If ever there was an industry and a time that epitomize “disruption,” it is the oil and gas industry today. Price declines of more than 50 percent since June 2014 have upended the sector, and dominate the agendas of industry executives. In fact, a new Cisco study identified “energy price volatility” as the external market force causing greatest concern for the industry today. The study, “A New Reality for Oil & Gas: Complex Market Dynamics Create Urgent Need for Digital Transformation,” shows an industry ripe for transformation by the Internet of Everything (IoE).
In the past, oil and gas (O&G) companies have attempted to address oil-price declines by resorting to short-term cost-cutting measures to see them through the slump. But this time is different. For one thing, it does not appear that prices will recover any time soon—if at all. Demand is down, and new production technologies are driving efficiencies that will increase production and keep prices low for the long term. This time, O&G firms will need to do more than cut costs – they’ll need to change their operating models through digital transformation.
For the study, we interviewed oil and gas executives, consultants, and analysts in 14 countries about the industry’s challenges, opportunities, and priorities. These experts identified intelligence from data as the key area needed to improve operational efficiency, and data analytics as the No. 1 driver of faster, better decision-making.
Additionally, the survey named faster problem resolution, better process control, and improved worker safety as the top three business benefits of IoE-powered technologies. The top three IoE-driven operational benefits were improved production efficiency, reduced downtime, and equipment performance optimization.
As an industry, oil and gas has been “digitized” for some time. True digital transformation, however, now requires adoption of the Internet of Everything — the networked connection of people, process, data, and things — throughout the value chain. Innovative firms are using today’s turbulent market landscape as an opportunity to grab competitive advantage by harnessing new IoE technologies.
To realize these benefits, O&G firms need to more effectively bring together their IT and OT (operational technology) functions to optimize business processes, enhance information for better decisions, reduce costs, lower risks, and shorten project timelines. Fifty-nine percent of survey respondents do not believe that their firms’ IT and OT strategies are aligned.
IoE transformation can generate a significant improvement to oil and gas firms’ bottom lines, while also contributing to the global economy. According to analysis by Cisco Consulting Services, by transforming business processes through IoE, oil and gas companies can capture their share of $600 billion of global Value at Stake between 2016 and 2025. This value comes primarily from improvements in asset utilization, process/supply-chain efficiency, employee productivity, and CapEx savings. For a $50 billion oil and gas firm, this translates into an annual bottom-line EBIT improvement of 11 percent – or a $538 million annual profit increase opportunity.
The ebb and flow of oil touches virtually everyone across the globe. TIME Magazine recently estimated that the decline in oil price from $107 a barrel in June 2014 to under $50 per barrel in early 2015 was equivalent to a $125 billion tax cut for Americans. And just this week, the International Monetary Fund projected that falling oil prices will spur faster growth in the United States and other developed economies, contributing to global economic growth of 3.5 percent this year.
For these reasons, Cisco Consulting Services and Oxford Economics teamed to study the potential macroeconomic effects of IoE adoption by the oil and gas industry over the next decade (2016-2025).
As shown in the illustration below, Oxford Economics predicts that global real (inflation-adjusted) GDP could increase by somewhere between 0.5 percent and 0.8 percent (or $552 billion to $816 billion) by the end of 2025 as a result of increased IoE adoption by the O&G industry.
Of course, these benefits depend on digital transformation of processes and business models, from the oil field to the front office. This requires that oil and gas companies leverage IoE to become more hyper-aware, predictive, and agile. These traits will enable O&G firms to innovate faster and achieve their desired business outcomes.
Since the network is the platform on which everything digital will connect, Cisco is uniquely qualified to help customers move to digital and beyond. Cisco Consulting has a long track record of helping organizations along their digital transformation journey. So if you’d like to discuss how IoE-enabled technologies and processes can transform your company, I’d love to hear from you.