As digital transformation increasingly becomes the strategic norm within the oil and gas industry, all sectors of the market need to ensure they keep up with this digital revolution. We previously took a look at where the midstream industry currently find themselves and what the digital oilfield 2.0 is going to look like. In this article, the 6th in our Swings and Roustabouts series, we take a look at the future of the midstream oil & gas sector, and how it is on the precipice of embracing digital transformation.
Although still out of sync with upstream and downstream sectors, the midstream sector is now having to react to sustained low oil prices. As long-term contracts that initially protected midstream companies from the downturn start to expire and opportunities for growth start to diminish, this sector has to join the rest of the industry in decreasing cost. Much like their upstream counterparts, midstream companies are emphasizing capital discipline and cost-efficient operations in today’s oil price environment. Embracing digital transformation is a way to achieve these goals.
In this article we take a look at the current factors pushing midstream towards digital transformation, what the future looks like, what the challenges of digital transformation in midstream are, as well as some examples of digitization use cases. First off, we start with a brief look at what exactly digital transformation means.
According to The Enterprisers Project, digital transformation is the integration of digital technology into all areas of a business, fundamentally changing how you operate and deliver value to customers. It also involves a cultural change within the organization, embracing this technology as the best way to get the job done. Digital transformation is more than taking a paper-based activity or action and putting it in a database. In midstream oil & gas, it involves automating workflows, creating a more efficient worker, decreasing HSE incidents, using sensors to monitor data such as temperature, pressure, vibration and leaks, and accessing comprehensive operational visibility from a central place.
Digital transformation initiatives give organizations access to more and more valuable data. This data can be leveraged to drive decisions and create value. Whether through enabling process optimization, knowledge capture or asset reliability, digital transformation presents a tremendous opportunity.
As the oil and gas market evolves, and the midstream sector with it, this type of organization transformation will become inevitable.
The growth of North American production of unconventional resources and the increased supply of natural gas has spurred the growth of midstream services in the region over the last 10 years. The rapid production growth had resulted in infrastructure constraints to move oil and gas to downstream markets and export locations. This created great opportunities for midstream companies to respond to these market demands.
Midstream companies jumped on this opportunity, heavily investing in new infrastructure to meet this new demand. Many large projects have recently been completed, while others are still in progress in 2019. With all this investment into new infrastructure, many midstream companies have bet on the sustained need for these pipelines and terminals. These developments have had numerous consequences.
Firstly, it has created a highly competitive environment, with many companies hoping to cash in on the production growth in the Permian and Appalachian Basins. With the majority of the industry focused on a few prolific basins, companies would need to fend off serious competition to achieve growth objectives. Secondly, after these large capital project investments, companies are being forced to be more cost-efficient. Midstream companies are being forced to move away from a grow-at-all-costs paradigm as investors closely evaluate project spending and focus more on returns. Due to today’s environment, energy investors desire capital discipline and growth backed by solid returns.
These consequences mean that midstream companies are emphasizing returns, cost efficiency and operational excellence. Digitization has an important role to play within all these objectives, especially in terms of achieving operational excellence. The pursuit of operational excellence is not new in oil and gas, but recent market conditions has placed a greater emphasis on it. Operational excellence creates value through systematic and repeatable actions that are clear and addressable for everyone in the company. It relies on well-documented standard processes that over time lead to continuous improvement of operating performance. Digital transformation allows for these repeatable, standard processes to be put in place.
The drastic increase in supply of natural gas, which created these new growth opportunities for the midstream sector, has also led to the near collapse of the natural gas price in recent months.
Natural gas prices are at their lowest since 2016. In the Permian, prices have been hit particularly hard, even falling into the negatives at times this year. As is the case with oil, this depressed price is forcing upstream operators to slow down production. For midstream companies involved in natural gas gathering and processing, moderating gas production growth may result in slowing volume and revenue growth, requiring a focus on cost efficiency and capital discipline. As the CEO of a leading midstream company said during a Q2 earnings call:
“…we are operating in an environment of lower for longer natural gas prices resulting in low, or even no, production growth. To succeed in this environment, we must continue our focus of being a low-cost midstream service provider.”
With natural gas producers slowing production, midstream companies will need to heed the above advice, and focus on cost efficiency. Digital transformation drives down operational costs, and will play a big role in companies achieving this objective.
It is clear that for any midstream company to compete in the industry in this environment, they must embrace digital transformation. As stated by the Global Director of Sales at a prominent supplier to the midstream market:
“It is extremely important for the industry to foster digital transformation – rethinking outdated business models and strategically applying technology to change them – rather than focusing on simply cutting costs.”
Deloitte lays out a roadmap for companies to use when wanting to implement digital transformation initiatives, known as the Digital Operations Transformation (DOT) model. This model is shown below.
Deloitte also analyzed the current maturity of different aspects of the midstream industry, as well as what their expected short term progress will be in terms of digital transformation.
As you can see above, it is expected that almost all operational units of midstream companies will move into the digital space over the next few years. Some leading companies have already started investing heavily in digital technology. In 2016, DCP Midstream invested between $20-25 million into digital initiatives. Thanks to a combination of reduced maintenance and other operational expenses, by the end of 2018 it reaped $40 million in 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.
The benefits of digital transformation in the midstream oil and gas space is clear. As stated by Chris Niven, research director, IDC Energy Insights:
“The convergence of IT and OT will improve maintenance and enable remote monitoring of equipment and planned shutdowns. Digital transformation is making the midstream sector to be more agile, proactive, real time, and collaborative and creating insights much faster for cost-effective operations. This transformation is also changing the way of midstream industry innovation through data-driven technologies such as real-time asset management, automated emission monitoring, and predictive maintenance into a valuable and cost-effective reality.”
There will be some challenges that companies in the midstream space will have to overcome to successfully implement digital transformation initiatives. Some of these challenges are listed below.
There are many areas within midstream oil and gas that would benefit from digitization. Below is just a brief list of use cases, to give an idea of the effect that digital transformation will have.
The current reality for the midstream sector is that while it has invested heavily in pipes, compressors, pumps, trucks, rail cars and tanks, it has underinvested in the processes, technology and personnel supporting these assets. The time is now for companies to address this issue. Midstream companies are facing pressures such as increased competition, a low gas price environment and investors focused on higher returns. These pressures require a counteraction that focuses on increased operational excellence. Digital transformation has shown to lead to operational excellence, and midstream companies need to go digital to avoid falling behind.
Next up, in episode 7 of our Swings and Roustabouts series, we take a look at the challenges that the entire oil and gas industry is facing to implement digital transformation initiatives.