Digital-Oil-Gas

Declining Crude Oil Prices Can Stress Out India-heritage Service Providers

The decline in crude oil prices goes hand in hand with the appreciating Indian rupee, which, on the one hand, encourages investors and, on the other, tightens the profit margins of outsourcing/offshoring companies. While industries that are directly dependent on the oil economy, such as automotive, aviation and consumer products from downstream oil byproducts, have reasons to rejoice due to plummeting crude prices, IT service providers are quickly shifting gears, portraying themselves as digital makeover artists and engineering service mavericks.

Oil and gas companies are changing and so are the requirements for associated services. Service providers are focusing on the evolving opportunities that will give them first-mover advantage. However, the volatility of the market remains an industry-wide concern, and providers need to future-proof themselves against this instability.

Factors to consider while driving business in the O&G market

History repeats itself. Global stakeholders remember well the landslide decline of crude oil prices in 2014 after which oil companies configured steadfast investment policies for resources like methane hydrate and shale to supplement the conventional petroleum resources. And, as they recovered from the slump and crude prices hit rock-bottom, oil companies became cautious and disciplined spenders. Most oil companies, including Shell, Chevron and BP, have been reluctant to increase capital expenditure as an engine of its short-term growth (Exxon is the only exception here) and are instead looking toward collaborative approaches.

So where are the opportunities?

While companies in the global crude oil industry, including those in upstream and downstream ecosystems, have adopted a conservative strategy toward the risk of falling prices, the situation can serve as a litmus test to stabilize the industry’s financial discipline. There’s a looming threat to the industry in the shape of a $50 or less barrel of oil. To stay afloat and maintain a positive cash flow, oil and gas companies must invest in disruptive innovation, such as digital oil fields. Traditionally, since the oil and gas sector spend much more on engineering services than it does on IT services, the declining crude prices would become an opportunity for outsourcing companies to ramp up their engineering services capabilities and make up for losses due to the declining dollar.

Companies are adopting “digital first” strategies. As a key to digital transformation for upstream oil and gas processes, the IoT network is critical for connecting workers on the surface with downhole equipment through automation technologies involving SCADA systems, cloud computing and big-data analytics. This way, companies can leverage high data volumes captured at the well head to generate actionable insights for surveillance, operational accounting, and health safety, environment and quality (HSEQ) compliance. Predictive analytics can signal production and HSEQ shortcomings before they result in cost-intensive downtime for rigs. Digital systems also can automate monitoring of production on a well-by-well basis and trigger an alert when a well is not hitting production targets. Neural networks can predict changes to a well’s yield over time and help exploration companies plan their upstream activity. A digital oil field built on a digital infrastructure made up of cameras, sensors, telecommunications connectivity and cloud computing allows a company to immediately detect spills and leakages. Engineering service providers with consulting capabilities and deep oil and gas vertical expertise are ideally positioned to help companies align their digital roadmaps to their business goals, while still serving the needs of the IT organization

The industry shifts toward shale. The number of operational rigs in North America increased significantly in recent years due to the rise of shale production. However, extraction of shale gas requires highly sophisticated technologies (such as horizontal drilling) as compared to conventional deep-water drilling. the infrastructure for shale extraction has not been established yet, globally. Stakeholders, typically the upstream or exploration companies face the risk of inadequate return on investment if they invest in wells with low turnout. This makes successful exploration of crude much more data-dependent and vulnerable to loss of crude, wasted resources and disappointing profitability.

Data is the new oil. An unprecedented growth in data from sensors and satellites in the oil and gas industry doesn’t automatically result in anything. Companies need help slicing and dicing this data to generate meaningful insights. The clean data can be used by the stakeholders to develop a machine learning launchpad, which will effectually function as an AI-driven digital oil analyst. Most oil companies are collaborating closely with technology companies to create a data-driven roadmap for leveraging resources. The balance of saving costs while driving growth is made even more difficult in the face of new environmental policies, such as such as localized bans on fracking. Upstream companies are looking at increasing productivity and decreasing cost with minimal environmental impact by pinpointing drilling locations for maximum crude extraction. Engineering service providers can support this effort by aligning seismic simulations with existing seismic data. Subsurface image projection, termed full waveform inversion technology, has been employed by BP to drill deeper wells with higher precision, resulting in the identification of 200 million barrels of additional resources at the Atlantis Field.

The volatility of the oil and gas industry is one of the major drivers of the engineering services outsourcing market. An ISG Provider Lens report focuses on the influence of IoT technologies on the engineering services market, including several aspects of product engineering, manufacturing engineering services and other digital-oriented services that uncover various opportunities for existing service providers as well as new providers hoping to tap this dynamic market.

About the author

Avimanyu brings around 8 years of experience in market research and consulting. At ISG, Avi has been working on research deliverables directed towards engineering services outsourcing/offshoring markets outlining the digital makeover of industries. Prior to ISG, Avimanyu’ s engagements were focused on providing strategic recommendations to both public and private sector clients across Europe, Middle East and Asia Pacific across commercial aerospace, energy and automotive industries

Research Focus : Software Defined Networks(SDN) and Engineering Services (ES)