Innovation acceleration: Digital transformation is key to energy industry survival
It’s not news that the global energy sector is facing its biggest challenge in recent history, driven by simultaneous demand and supply shocks that have driven the cost of energy to its lowest levels in history. Leaders in the energy industry, regardless of the company’s size or position in the value chain, must decide how best to balance uncertainties on the supply side with the constantly changing demands of a growing global population.
The natural tendency for leaders may be to respond as they did to a previous energy demand or supply shock crisis, because those approaches are tried and tested. But the future is unlikely to be a continuation of the past. The time is ripe for innovation and transformation, rather than a minor reset. We strongly believe that this transformation must be a digital one.
The energy sector has reached an inflection point
Inflection points are often subtle when they occur and become obvious only in hindsight. But this energy crisis represents a sharp juncture and a bend in the road ahead. In the past, the industry has survived crises by cutting costs. Now the sector is realizing that incremental change is not enough to overcome the current existential threat. Energy businesses are being forced to take a critical look at their business fundamentals and figure out how to take control of their future.
There’s a bend in the road ahead of us. To use a car analogy, when you get ready to enter a curve, you have to slow down going into it, but you accelerate coming out. Digital transformation can spur the acceleration that will propel the industry forward.
Digital transformation is already speeding up
Over the past few months, we have seen the industry react traditionally with cost reductions, but also in previously unimagined ways, speeding up years of experimentation with new services and business models. These tactics have ranged from adopting business continuity tools overnight to embracing novel, highly scalable collaboration tools across enterprises without a hitch.
Companies that apply these new insights and ways of working for the long term will create competitive differentiation, a point underscored by the CEOs of many integrated oil and gas, exploration and production, and oil field services companies in their Q1 statements. Their reports make it clear that the current energy crisis has accelerated the adoption of digital technologies by the industry to increase safety, drive efficiency, and lower costs.
“I have never been more convinced that digital is the future,” says Jeff Miller, chairman, president, and CEO of Halliburton, in the company’s Q1 2020 earnings report. “The next frontier of digital solutions will help drive efficiencies in our workforce and reduce capital investments through automation and self-learning processes. In this environment, digitalization will unlock the potential to structurally lower costs and enhance performance across the entire value chain.”
This represents a fundamental change in thinking and approach, recognition that we cannot simply do the same thing we have always done.
The industry must not only transform technology, but also mindset
Despite major investments over the years in IT infrastructure, equipment, and operational technology, many industry processes remain manual, disconnected, and inefficient. Data is siloed. Simulations are lengthy. Applications and infrastructure are legacy-based. Performing risk assessments, asset integrity inspections, and tracking safety incidents are costly and time consuming.
Leaders in the energy sector must set the stage for recovery in the short and long terms. If demand surges back strongly, the energy sector can confront price pressures on the supply side with more surety. But demand recovery remains uncertain.
What is certain is that change is needed and that one of the biggest challenges the industry faces may be navigating internal cultural transition. The industry simply cannot survive if we continue to take 10–15 years to develop new products or innovations; if we insist on developing basis-of-design documentation stretching 100-plus pages for software offerings to address immediate business needs; if we superimpose lengthy assurance processes identical to major capital project practices in developing technological solutions. The current energy crisis will challenge our leadership approach and force our hands to update these processes, behaviors, and attitudes in order to innovate in the shortest timeframe possible.
The good news is that the technology exists to implement solutions that can have a significant impact on cost, efficiency, agility, and intelligence — and this can be deployed in days/weeks, not years.
We have the opportunity to build a stronger future
Energy industry leaders now have the chance to create a strong foundation, not just to meet immediate challenges, but also to instill strength and flexibility that will allow their businesses to grow and adapt to whatever the future may bring.
Rather than thinking about their future just once a year, contemporary companies should be constantly modeling different scenarios based on optimizing their own assets and resources, such as wells, reservoirs, and production systems, in near real time. They should also study what their competitors and even companies in other fields are doing that could affect their core business. Regular, dynamic planning based on real-time data, including nontraditional information such as social media trends and sentiment analysis, allows companies to better respond to volatility in the market, which is likely to continue into the foreseeable future.
