Digital in energy
Much has been written about the transformative impact of digitising operations in Oil and Gas. Oil and gas companies which have long been technology intensive at the well-head, are now beginning to extend their technological capabilities, especially digital capabilities, to the rest of their operations.
We conservatively estimate the use of digital technologies in the upstream sector could result in cumulative savings in capital expenditures and operating expenditures of US$100 billions by 2025. For instance, savings can be realized in operational excellence (more effective maintenance and better operation of assets); in the supply chain; and in the use of integrated platforms (connecting the organization with external partners).
We believe there are some important guiding principles to consider when developing a digital business models:
- The solution needs to be a business-led exercise, identifying the greatest business challenges and assessing how digital can help.
- The digital transformation of a company needs to be holistic and address all the elements of the operating model.
- Building a digital organisation needs to encompass stakeholders beyond the company itself.
- There is no one successful digital template to follow.
- Getting the right weighting between technical and technology capabilities is critical.
Enhanced profit recovery
When oil prices fell in 2014, oil and gas producers worked frantically to lower their costs to adapt to what many assumed would be a short-term drop. Four years later, prices are still a long way from their previous highs, but with the oil price returning to more than USD$60 a barrel, most companies have a bit more breathing room. However, the pressure isn’t off.
Investor impatience with unprofitable barrels, the uncertain impact of the new tax law on investment and capital structures, and still-fresh memories of the recent price collapse are all helping to keep the industry alert.
Now that the price of oil has started to rebound, producers need to start thinking about how to deploy this cash sensibly back into the business. Companies should continue to focus on reducing operational costs to improve profitability and be well-positioned for future market swings.
A recent paper 'A playbook for oil & gas in 2018 and beyond' considers a number of strategies that can lower production costs for O&G companies such as capital expenditure discipline, lease operating expense, use of digital innovation in production to decrease costs and lift production rates.
PwC works with oil & gas companies throughout the hydrocarbon value chain from reservoir to consumer including exploration, production and service companies. We help our clients undertake deals that optimise value and minimise risk.
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Oil & Gas trends
As supply increases and oil prices rise, volatility will continue to shape strategy.
PwC’s Strategy& recent report highlights the possibility of a supply crunch for the Oil & Gas industry. This may seem hard to imagine, given the ramping up of U.S. oil production and the burgeoning sense of optimism that is sweeping the sector. In general, the industry feels much healthier than it did 12 months ago: The price of oil has rebounded. The industry is thus recovering from the brutal last few years of weak prices, enforced capital discipline, portfolio realignments, and productivity efficiencies.
At the same time, the International Energy Agency (IEA) has been flagging the possibility of a supply crunch since 2016. With oil demand growing, and investment in many major projects having been deferred during the downturn, there is less potential supply available. Oil companies will need to boost their production, and there is a risk that some may struggle to keep up.
The fundamental challenge, of course, is the intrinsic volatility in the sector. Producers need time to address the vagaries of an over- or under-supplied market. They also need to grapple with the pace and magnitude of the transition to energy from non-fossil fuel sources. Facing these uncertainties, oil and gas companies must develop a resilient strategy to mitigate these risks.
In short, while the supply glut may have ended, its aftereffects will continue. In the short term, companies must maintain capital discipline and the focus on productivity improvements and applying new technology. In the long term, they need to make their portfolios profitable against low break-even prices. Moreover, they’ll need to figure out how to future-proof their overall portfolio, and make it secure amid the transition to a lower carbon world.