How Digital Transformation Drives Cost Reduction

Of all the industries impacted by the events of the past year, few have had to endure the same measure of ripple effects experienced by the oil and gas industry.

As the world slowly emerges from mass lockdown, the sector is again showing strength; the market price of oil has stabilised and demand for oil and gas products is normalising. While there are causes for optimism, leaders in the sector know that this isn’t a time for complacency, but a chance to take decisions that will help put their business on firm financial ground for the forthcoming years.

The focus now is to use digital transformation as a catalyst to elevate from financial stability to greater levels of profitability. With uncertainty on future revenues, the core focus for improving financial health is in reducing their total cost of ownership (TCO). To achieve this goal, leaders can use digitalisation to make vast improvements to their long-term cost structures.

Understanding TCO

While understandably preoccupied by the implications COVID-19 has had on their business, leaders in oil and gas now need to look at the bigger picture. TCO offers a means for looking beyond current stresses to see the value and revenue generation potential of new initiatives. It combines the various factors that contribute to cost over the lifespan of a project, such as capital expenditure and operating costs, in order to derive a means for weighing up various options. In oil and gas, which is an unavoidably asset-heavy industry, TCO provides a lens for understanding the long-term value of capital projects.

When undertaking new investments, leaders are constrained by CAPEX and therefore need to look for areas where they can make the total cost more affordable. This could include finding ways to lower maintenance costs, reduce unplanned downtime or decrease the power consumption required in the production process. Capturing the benefits of digitalisation presents an opportunity to make significant improvements to OPEX over the asset’s lifetime, therefore making a more compelling case for new investments.

Where leaders are focusing their efforts

While there are a range of strategies oil and gas leaders can employ to tackle TCO, initial focus should be on the lowest-hanging fruit. While many use cases exist, here are three significant examples of where digitalisation can bring huge and readily apparent cost improvements.

1. Preventative maintenance

Oil and gas companies have a lot of assets, in terms of the machinery, equipment, and tooling required to manage on-site operations. In such environments, single points of failure can have catastrophic impacts on the cash flow of a project – even amounting to hundreds of thousands of dollars per day. If we're able to prevent these failures, the return on investment - and therefore the TCO - is greatly improved.

Companies have typically taken some initial steps towards preventative maintenance, but as the capabilities are growing, especially with developments in AI and Machine Learning, there are more benefits to explore in this space. The more data companies are able to capture around their assets, the better their predictive models and, therefore, the better their assets work and can be prevented from unexpected failure. In this regard digitalisation can bring the industry very quick returns by avoiding unplanned downtime and enabling better planning around maintenance work.

2. Upskilling workers

A distinctive feature of the oil and gas industry is the remoteness of assets. Oil companies may have projects, such as drilling and production, in areas far detached from their headquarters and central control centres. Maintaining these assets can be challenging as there will be requirements for specialist personnel to be on site for tasks such as maintenance.

A common issue companies experience is where they have a similar type of asset that fails in two different locations, but have only one person certified to fix both. This tends to create a a bottleneck as one site is forced to run a depleted service while it waits for the expert to finish work at the other site. Alternatively, with a multiskilled workforce, the pool of talent available to the company multiplies in volume.

As such skills can be hard to find and develop, there is an alternative means for multiplying the company’s skill base via augmented reality. In these cases, an expert can make assessments and advise on corrective measures without having to be physically present on site. The expert is also able to train personnel who are on the ground at sites to help in their upskilling. This approach brings greater flexibility and multiplies the resource available to companies.

3. Intelligent equipment

Oil and gas companies tend to work with multiple equipment assets that have been sourced from several different OEMs. A large portion of the cost of that equipment is going to come not at the time of purchase, but spread across the lifecycle of the equipment. Traditionally, OEMs have been selling that equipment and then they have no visibility on how it is used or how it is performing.

Where digitalising can help is in integrating the lifecycle and use of the equipment between the parts maker and the end user, to give the OEM visibility on the equipment’s current status. The OEM may therefore monitor and confirm that the equipment is working as intended. Conversely, there could be some warning signs on it, in which case they’d recommend repair work before the issue reaches the point of failure. The proactive and collaborative nature of this relationship can then bring down the cost significantly over the course of an asset’s lifecycle.

Getting TCO under control

In order to improve the economic viability of projects, TCO is the appropriate perspective to take. Oil and gas companies have a lot of options around how they allocate capital, and the opportunity cost of investments can be significant. Digitalisation can help in optimising the use of personnel and assets to reduce potential cost burdens and get more value out of assets.

Identifying these areas where potential cost efficiencies can be realised is not always easy and can be overlooked. We work with our customers to estimate areas where savings are possible and propose solutions that will bring their costs down. Taking a concentrated focus on TCO means we can review the entire lifecycle together and identify opportunities for where digital solutions can lower costs, help take a more asset-light or asset-optimised approach, and help our customers to make better use of knowledge and personnel.

The next decade will be a pivotal one in the oil and gas sector’s future direction and the choices that leaders make now will have a profound effect on their potential profitability. The key to excelling over this period is to have an open mind as to what’s possible and how digital solutions can improve the financial viability of new projects, at every stage of the lifecycle.

If you would like to know more about these ideas, please get in touch via e-mail or LinkedIn and I’d be happy to elaborate.