At a recent executive panel event, author and independent advisor on digital strategy and innovation in oil and gas, Geoffrey Cann said the oil and gas sector’s inability to ‘scale-up’ digital innovations is an impediment to progress. One of the key takeaways at the event was the problem of scaling up digital innovations from pilot to real application.
Although oil and gas companies may be serious about investing in digital innovation, many still struggle with moving beyond pilots and trials. Mr Cann said due to oil and gas companies’ multiple layers of management, tight procurement rules, waterfall design philosophies, and intergenerational masses of infrastructure, they inherently move slowly towards the future.
Pilots and field trials are really valuable for digital technology start-ups as they can fine-tune their solutions under real world conditions, identify key additional features that customers really want, and sharpen the fit of the solutions to the industry. They also reveal shortcomings in scalability, support, deployment, and value that start-ups need to solve if they are to progress.
Pilots and trials are also useful for oil and gas companies since they can gain real experience with the latest technologies. Pilots also often surface deeper insights about customers, reservoirs, processing equipment and business processes, which are valuable in themselves.
However, getting these pilots and trials through to the next stage is a real problem in the sector. By not moving to deployment, customers create a risk that the technology company will not survive, while customers will not capture all the benefits they’re entitled to, since many technologies are really platforms whose benefits grow with scale.
SUCCESS IN SCALING UP DIGITAL
Years ago, Mr Cann worked for a big manufacturer of cement, building products, and concrete, who he remarked had ‘cracked the formula’ for scaling up innovations across their sprawling global business.
“Back then, mature businesses like cement and concrete no longer experienced big jumps in productivity through some clever innovation,” he said.
Gains instead derived from the hundreds of tiny improvements made at the various plants and the solutions to deploy those changes to other plants.
“A 0.5 per cent reduction in energy use at a single cement plant translated into big gains across the business if it could be replicated.” The company ran a portfolio of pilots across a number of its plants and constantly polled them to see what was working.
Successful innovations were pushed through a central lab which could productise the innovations and enable them to scale up across the fleet.
Nowadays, industry leaders who are serious about scaling up digital put in place their own internal digital accelerators.
“Dedicated corporate teams work with a portfolio of digital solutions to sort out scaling issues, promote change management, figure out deployment pathways, and measure value,” Mr Cann explained.
An example might be an oil field unit who trials a machine learning solution for detecting artificial lift issues. If successful, it can be replicated to solve other problems, and then be redeployed into the original unit for additional testing.
Once the solution is proven, the enterprise deployment strategy will enable the innovation to be replicated across the entire business. “[The strategy] considers the overall solution architecture, the pace and timing of deployment, the communications strategy, the migration approach, the implications for turn arounds, and the longer-term sustainment strategy,” Mr Cann stated.
START-UPS VS TECHNOLOGY MAJORS
Promising digital solutions developed by start-ups are often acquired by large technology incumbents who know how to deliver digital solutions to the market.
“They have the sales force to drive uptake, the product catalogues to deliver more complete solutions, the implementation teams to drive deployment, the integration know-how to deliver interconnections, and the change management chops to overcome resistance. They provide trust to the market that the solution will work, in all situations, under pressure,” Mr Cann said.
Although for the digital start-up, selling out to an established technology player looks like an attractive answer to the problem of scaling up, but if the start-up’s goal is to maximise value, it may not be the best decision. Mr Cann noted that there are no ‘unicorns’ (start-ups with a valuation of a billion or more) practicing in the digital oil and gas market, possibly because of the ‘sell out early’ temptation.However, there is an increasing interest among some oil and gas companies to invest in these small prospective digital companies.
Shell has a venture fund that has invested in blockchain and visual data analytics, Suncor and Cenovus own a fund that behaves like a Silicon Valley venture fund, while Repsol has a new ventures unit that has invested in a blockchain company.
The funds that take an active interest in driving scale are particularly attractive to start-ups. Mr Cann said there is a compelling financial logic to this idea.
“The oil company investor can help shape solutions to better fit their needs. The oil company as investor lends strong credibility to the solution and helps reduce resistance to internal deployment. And as an investor, the oil company stands to gain should the innovation become a ‘unicorn’ (which would not happen if the innovation is purchased early by a technology incumbent), and can likely exit by selling their interest to a technology incumbent.”
Investors have told Mr Cann that a start-up only has a 1 per cent chance of survival, but when a customer takes a very strong interest in helping the start-up, the chance of survival grows to 30 per cent. So far, however, Mr Cann has only seen very large oil companies provide these kinds of investment funds.
“The recent low oil price environment constrains the capital budgets for many smaller oil companies, and their capital is vigorously deployed to maintaining the business basics (reserves management, production, infrastructure capital).” You can find Geoffrey Cann’s latest book ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’ on Amazon, iTunes, Audible, and other online bookshops.
