The companies that invested in digital innovation in the field have rebounded since the crash, while other companies continually approach bankruptcy. One company, Devon Energy, is leading the way in using the digital oilfield and data analytics to improve performance and operational efficiency. [1]

The Old Barriers to Digitization Have Disappeared

When crude oil demanded a high price, exploration and production (E&P) companies focused on high production levels to meet demands and maximize revenues. Experimenting with new technologies was viewed as a distraction and possible delay in production. [4] This barrier to explore digitation disappeared with the oil crash. Over the past couple years, companies have been under immense pressure to decrease costs, especially the large capital investment required to drill new wells. There has been a shift in focus from exploration drilling to production optimization, incentivizing investments in digitization to maximize the recovery of existing wells. As show in Figure 1, “revenue has decreased 40% since 2014; however, operating expenses have declined by only 9%” [2].Companies are now taking the time to pause and ask how they can increase revenues without adding additional costs.

Figure 1 – Average Revenues and Operating Expenses

Figure 1: Average Revenue and Operating Expenses

Additional Incentive to Automate – The Big Crew Change

Thousands of professionals will be retiring soon in the oil and gas industry during what’s known as “The Big Crew Change”. The age gap within the industry, due to the historical boom and bust cycles, will soon lead to a deficiency in qualified technical professionals. This gap in experience further incentivizes companies to use automation and digitization to speed up routine analyses and aid in decision making. [5] As a younger generation takes control of the industry, the convergence of data, machines, and people to implement automation also eases. Companies hope that the tech-savvy millennials will help make up for the lack in experience by using new technologies and a fresh set of eyes. [4]

Devon’s Success

There are opportunities for digitization to improve asset reliability, boost throughput, and optimize field recovery. Installing sensors in drilling tools and on production wellheads can provide live data for decision making and analytical analysis. Since Devon began investing in big data in 2012, production rates from horizontal wells have increased by 250% and costs to drill, complete, and operate its wells have fallen by 40%. [1]

Geosteering is one area that Devon says has improved results significantly with automation and analytics. Geosteering is the intentional directional control of a well using downhole geological measurements. [7] Most geosteering tools provide a geological picture of the wellbore that lags the bit location by about 100 ft. This data is delayed and open from many interpretations. Devon developed a real-time drill bit tracker that uses artificial intelligence and machine learning to determine the best path to drill a well. [1]

Other companies are following. Over the next three to five years, approximately 80% of the oil and gas industry professionals surveyed said they plan to invest the same amount (18%), more (44%) or significantly more (18%) in digital. [3]

Conclusion

A digital transformation requires a shift in the mindset of oil and gas professionals, which is long overdue. The outdated drilling and production methods previously used by E&P companies are no longer sustainable in a low oil price, but companies can survive by using an exchange of information from smart elements that enables “expansive monitoring, integrated operations, remote configuration and optimization, and even self-management” [2]. Devon has set an example of the improvements that can be made, and the rest of the industry is likely to follow.

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[1] Trent Jacobs, “Devon Energy Rises to the Top as a Data-Driven Producer,” Journal of Petroleum Technology, October 11, 2016, http://www.spe.org/news/article/devon-energy-rises-to-the-top-as-a-data-driven-producer, accessed November 15, 2016.
[2] Nate Clark, Abhish Abraham, and Amin Anvar, “Unrealized Potential Of Digital,” May 16, 2016, http://www.ogfj.com/articles/print/volume-13/issue-5/features/unrealized-potential-of-digital.html, accessed November 15th, 2016.
[3] “Survey: O&G Investment In Digital Technologies Shows Resilience,” Oil and Gas Financial Journal, April 22, 2015, http://www.ogfj.com/articles/2015/04/survey-o-g-investment-in-digital-technologies-shows-resilience.html, accessed November 15, 2016.
[4] Josh Arceneaux, “Staying Competitive in a Down Market,” Oil and Gas Financial Journal, December 16, 2015, http://www.ogfj.com/articles/print/volume-12/issue-12/features/staying-competitive-in-a-down-market.html, accessed November 15, 2016.
[5] Schlumberger Oilfield Glossary, http://www.glossary.oilfield.slb.com/Terms/g/geosteering.aspx, accessed November 15, 2016.

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4 thoughts on “Oil Companies Need to Go Digital to Survive

  1. It’s great to see the increases in efficiency in the oil/gas space. From a business perspective, the ability to combat narrowing margins helps spur the economy, and from an environmental perspective the ability to increase yields in existing wells helps decrease the number of new wells to be drilled. Another example of increasing well yields that comes to mind is Enhanced Oil Recovery (EoR). This has the added benefit of removing excess CO2 from our atmosphere by pumping it into existing wells to extract remaining oil that was previously inaccessible (Carbon Capture and Sequestration). While this technology also has its risks (e.g., if a well is filled with CO2 and then there is a leak), it appears that the industry as a whole is moving in a way that should reduce costs and be more sustainable.

  2. Fascinating read! I had never thought about the skewed age profile in the oil and gas industry before and was fascinated by your description of “The Big Crew Change”. It sounds like a fantastic opportunity to make a radical digital change in an industry that is often regarded as very conservative and stuck in its ways.
    The HBS Energy and Environment Club held their annual Energy Symposium recently and one of the topics discussed was “Digital Oilfield” and the myriad ways operating models can be enhanced by analyzing big data. Hearing from the oil and gas professionals we invited, I sometimes wondered whether digital innovation is also driven somewhat by a push towards digitization in the renewable energy sector where cutting edge technology has been the bread and butter business since industry inception. As the renewable energy becomes more profitable and oil and gas prices continue to suffer from volatility and uncertain carbon regulation, the pressure to innovate is heightened in the oil and gas sector.

  3. Digitization is making waves in the operating oil field as well. Automated systems with remote access, once considered too expensive for marginal, onshore wells, have become affordable and allowed operators to delay installing more expensive EoR techniques that Pierre referred to. Conventional oil and gas in the US can be optimized further than the unconventional resources, allowing old fields to produce every economic molecule before advancing to the next method of production. Will be curious if US O&G operators have the patience to allow digitization to work, or will they revert to the hubris that has defined the industry throughout the last 100 years.

  4. Very interesting article! It’s really fascinating that Devon was able to boost output by as much as 2.5x and at the same time cut nearly half of its well operating costs with big data investment. It is even more interesting to me that none of major oil companies, who arguably have stronger R&D capability and more generous investment budget, decided to pioneer investments in digitization of oilfield operations. Do you think the reason was because the majors are better diversified and thus less impacted by the price collapse, as compared E&P players like Devon who felt stronger top-line pressure?

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