The upstream oil and gas business is changing faster than ever before. With accessible oilfields now exploited, upstream organisations are forced to carry out exploration in increasingly inaccessible locations, where costs are higher. IT is playing a much bigger role as many organisations are using technology to enable operations to be continuously monitored and operated from a distance.
At the same time the industry has been impacted by the global economic slow down where the world’s economy has experienced a period of declining output. This has led to a reduction in demand for oil and a dramatic fall in the price of oil.
As a result, IT costs as a percentage of lifting costs have increased.
While IT alignment with the Upstream Lifecycle is necessary to obtain effective cost management, in reality misalignment often exists.
Top five ways to recognise when IT is out of alignment with the upstream business
The business is trying to reduce costs as a mature oil field nears shutdown and IT cannot respond fast enough
The business operation is scaling at speed as it moves towards First Oil or Gas and IT cannot provide a stable support environment
IT cannot answer simple business questions such as ‘what am I getting for my money?’
The business is working in a joint venture or with a National Oil Company (NOC) and is exposed to IT cost recovery
Charging models do not support a link between consumption and costs.
IT costs in upstream organisations typically do not align with the Petroleum Production Curve
The Petroleum Production Curve as predicted by Hubbert (footnote 1.) is bell shaped but IT costs have traditionally followed a different curve which puts it out of alignment with the business lifecycle. The shape of the IT curve is due to many factors including the requirement for initial investment in the early stages, long term commitments that have to be made without fully understanding the business strategy and a reactive approach to cost management.
Historically this has only been a problem in the later phases of the Upstream Lifecycle where IT has found it difficult to respond to the business focus on reducing the cost per barrel of oil. However, it is now becoming increasingly important at all stages of the lifecycle as a result of the decline in oil prices.
IT must stay one step ahead of the business
The upstream business lifecycle is dynamic and IT requirements change significantly at each stage. For example, in the exploration phase, the business is often getting to grips with working in new remote and culturally demanding locations: nobody knows what to expect and IT needs to be flexible and respond quickly. In the production phase, the business is stabilising and IT needs to provide, constant, predictable and reliable support. While in the de-commissioning phase, cost control becomes increasingly important, putting pressure on IT to rapidly reduce costs.
Traditionally IT functions have worked hard to respond to these different challenges. PA Consulting Group (PA) believes that keeping up with the business lifecycle is not enough. To deliver true value IT must stay one step ahead of the business.
creating an IT strategy for each stage of the Upstream Lifecycle
collaborating with the business to understand the timeline for change
implementing the IT strategy before the business moves to the next phase.
This may sound simple but there are significant barriers to making this happen, particularly in areas such as deep water blocks and emerging economies where a significant amount of exploration and production is now taking place.
Create an IT strategy for each stage of the Upstream Lifecycle
Organisations that try and adopt the same IT strategy for all phases will experience many challenges resulting from unstable, inflexible or uncontrollable IT. This significantly impacts the quality and cost of services, meaning simply that the business does not get value for money.
The IT strategy should:
describe the approach IT will take to delivering services
align with the objectives of key decision makers
consider the entire decision making process
place emphasis on building relationships at the right level.
In mature areas such as the North Sea, key decision makers are likely to be internal, but in emerging oil economies operated under production sharing agreements, decision making will be dominated by National Oil Companies and Joint Venture Partners.
This increases the number of parties that can influence how IT is operated which increases the risk of introducing change in a timely manner.
TOP TIP: Work out early which areas of strategy you can influence
There will be tension between the different strategies. For example the operator may have a strategy of supplier rationalisation where the NOC may require diversification to build local capability. The strength of relationship will determine the degree of influence, which will affect costs and timescales.
Understand the timeline for change and plan accordingly
IT must work with the business to understand the different stages of the Upstream Lifecycle and anticipate the IT required at each stage. This enables the IT plan to be driven by the business strategy rather than corporate IT strategy. At a minimum the plan should include the following for each lifecycle stage:
skills and capabilities.
Creating a high level plan for each lifecycle stage enables organisations to really challenge themselves on aligning IT solutions with the business challenges.
TOP TIP: Be ready to ‘make the market’
Many production sharing agreements mandate the use of local resources. Often the local markets cannot provide mature skills in emerging oil economies. Be ready to explore innovative ways of developing capability through long term investment and include this in the overall design.
Implement the strategy before the business moves to the next phase
Finally it is important that IT is ready to implement the changes before the business moves into the next lifecycle stage.
This gives a number of benefits including:
developing the skills and capabilities which are going to be critical in later phases but are not currently available
providing reliable IT support as the business moves into production following First Oil
reducing fixed IT costs prior to the de-commission phase so that IT can mirror the business and reduce costs quickly as profits decrease and cost per barrel of oil increases.
As there is a long lead time for some of these activities it is possible that work needs to start up to three years ahead of the business moving into the next phase. This is particularly true if it involves re-negotiating outsourced contracts.
TOP TIP: Act early to switch fixed costs to variable costs
Many IT costs contain a significant percentage of fixed costs. As organisations move into the de-commission phase this makes it difficult to respond to business demand to reduce the cost of IT services. For example, consider changing charging mechanisms from a per user basis to a per call basis.
PA believe that when IT gets ahead of the Upstream Business Lifecycle it can truly achieve alignment with the business. We recognise this is difficult as there are many obstacles which vary depending on the stage of the lifecycle and the type of arrangement that governs the operation. However, this alignment will pay significant dividends through effective cost management and more productive relationships.
To request a PDF of this piece that includes graphics, or to hear more about our insights and expertise for the oil and gas sector, please contact us now.
(Footnote 1.) M. King Hubbert’s original 1956 prediction of world petroleum production rates. Hubbert Peak Theory – Hubbert Peak theory suggests that the rate of petroleum production for any given oilfield tends to follow a bell curve, and that the world economy is heading towards a period of declining output. It is one of the primary theories on peak oil.