13 minute read 17 Oct 2018
Touch screen analysing commerce

How digital technologies are transforming National Oil Companies

By

Jeff Williams

EY Global Oil & Gas Advisory Leader

Global energy executive. Passionate technologist. People developer. Husband and father. Outdoors enthusiast.

13 minute read 17 Oct 2018
Related topics Oil and gas Digital

Digital technologies hold the key to National Oil Company transformation, moving beyond efficiency to growth.

Oil and gas will remain a major part of the global energy mix for the foreseeable future but, if NOCs are to keep providing the much-needed financial support to their home countries, they will have to fundamentally change how they operate.

From volume to value

Prior to 2015, volumes and budgets were the main metrics NOCs focused on — how much oil and gas they were producing and how they could maximize that production. In today’s environment of constrained capital and changing demand patterns, the focus must shift to value — conducting operations with an eye toward driving efficiency and maximizing returns on their invested capital.

This means NOCs can no longer be evaluated solely on production volume but rather on efficient production volume. This will require NOCs to allocate capital to projects that promise the highest returns and to assets that operate at the highest efficiency.

Evolving operating models

The transition will also require NOCs to adopt more transparent and commercially focused operating models — the same type of models publicly traded IOCs have honed for decades. Many large NOCs like Saudi Aramco, Petrobras, PEMEX and CNPC are taking steps in this direction, to varying degrees.

To navigate the transition successfully, NOCs will have to change their financial structure and expand their business relationships to include not only their governments but also investors on an international stage. Although they might have operated purely as cost centers in the past, NOCs now must function as profit centers and, as such, they have to justify their business decisions to investors and other stakeholders. They have to take a more robust and disciplined approach to allocating capital to the highest-return projects, and operate these projects so that margins and capital efficiency are both maximized, which will help position them for long-term growth.

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Chapter 1

Leveraging digital technologies to maximize returns

NOCs need to leverage digital strategies to help shift to a commercial mindset and maximize returns on investment.

While NOCs have an advantage over many IOCs in terms of the vast reserves they hold, IOCs still have a stronger commercial footing. NOCs can overcome this shortfall by leveraging digital technologies like the internet of things (IoT), artificial intelligence (AI) and the cloud. These tools will allow them to improve recovery, reduce the cost of extraction through automation, accelerate strategic decision-making as well as control and manage assets from anywhere in the world. In fact, some NOCs are already successfully implementing digital technologies in various ways to achieve this.

Transitioning to a new operating model requires NOCs to assess the current state of their digital technology systems and then determine where these systems need to be improved to achieve desired business goals.

First NOCs should define the set of outcomes they will track to ensure they are hitting their business targets. The outcomes, which include common metrics like return on assets, earnings per share and operating margins, provide clarity on the type of data needed.

Secondly, NOCs should ensure they are collecting the correct data sets by using the right combination of enabling technologies — digital systems that capture and analyze data.

The role of the CEO

If you were the CEO of a NOC leading your organization through this transition, how could you best leverage digital technologies to ensure a smooth transition from volume to value? Fundamentally, you would use digital to sharpen your view of the business through two different lenses — the physical and the financial.

The physical lens focuses on the real-time flow of your physical asset — hydrocarbons — through various parts of your business: from the reservoir to the wellhead, from the refinery to the retail gas station. But, currently, the view is hindered, if not outright obstructed, by the real or virtual silos and barriers put up between business units and throughout the supply chain. These barriers segment both the flow of hydrocarbons, and the various data sets recorded on this flow, many times. They also create a significant amount of data error making accurate business forecasting near impossible — or approximate at best.

Digital-enabled data transfer breaks down these silos to provide a seamless view of hydrocarbon flow, open and transparent knowledge sharing, and a clear picture of which units are running efficiently or falling behind. This physical representation of the value chain is represented by operating technology.

The second lens — financial — provides an accurate view of costs, market prices and other valuation information. By overlaying financial metrics on top of the physical view, one can track earnings, costs, and value gained or lost at each step of the asset value chain. This financial overlay on the physical value chain is represented by information technology.

The true power of digital technology lies in that “sweet spot” where the operating technology and information technology meet. Getting these technologies to work seamlessly together requires the right infrastructure — one that tracks both physical volumes and the financial value of those volumes at each step of the process. It should be structured to mimic the real-world operating technology environment and with robust cybersecurity measures in place to ensure reliable and secure operation.

Using analytics to answer questions

With the two overlays of the business fully developed, focus shifts to deciding which type of analytics makes sense at any given point in the value chain. The digital technology platform must support analytics that answer some fundamental questions:

  • What kind of analytics will have to be performed to better understand and optimize various parts of the business?

For example, machine learning to optimize operations.

  • What kind of performance will be required from the operating environment to deliver the desired financial and performance objectives?
  • Which processes should be changed or optimized to drive greater returns?

A properly implemented digital technology infrastructure can give NOCs a significant performance edge across the asset chain and help set them up for long-term growth.

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Chapter2

Seven ways digital can improve NOC growth

Digital technologies can bring greater discipline to the planning and budgeting process.

The industry as a whole has a spotty track record when it comes to capital discipline and megaproject delivery. An EY study of the performance of 365 oil and gas megaprojects (projects with a proposed capital investment of US$1 billion) around the world found that 64% faced cost overruns and 73% reported schedule delays. These overruns typically end up costing the operator many millions of dollars over the original budgeted estimate.

