Digital transformation isn’t about the technology. It’s about the business.
By Anne-Frances Hutchinson
As energy producers look to the future, inroads in digitalization are powering their visions. Renewables are on track to produce nearly 70% of the world’s electricity by 2050, and by 2033 half of the cars sold around the globe are likely to be electric.
The International Energy Agency (IEA) estimates that smart demand response could generate the equivalent of today’s installed electricity capacity of Australia and Italy combined, potentially saving $270 billion in new infrastructure costs. Smart EV charging technologies that pull juice when supply is high and demand is low can significantly reduce the amount of new electricity infrastructure, saving an estimated $100 to $280 billion in spending over the next twenty years.
Energy producers are looking to digital transformation as a way to make field operations safer than ever, create greater visibility along supply chains, and to tune back offices to an unprecedented level of efficiency.
The IEA reports increased investments in digital technologies by E&P leaders as the rate of digitalization in the sector increases. On the supply side, they estimate that wide adoption of digital technologies such as enhanced modelling, process automation, sensor use, and predictive maintenance could lower oil and gas production costs by 10% and 20%. There are substantial opportunities to be had in terms of capital and operating expenditures. PwC sees companies fighting for an estimated $1 trillion in savings over the next handful of years.
The promises of the digital age are many, but the road to digital energy transformation is littered with failed initiatives. Research from Bain & Co. illustrates the challenges faced by many producers eager to embrace trends, launch groundbreaking pilots, and reap promised rewards:
“Companies frequently charge in, intrigued by the possibilities of digital and encouraged by vendors, adding sensors to critical equipment, purchasing systems and staffing up an advanced analytics team. Many find that they still cannot access the right data to glean meaningful insights, and the frontline operators don’t trust the outcomes. Learnings are not as transferable as hoped, given many different types of equipment, data, and connectivity across facilities. Executives don’t know which external partners could be most helpful, and hiring more analytics talent runs into budget constraints— particularly since it’s often unclear which of several digital initiatives is more important than the others. Should they invest in warehouse robotics, better e-commerce systems, or drones to supervise hazardous conditions?”
These common issues make the underpinnings of failed digitalization programs quite clear: Digitalization incorporates technology, but it is not a technology issue. Rather than viewing digitization as the culmination of the ideal mix of software and equipment to generate desired results, whether in matters of safety, efficiency, or even asset management, it should be understood as a means to forward motion, not as the endgame.
The Path to Digitalization
A recent survey of oil and gas leaders by EY found that most companies are willing to invest in digital transformation efforts as ways to control costs and garner bigger returns on capital. Organizational challenges loom large, necessitating a rethinking of essential questions that surround technology adoption. “If you ask the wrong question at the beginning of your journey, then you’re going to be aiming for the wrong target,” said EY analyst Keith Strier, global and Americas advisory leader for AI.
There are steps to take that will help leaders avoid overly costly and failed digitalization experiments, especially as oil prices continue to fall and the cost of risk rises. Here are a few starters from the experts at PwC:
- Determine what the business needs. Digitalization is a business-led process, and understanding what the technology can do in support of business goals is essential. Knowing where a company’s strengths lie is the very first step, and leaders should take a high-level operational approach to understanding how digitalization can make those strengths work overtime for success.
- Embrace collaboration. Digitalization should not exist separately from the overall business process. Taking a siloed approach makes effective communication across roles and business units particularly challenging, and dilutes the power of cross-functional teams. PwC advocates approaching digital transformation from the perspective of building new capabilities and leveraging technology across all key aspects of the value chain.
- Link strategy and culture to digitization. View digital transformation as strategic and organizational as well as technological.
- Think and act holistically. All dimensions of a company, including suppliers and external partners, need to be on the digitalization journey together. Piecemeal efforts will yield partial results that can’t move the business forward, and moving forward is the point of digitalization.
- Chart your own journey. There are no best practices in digitalization, and the pressure is on for organizations to create their own maps to transformation. Each journey should meet the specific needs, objectives, and challenges of the business.
- Balance your technology talent. Energy company engineers will need to be more digitally attuned to handle the intricacies of transformation. Finding the right balance of data scientists and digitally proficient software engineers is a key challenge to be faced. “It is critical that the oil and gas sector attract and retain talent that is technologically focused,” PwC analysts stated. “As the industry evolves digitally, HR executives will need to think carefully about how they attract a new generation of technologically savvy younger people.”
Data and technology alone can’t get us to a brighter energy future without clear business strategy and great talent. The effective combination of digital technology, strategy, and people is key to bringing the energy sector’s digital age to fruition.