Delivering on the Promise of Value:
Operationalizing Digital Transformation Strategies
for the Post-Pandemic Era – Part 1
The oil and gas industry has emerged, at least in part, from a multifaceted crisis that challenged value creation and the identities of companies across the value chain. Supply diversification, demand evolution, different investor demands and business models, and evolving low-carbon energy systems have all impacted the way the industry operates. All this with a backdrop of the fast-moving macro environment of new technologies, societal pressures, business ecosystems and changing consumer demands in the COVID and post-COVID world.
Overall oil and gas industry sentiment appears to have become optimistic, driven by increasing commodity prices, faster-than-expected demand resurgence and the impact of years of limited investment. Still, operators have held back on pressing on the proverbial “pedal to the metal” due to continued investor pressures to prioritize cash flow, returns and ESG performance.
Treasure at the End of the Rainbow – Digital Value Myth
Throughout our experience over the last 5+ years working with operators on their digital journeys, we have seen digital transformations grow increasingly complex. New entrants and established players have introduced a new wave of technologies and digital solutions, which have arrived in many cases before companies fully embraced the prior generation of solutions. Energy companies of all types and sizes launched digitalization efforts spanning topics such as advanced analytics and AI, process optimization and increased automation in operations. Unfortunately, many digital transformations have been overhyped and delivered minimal results aside from a few pilot project successes.
In the case of US onshore operators, especially small to medium independent operators, the focus continues to be survival and cash generation. In the COVID-19 era of volatile prices, digitalization efforts at many companies took a back seat to day-to-day operations. For the better-positioned and larger operators with resources to weather the storm, the disruption of COVID-19 did two things: first, it underscored that survival requires resiliency through scale and adaptability, and second, it forced companies to adopt new ways of working and let go of the status quo. Putting digital solutions at the core of the business is required to achieve both goals.
In a recent survey of onshore operators conducted by The Carnrite Group, only 22% stated that their focus over the last 5 years has been on effectively building the foundation to start a digital transformation, while only 44% felt comfortable that they are in the process of a digital transformation (many admitted that their digital transformation has occurred at a slower pace than originally thought). Additionally, 33% of participants highlighted that their organizations do not have the right capabilities and/or leadership to successfully achieve their digital transformation ambitions.
The Devil is in the Details
Many operators have often faced the challenging reality of digital transformation: “why have efforts to unlock value from our digital transformation not been successful?” Many companies have opined on the answer to this question: waiting for the 99% solution; leading with technology instead of the right business problems; pursuing ad-hoc pilots without a vision plan and business case to scale in the event of success; misalignment between executive sponsors and employees or between centralized digitalization teams and operations. These challenges are valid and plague many digital transformations. However, our experience also suggests significant effort is required to address the following topics for digital transformation to be successful:
- Robust Data Structure & Management
- Establishing consistent data architecture
- Implementing a defined data management plan
- Building (or acquiring) the experience required for future adaptability
- Focus on Structure, People, Process and Metrics & Motivators (not just Technology)
- Appreciate the fact there is always reluctance to change
- Acknowledgment that the industry lacks native digital talent
- Willingness to address limited resource bandwidth
- Incorporating the Right Hardware
- “Kitting” the wells with the optimal level of hardware
- Addressing connectivity issues in remote locations
- Building the right level of redundancy into systems
Delivering Digital Transformation in the New Era
To be successful with digital transformation strategies and ambitions, especially given the broader industry context and post-COVID world, we believe oil and gas operators need to focus on five key elements. Doing so is intended to drive focus on targeted operationalization of digital rather than “boil the ocean” digital transformation efforts of years past.
Leading O&G operators, who have focused on key elements of the new digital transformation, have already seen significant value being captured:
Note: Number presented as mean. Production Cost per BOE includes LOE and Gathering, Processing and Transportation expense. Upstream Cash Flow calculated as Revenue per BOE (excl. hedging), minus LOE and GPT expense, minus Cash G&A, minus Production & Ad Valorem Taxes.
Source: Rystad UCube version 2021-07-09. Data set includes 5 operators with US onshore operations.
Digital Strategy & Business Model
In past years, oil and gas operators have spent considerable energy developing long-term digital “north-star” ambitions, but the pandemic has not only shifted the vision, but also shifted the value. We suggest three targeted digital priorities to help quickly operationalize digital transformation ambitions:
- Digital Spark– Digital transformation doesn’t necessarily have to mean drastic business model changes. Rather, companies can leverage technology and data to reimagine ways of working. Digital Spark looks at ways of reimagining current business and operational workflows, breaking silos apart, and putting it back together through a lens of (1) decisions being made, (2) data and information flows, (3) integrated workflows, and applying it to (a) what work should get done, and (b) how it gets done. Operators have unlocked significant value by leveraging this approach across operations and maintenance workflows, focusing on artificial lift optimization, well intervention & chemical optimization processes.
- Product/Technology Commercialization– Identifying opportunities to not only enhance the core business but create new value/revenue streams but commercializing innovative and unique products and solutions. This is a radically different way of thinking for an industry that historically viewed innovate solutions built for internal purposes as a competitive advantage that needed to be protected. In the new era, companies should instead weigh whether there is an opportunity to harness the solutions across internal operations and sell them to competitors and the industry at large. The designed solutions can be pushed into the market directly through existing customer/partner channels, or as part of a new separate entity/business model.
- Partnerships & Platforms –Design unique business strategies that leverage a broad group of partner ecosystem networks which help drive the design of collaborative platforms to solve unique challenges, such as an open network for supply chain optimization. Launching a successful partnership structure or designing a cross-functional platform requires significant commitment. It will also require new ways of thinking, including viewing partners and vendors as partners with the potential to unlock the next wave of efficiencies for the industry if we work together effectively.
To accelerate the digital transformations of our clients, The Carnrite Group has established an innovative ecosystem of strategic partners. These partners assist with many of the key elements highlighted in delivering digital transformations in the new era.
Carnrite’s Ecosystem of Partners Includes:
Note: Carnrite’s relationship with these partners varies from holding equity investments to having formal partnerships/ joint ventures to maintaining informal, mutually beneficial relationships
Stay tuned as we describe the remaining elements of a successful digital transformation in the coming posts.