Service players face disruption through digitalization
July 15, 2019
Digitalization is disrupting the upstream oil and gas supply chain, reshaping business models and creating challenges and opportunities alike. This is the conclusion of a new insight from consultancy Wood Mackenzie, which highlighted the mixed picture in the oilfield services sector, which is still experiencing the impact of the worst downturn in a generation.

The Edinburgh-based consultancy said that those along the upstream supply chain whose main purpose is to supply services to and develop technologies for the exploration and production community, many of the ideas and new operating models will disrupt their current business.  On the other hand,  operators can obtain greater visibility of the supply chain – thereby providing the ability to optimise other key areas of operation, such as safety and productivity.

The integrated oilfield services (OFS) providers – viewed as some of the most technically sophisticated companies within the upstream supply chain, their tools, sensors and technologies being used throughout the well development process and their proprietary software core to company workflows – may find their relationships coming under increased threat from digitalization.

Wei Liu, who manages Wood Mackenzie’s upstream supply chain consulting team, told Upstream Intelligence that oilfield services players are under pressure to implement business models that can adapt to a new digital age that could be materializing within the next two to three years. “Given that we now have 5G technology in place and it will have much better connectivity as well as AI powers going forward, there’s a challenge for the OFS players to innovate,” he said.

A number of integrated OFS companies are looking to sell their integrated offerings to operators. But, said Liu,  Wood Mackenzie has encountered some resistance towards having a complete value chain data being controlled by these OFS companies.

As digitalization breaks down data silos and make data more fungible, Wood Mackenzie noted that Cloud-based platforms can manage multiple types of data, simplifying data management and reducing the need for different proprietary systems. For the incumbents, this disrupts the traditional model in which they control the data and systems. And as operators increase their capacity to measure and benchmark all facets of their work, it is likely new business models will emerge. 

It expect service contracts to evolve from fixed-price models, such as day rates and lump-sum costs, to risk-reward agreements, and in time, to outcome or performance-based models. Despite such challenges, these technically adept companies will evolve and develop new offerings. But it won’t be easy, said the consultancy. At a time when the sector is still struggling from cyclical headwinds, the challenges of structural upheavals are magnified.

Tech firms make an impact

Big tech firms such as Amazon, with its AWS, Google's Cloud and Microsoft Azure have made a significant impact on the industry. Big tech firms are bringing cloud services and analytics to the whole industry. Cloud storage and computation services are now dominated by Amazon's AWS, Google's Cloud and Microsoft's Azure. IBM and Oracle also have specialized cloud capabilities, which are applied to more niche situations. The attraction for these new entrants is twofold: the prospect of huge unstructured datasets; and becoming the custodians of highly valuable datasets in a high-margin industry facing an existential challenge.

“They are trying to offer empowered solutions to operators. But there’s been limited progress so far, mainly due to a lack of infrastructure in place. There will be some competition between operators and OFS companies. So a lot of changes are going to be taking place and we see that being a challenge – although it is not going to be purely negative in its consequences,” said Liu.

In Wood Mackenzie’s view,  digitalization will transform the upstream supply chain vertically, led by the ripple effects of oil companies' digital ambitions, and horizontally, driven by oilfield services companies' digital investment.
Digital disruption in Supply Chain
Source: WoodMac

On the vertical integration side, we are seeing this push from those top down and bottom up technology innovations, said Liu.

As an example, in Singapore, the consultancy is engaged with an equipment provider to a major fabrication yard. “They were enquiring about 3D printing features on board a platform, looking at more immediate repair and maintenance services. And this has been pushed from the top down, from the tier 1 players in the value chain,” said Liu.

Liu said this technology drive has been in place since 2015, and is an ongoing trend. “We see this as being further accelerated, as part of a vertical integration process,” he said. 

In terms of the horizontal integration aspect, digitalization will also define the competitive landscape of the supply chain. The emerging trend of digital alliances compounds the impact on competitiveness, said Wood Mackenzie. Joint R&D in digital technology will promote sharing of resources and services, eventually leading to industry-wide digital ecosystems with certain protocols and specifications. The integrated service players are well positioned given their established relationships, data connections and spec integrations. But the operators may also see this as an opportunity to reassert ownership of certain processes.

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