Digital technologies can bring greater discipline to the planning and budgeting process, allowing NOCs to maximize their returns on invested capital and develop a project portfolio that is continuously geared to yield the highest returns.

The following are seven ways to leverage digital for growth.

1. Optimizing prototypes

NOCs can use digital solutions to build virtual prototypes of the capital project which facilitates greater efficiency and less rework in design. A digital prototype of a plant or refinery can help the owner improve estimating, to reduce capital spend and arrive at an optimal design, well before the first shovel goes in the ground. 

2. Increasing project productivity

NOCs can use software platforms to enhance accuracy during planning, increase speed of execution and manage and track project performance. Such technology can also help reduce siloed working and wasted effort, thus helping NOCs bridge the productivity gap that exists versus other asset-intensive industries.

3. Digitizing the workforce

NOCs can leverage advances in robotics and AI to increase productivity and enhance capability. A significant volume of back office work in accounting, finance, supply chain and HR could be done by software systems to lower invoicing and payroll processing costs, minimize data-entry errors, improve security by reducing personnel access to sensitive data, and retain process knowledge that traditionally resided in the brains of a few individuals.

Although these ideas are still largely in development, companies will soon be able to develop workflows that run any number of operating scenarios in a virtual plant, including performing stress tests and optimization studies. Such studies will provide a more accurate picture of the project’s actual costs and help identify construction or operational problems that can be designed out or worked around. The upshot: owners spend less time and money to develop a project that functions as intended, the first time.

4. Automating Research & Development

NOCs can use digital technologies to streamline their R&D functions. For example, they can provide virtual assistance to engineers and scientists who are stretched too thin or lack resources. Most importantly, digital initiatives can help researchers more accurately simulate the effect a new process or technology solution will have on the value chain, and where it stands to drive the greatest monetization opportunities.

EY investigated the feasibility of creating a virtual R&D department for the chief scientist of a major chemical company. Our research showed that by leveraging AI and learning models like those used by IBM’s Watson, NOCs could automate large parts of their R&D process, making research functions faster, smarter, more efficient and mobile.

A scientist working out of a centralized research facility could use such a system to direct virtual R&D projects for any business unit in any operating region or time zone, right from his or her own desktop computer.

Hydrocarbon consumption

60%

Roughly 60% of all hydrocarbons are consumed in a country other than where they originated.

5. Improving logistics and trading capabilities

NOCs can use predictive analytics to improve the trading process by providing greater connection between manufacturing and the commercial or retail side of the business. Such analytics provide a greater understanding of the forward curve, the difference between crude prices and how the company should hedge. Although not many NOCs are fully implementing digital in their trading, they should seriously consider adding this functionality.

Transportation is a critical part of any oil company’s business, specifically because roughly 60% of all hydrocarbons are consumed in a country other than where they originated.

A wealth of data exists on logistics-related parameters — everything from weather reports and shipping information to routing paths and freight rates. Using neural networks and predictive models, NOCs can collect and analyze all these data sets to more precisely understand the ETAs of ships and predict how long a particular port takes to turn around a ship. This information can be used to drive efficiencies that shorten the cycle time and get ships in and out of ports much more quickly.

Earning 50 cents more per barrel on 1 million barrels of exports per day can increase an NOC’s profitability by US$200 million per annum.

6. Sharpening supply and demand forecasting

NOCs can use digital tools to improve their supply and demand forecasting in order to maximize profits. Major oil exporting countries produce different crude slates and announce monthly prices for their crude exports. In response to these variable prices, demand from spot buyers from an exporting country can vary significantly. In addition, even small adjustments to prices can have a significant impact on overall revenues. For example, earning 50 cents more per barrel on 1 million barrels of exports per day can increase an NOC’s profitability by US$200 million per annum. Furthermore, by altering the crude oil production slate based on forecasted demand, the NOC remains more competitive.

With ever-lowering computing costs and increased access to data, a robust demand and supply model can be built with a minimal investment that can be recouped quickly. Such a model can also help the NOC develop its own blend of crude (by mixing crude oil from other countries) that will suit the specifications of refineries while also allowing the NOC to command higher prices for its products.

Many NOCs also have large downstream operations that produce various refined products. Estimating demand for different types of fuel, both in domestic and exports markets, can help the NOC optimize the product mix generated by its refineries and, thereby, maximize refining margins.

7. Reducing losses from oil theft

NOCs can install digital sensors to help monitor and reduce oil theft. Many oil companies lose significant revenue to theft, with operators in Nigeria reporting some of the highest losses. However, the phenomenon is widely prevalent, with reports of theft in Mexico, China and Singapore. Digitalization can play a significant role in reducing theft.

Installation of a sensor network across major pipelines can be both complex and expensive, but the use of sensors in refineries, fuel depots and retail stations helps ensure companies can quickly identify sources of loss in inventory and take corrective action.

Summary

For any company operating in the oil and gas industry’s post-downturn era, growth beyond production will be the focus, but it will be hard to come by. For NOCs to grow, they must become more commercially savvy, and they must do so quickly and effectively. By implementing digital technologies across their businesses, NOCs will be better positioned for growth on the global stage — the kind of growth that helps them adjust to changing crude margins while continuing to give back to their home economies.

About this article

By

Jeff Williams

EY Global Oil & Gas Advisory Leader

Global energy executive. Passionate technologist. People developer. Husband and father. Outdoors enthusiast.

Related topics Oil and gas Digital