The sector should keep an eye on new technologies that can realize innovative but previously impractical ideas. For example, a decade ago, futurists first talked about self-optimizing oil fields, which use sensors to record, analyze, and regulate information to and from individual wells and production systems in remote locations. Today that blue-sky thinking has become reality, allowing energy companies to increase efficiency, return on investment, and worker safety.
Energy companies face a barrage of short-term challenges. Providing business continuity and maintaining productivity in a virtual environment are just a few of these. But companies are already successfully adapting with the help of technology.
For example, finding hydrocarbons takes a lot of data and data analysis. Traditionally, highly skilled people worked with this data, which was stored on site and accessed via expensive workstations. Now that people must work from home, companies that have already moved their data to the cloud can continue to operate, because their engineers can access and collaborate on that data remotely. Once companies start enabling that access and new ways of working, they will not go back. The results will further embolden creative organizations to experiment with even more innovative approaches to challenges in the energy value chain.
Reshaping business models
Leaders must recognize that digital technology will shape the form of the company’s future, at the same time the company’s future will shape the form of the digital transformation. New technologies have redefined the energy ecosystem, democratizing access and allowing participants to move away from costly, complicated, and time-consuming procurement processes toward Software as a Service (SaaS) offerings. Shifting operations to the cloud can cut costs and improve efficiency, data capture, decision-making, and modeling.
For example, analytics tools for production monitoring and optimization of wells can now be offered to energy companies instantaneously, driving immediate insights and impact without compromising security. Similarly, energy companies can have instantaneous access to new (micro-) services allowing them to compare and contrast their own proprietary models with state-of-the-art models. Full waveform inversion (FWI) modeling in the upstream domain is a pointer click away on a pay-as-you-go model, without the need to exchange large volumes of data.
Energy companies will need to create a new digital ecosystem — and direct their capital toward driving digital projects that yield competitive differentiation.
Investing in talent and skills for the long haul
Looking ahead, companies will want to reimagine workflows in ways that combine smart humans and powerful machines, instead of treating them as independent areas of investment. This fusion is the hallmark of the fourth industrial revolution, and we are either willing or unwilling participants. Now is also the time to develop a plan to cultivate and attract talent with competencies tied to the digital energy future, such as:
- Geoscientists who can run high performance computing workflows to identify energy sources faster, less expensively, and with less environmental impact.
- Asset managers who can use advanced analytics, AI, and robotics to optimize production and assure technical integrity across reservoirs, processing facilities, and pipelines.
- Well engineers who can use machine learning to analyze years of structured and unstructured drilling reports to uncover the best practices that drive worker safety and operational efficiency, so that wells consistently rank as best in class.
These combinations of technology and skills can reduce business and operational risk and positively impact health, safety, and environmental performance.
The way forward
We are optimistic about the future of the industry. It has a long history of innovating in order to address the ever-growing demand for energy in a responsible way. But it will require a change in leadership, behavior, and attitude to embrace digital transformation. The companies that survive this energy crisis will be the ones that can quickly change existing paradigms and spur the acceleration that will propel the industry forward. It’s time to reset, recalibrate, and boldly face the future with creativity and innovation.
We had a great opportunity to collaborate with Professor Venkat Venkatraman of Boston University to assess and make sense of the challenges impacting the energy industry today. Venkat is the David J. McGrath Jr. Professor of Management at Boston University Questrom School of Business, and one of the most recognized and cited researchers in strategy and digital business.
The result of our collaboration, The New Energy Playbook: An Accelerator for Innovation and Transformation, offers a fresh perspective to help leaders as they develop new playbooks, reimagine energy futures, and adapt plans to restructure internal operations and realign external partnerships. We invite you to download a free copy of the paper and attend a webinar on June 11 at 9am PST to learn more.
This downturn in the energy sector may be the most severe that we have seen in a generation. But, as visionary businessman and Intel’s late CEO Andy Grove once said, “Bad companies are destroyed by crisis. Good companies survive them. Great companies are improved by them.”