Major Oil and Gas companies have been in a unique and fortunate growth position for decades. Unlike almost any other industry, O&G companies have been soaring at the top of the food chain with few reasons to consider changing the way they operate. The O&G industry has for more than 20 years enjoyed steady profits, facilitate with both optimistic views and expectations of growth in demand and increasing oil prices.
With such a bright future, there were few, if any, incentives less than a year ago to question the basic rules of the game for creating and capture economic value. There were even fewer reasons to analyze the effectiveness of the end-to-end value chain after all we were all making good returns for our shareholders. Why question something that apparently works? Combined with a strong functional orientation where performance is primarily measured in each functional silo, we just might unintentionally put in place the perfect condition for functional ivory towers and process fragmentation.
There are many good reasons why this has happened since almost any traditional industry is built around long-standing beliefs. These beliefs are true until something or someone changes the rules of the game entirely for the contenders, like through the industrial revolution or even right now. New disruptive technologies are cannibalizing profit streams for those too complex and too slow to recognize the possibilities. The examples are numerous as Amazon, Uber, Bitcoin, Netflix and others that have completely changed the game.
Some industries are more exposed to low margins and change than others. To survive, companies like BMW, Mercedes and IBM have in some areas refined the art of dealing with disruptive innovation technology. They have had to change and adapt their business to reality or risk being a footnote in tomorrow’s news. Industry verticals like manufacturing and finance are almost constantly faced with existential challenges on a regular basis and might also hold the key for other industries like O&G as to how to change and adapt their business architecture to the pace of life in order to survive even at $50 per barrel of oil.
"Statoil has started the journey towards utilizing new technology in areas such as advanced data analytics to connect and put the lights onto their dark data".
To be a successful business in the digital age of 2020, O&G companies might require managing the frequent changes in technological cornerstones in their business architecture. Some may do this intentionally leaving behind legacy system and thinking rather than keeping out decisions concerning future technology investments.
Digitizing the value chain, advanced data analytics or hyper-scaling the O&G business is not likely to happen if the base is built upon physical foundation, thoughts and beliefs from the last century.
There are numerous examples where the magnitude of Big Oil companies’ once fit for purpose business architecture is now in 2015 at a key road crossing. At an increasing speed through the last 10 years, we found that what was working back then, has now become technical debt and outdated legacy business architecture that hamper the ability to adapt, change and deliver shareholder value.
Is the O&G industry finally at a tipping point of profound change?
The financial realities over the last eight months combined with the disruptive technological opportunities and promises evangelized by Gartner, Forrester, McKinsey and others might be the required fuel for the real discussion to start: How long will the traditional business model supported by legacy systems keep up with the technological reality of 2015?
Remember, most of the big O&G companies are still using technology and ERP systems designed and implemented in the previous millennium when most did not even have a mobile phone or internet. Consequently the business architecture in which most companies rely on to provide lubrication to their current work processes and create value is most likely not orchestrated to use in 2015, given it was created 10-15 years ago.
The information technology implemented over the last two decades and has in fact become a very challenging task to master, as larger the size of the company the worse the complexity has grown.
Much like through the commercialization of the internet that has happened over the last 10 years, we are now at the brink of the next wave of big change as to how to operate the oil & gas business. The digitization of the industry will happen by the magnitude of all technological change that is occurring presently. Information will become more liquid, everything can relate and be connected to everything else and provide business insights if managed and orchestrated correctly. In 2015, we are in the forefront of a digital tsunami that will profoundly change our business outlook. Either we are growing, or we might find ourself out of business at a very high speed.
In order to make the transition, dual speed architecture is required almost as a prerequisite. You then have the opportunity to create the optimal design for 2020, disconnected from the governance of the legacy, while establishing the new digital cornerstones required for operating efficiently in the new world – all without compromising the integrity of the past. Then aggressively sun-setting the past in close co-operation between IT and the business.
As many of our competitors, Statoil has started the journey towards utilizing new technology in areas such as advanced data analytics to connect and put the lights onto our dark data. Running a business in the U.S. shale producing regions with low recovery rate per well, the idea of connecting data across the value chain and applying advanced data analytics might be the single most important factor to really move the needle in terms of higher recovery rate and increased profitability.
The U.S. shale producing regions might be the perfect sandbox for innovation. However, this requires holistic business understanding, a resilient business architecture, skills and intentional investments in technology and knowledge.
Adaption of smarter technology requires smarter people, more holistic business knowledge, simplification skills and a strong vision of how technology can help drive business performance. If this adaptability to changing technological opportunities is purposefully invested in, it may become the critical genome for survival in this age of Digital Darwinism.