The petroleum industry is entering a disruptive period in the way business is conducted. It is precipitated by new model-based work flows and driven on by a heightened awareness of the competitive advantages of new methods. - Asset management is at a crossroads. "Niche" technologies are rapidly taking market share from established integrated service providers. However, model-centric systems are beginning to make their way into asset management. This "raises the bar" for innovative technologies (from Christensen, 1997).
This dilemma is analogous to the naval aircraft carrier. By introducing a revolutionary integration of air and sea technologies, the aircraft carrier forever changed the rules of naval engagement. The change quickly marginalized more conventional navies and altered the way by which global power was projected. This technology was the end result of man-centuries of design, engineering, redesign, and implementation.
Like many innovations of great magnitude, it was so demanding of capital and expertise that it's full development and implementation was possible only by most thoroughly capitalized powerhouse of the time.
The "rules of engagement" in the upstream oil and gas industry are currently being disrupted in a very profound way as well, also by the introduction of an integrated technology. This technology is the model-centric approach to asset management. By model-centric it is meant that an "enhanced reality" computer model becomes the repository of all information about a particular producing asset.
This technology leverages recent developments in integration software and visualization hardware, and establishes a vehicle for the full and dynamic integration of data from various disciplines: geology, seismic, reservoir engineering, economics, petrophysics, facilities, and drilling. Like the development of the aircraft carrier, the roll-out time and expense of this integration has been enormous, and has taken great vision, investment, and long term thinking on the part of two or three major technology houses. Above all, this development is heralding a period of disruption in the way producers do asset management.
Disruptive technologies are attracting a lot of attention lately, particularly since publication of the book "Innovator's Dilemma" by Dr. Clayton Christensen of Harvard Business School. As Christensen explained at the recent Cambridge Energy Research Associates conference in Houston, well-managed companies are susceptible to failure when blind-sided by disruptive technologies. These technologies invariably originate at innovative companies that exploit alternative markets which value attributes not presented by mainstream technologies. His classic example of a disruptive technology is the PC, which offered simplicity, convenience, and accessibility, as opposed the speed and reliability of mini-computers and mainframes.
Certainly there are disruptive technologies at work in the upstream sector. At the highest level, one need only look at the flight of capital from the energy sector to Silicon Valley to appreciate the technology-derived dislocation of resources brought on by technological innovations. On the local level, there has been of late a proliferation of PC-based software systems that are challenging the dominance of the "heavy" integrated Unix systems that have been around since the mid-1980s. Their increase in market share seems to be following the classic rapid-evolution path followed in many industries, and described by Christensen.
But there is a difference, one that derives from the very challenging nature of total asset management. When an operating company attempts to add value to an oil and gas producing property through modern integrated technology, it is attempting to optimize all components of the asset simultaneously. By their nature, innovative PC-based technologies sub-optimize one or two components of the asset, and tend to be weak in multi-disciplinary integration.
For example, you are an overworked asset manager guiding an aggressive reservoir maintenance program for a marginal field. You need to determine how, where and even if, to drill horizontal or vertical injector wells to maintain pressure and maximize recovery.
To answer this question, you intend to run a series of alternative fast-turnaround reservoir simulations that you will use to "feed" the hard-wired economic modeling package. The simulation program, in turn, needs to "feed" off of an upscaled stochastic geological model, which in turn needs to quickly combine geological information, measured in depth, with precise seismically derived faulting information measured in reflection time. Everything is interconnected, and changes in the geological model alter the reservoir simulation and underlying economics of injector placement.
Your reservoir engineer has just finished running economics on the latest series of simulation runs and you are presenting your final injector pattern at the morning meeting. When there, you hear a cough from the back of the room. The geophysicist stands up and explains why she now believes that the #5 well is fault separated after all, and that she needs to rebuild the geologic model so that engineering can re-run the simulations.
What do you do? The answer depends on whether the asset team is "optimized" and using a fully integrated, fast-workflow system, or whether instead they are "sub-optimized" with each discipline using a cost-effective, easy to use, and very accessible "niche" system lacking full integration.
The above parable tries to illustrate why the new and innovative "niche" technologies that are eroding market share for a variety of software companies, may not be in the best interest of those concerned with maximizing asset value. The pitfall of sub-optimization is a well-known one and was brought into corporate consciousness by Deming decades ago.
Niche vs. integrated
Ironically, the growth of these "disruptive" technologies in many ways is exactly what the upstream industry is now demanding. Crippled by numerous downturns and the flight of capital, oil and gas operating companies are relying more and more on outsourced "niche" service groups to fill growing gaps in core competencies.
These service groups naturally gravitate to the high quality, low cost "niche" software solutions so prevalent today. It would seem that Christensen's model of disruptive technologies presents a mechanism by which the outsourced community of the deconstructed upstream industry is systematically introducing "sub-optimization" into asset team management.
But the drama in our industry stems from the fact that while various software innovators are quickly eroding the market share of the established integrated companies, these beleaguered "powerhouses" are finally rolling out their first "combat capable" aircraft carriers (mature and operational integrated software packages). The race is now on between the rapid expansion of "niche" software solutions and "top-down" demand for fully integrated packages that will help asset teams add full value to producing assets today.
This "drama" can perhaps be distilled into a diagram, which is a variation on a graphic presented in the Innovator's Dilemma. This illustrates the rapidly evolving "disruptive" technologies that are displacing more conventional ones, rapidly and effectively.
The graphic also shows the new step-change (in both capabilities and demands) in knowledge management resulting from the introduction of the mature model-centric workflow. The step-change raises the bar considerably, perhaps irrevocably, for undercapitalized start-ups that cannot afford the immense outlay of funds needed to migrate a wide range of technologies to one integrated database. Just like the aircraft carrier, this extremely expensive innovation is starting from inside the system.
If this diagram is an accurate snapshot of the current state of evolution in oil and gas asset management, then we are now at a crossroads.
- If current trends in outsourcing continue, then it seems inevitable that sub-optimized service groups will become the order of the day. These groups will eventually develop links and patches into each other's software, and full integration will arrive at some time in the future.
- The alternative is the "aircraft carrier" model - fully integrated and newly matured packages just rolling out of drydock. These are more expensive alternatives and require more training and upkeep than the simpler alternatives. However, they are the only logical solution to the asset manager that demands full asset optimization now. Properly applied, their greater expense will be more than offset by project acceleration and the subsequent creation of value.
Which of the two systems will win out? It depends on which segment of the industry has the heightened sense of awareness. Should the responsibility for growth continue to be placed on the shoulders of the new "outsourced" community, then the "disruptive" technologies will probably erode the "integrated solution" community irrevocably.
On the other hand, should operating companies suddenly gain a sense of awareness of the enormous competitive advantages inherent in highly integrated and newly mature software, then there will soon be a stampede to the model-centric approach. Time will tell.
Christensen, C., "The Innovators Dilemma: When New Technologies Cause Great Firms to Fail," Harvard Business School Press, Boston Mass, 1997.
Deming, W., "Out of the Crisis," MIT Press, 1986.
Tobias, S., "From G&G to S&S: Watershed Changes in Exploration-Development Work Flow," Oil and Gas Journal, Nov. 30, 1998.
Tobias, S., "Managing Overseas E&P in the Age of the Internet" Oil and Gas Journal, March 4, 1996.