Digital Transformation Strategy Advances in Oil and Gas
The buzzword “digital transformation” can seem nebulous, but a handful of companies have digitally transformed their business. Netflix is one of the more straightforward examples. By shifting its business from primarily renting DVDs through the mail to becoming a streaming-content powerhouse, the company has achieved tremendous financial growth. The company’s split-adjusted initial-public-offering price in 2002 was $1.20. On 9 July, it closed at $379.93.
Now take a look at the oil and gas sector, which, like many industrial sectors, focuses on physical assets. “It’s hard to disrupt the industry just by writing apps or putting in new technology,” said Bill Johnson, chief transformation officer at DCP Midstream in an April keynote at Pi World. “The way our people operate has been similar for a very long time.”
While the oil and gas industry, especially the upstream business, has embraced sophisticated analytics to reduce risk from the exploration and production of oil and gas, the sector has been relatively slow to implement digital technologies. In that regard, it is similar to the broader process industries and industrial manufacturing sectors, which ranked at the bottom of PricewaterhouseCoopers’s Strategy and Global Digital Operations Study in 2018. Johnson, citing McKinsey data in his keynote, stated the oil and gas sector at large trailed almost every other industry in terms of innovation and technology.
The Accenture report “The Digital Oil Company” surmises that comparatively few firms in the niche (19% according to its research) have deployed digital technologies in a transformative manner. It adds, however, that the oil and gas sector has been an early adopter of sensors, automation, and data analytics.
McKinsey reaches similar conclusions, noting that, while the sector has helped pioneer the use of supercomputing for reservoir modeling and drilling, the industry has not yet benefited “from the enhanced productivity that digital- and analytics-driven change can bring,” according to the McKinsey report “A New Operating Model for Well Organizations.”
But DCP Midstream, for one, is making considerable investments in digital technology. In 2016, the company invested between $20 million and $25 million on its digital-transformation initiative. “Most of that investment went toward the collaboration center in Denver,” Kanellos said. By 2017, the company achieved a return on investment in that spending, thanks to a combination of reduced maintenance and other operational expenses. By the end of last year, it reaped $40 million worth of savings.
The digital initiative also led the company to discover it could potentially increase production across its 60 plants, resulting in an average potential boost of $2,500 per plant, or $50 million in potential income per year. “To generate $50 million of income, we would typically invest in about a 7X multiple,” Johnson explained. “I can tell you in our digital transformation team; we haven’t spent anywhere close to $350 million to $400 million.”
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