Imperatives

Optimize production of current reserves
Analysts are asking how cheap crude oil can become, after they spent almost all of 2008 debating the opposite question. The main reason for the slump is the darkening outlook for the world economy. In other words, the current defining feature of global energy markets remains low and volatile prices reflect a tight balance of supply and demand. Optimizing production of current reserves is an imperative for major oil companies that are cutting back on new wells as prices fall. The cyclical nature of the Oil and Gas industry will set the stage for another price spike by late 2010, once global demand begins to pass global supply. Despite volatile energy prices, there is a consensus that the world’s energy markets will continue to deliver reliable energy supplies.

Optimize assets and processes for delivery of product to end consumer
The geographical allocation of demand is changing. The increasing demand for energy from India and China as they strive to expand their industries are countering stable—or even decreasing—levels of demand from other countries. This is due to rates of economic growth falling and increased environmental awareness, irrespective of whether oil prices rise or fall. The limited nature of storage capacity, coupled with the availability and location of processing and refining capacity, requires constant optimization of assets to deliver the right quantity of the right product at the right place, and at the right time.

Optimize time -to -mar ket against economic conditions
The time from initial discovery of reserves to its production onto the market is the key to financial success. When embarking upon the major capital outlay required to bring proven reserves to market, companies are combining forecasts of the value of future production with estimates of project cost and duration. In cyclical markets, extremes of which the industry is currently encountering, these can be terribly difficult decisions.

Mitigate risks regarding alternative sources of energy
With the increasing scarcity of economically viable sources of oil and gas, the relative economic value of alternative sources of energy will increase in the medium term and provide potential competition to oil and gas. To guarantee a robust business model in the future and sustain a strong position in the economy, the Oil and Gas industry needs to recognize that the development and management of potential alternative energy sources is a prime business imperative. This is irrespective of the fact that the business case for alternative energy is adversely impacted by the current low oil prices.

The need to cope with the skilled worker shortage in the Oil and Gas industry
reduce the legacy skills and complex pools of experience in the industryThe aging workforce crisis will be accelerated by the current recession, as voluntary lay-off programs target those with only a few years to go. This will overall. The cost of such labor might rise in the Oil and Gas industry even before the recession ends. Retaining and attracting talent to the industry as well as dramatically improving the productivity of employees, is one of the most critical challenges that the companies are facing.

Maximize return on investment for human and financial capital
All of these imperatives combine to form a return on investment. In addition to the technical and engineering feats required to find and extract reserves from ever more remote and hostile environments, ecologically and politically, the health and safety of the industry’s workers and the local population and communities remains of paramount importance. A single human or environmental catastrophe can negate many years of planning and projected returns.

To maximize their return on human and financial capital, companies must have the information at hand to formulate and execute comprehensive risk mitigation strategies, which should be embedded in their information systems to ensure proper control.

Business trends

Financial Crisis
The global financial crisis is endangering the business case of the major capital investment projects that will be required to ensure future supply meets the anticipated demand. The current credit crunch could have a significant impact on future supply if investments are not made, leading to increased prices and less competition in the future.

In the short term, this financial crisis could pose financing risks even to the largest oil and gas companies if prices remain below a rate where revenues cannot guarantee the viability of current investment decisions. This may be especially true in the National Oil Companies (NOCs), where the company’s profits and cash flow are needed to maintain government spending plans— which can rarely be curtailed quickly. However, in the long run, a high level of fluctuation within a trend of increasing prices is expected due to growing scarcity and increasing demand.

Merger and acquisition activity is likely to increase as lower oil and gas prices adversely impact company share prices, cash balances and reserves, especially among the tier 2 players.

Energy as Geopolitical Weapon
The Western international oil majors now control less than 10% of the world’s oil and gas resource base. The increased influence of the NOCs, and their willingness to make investment decisions based on geopolitical considerations, is impacting costs and prices across the industry. In addition, price-setting by NOCs will continue to be used to bolster political decisions and campaigns, although in the present low-price climate their potential and effectiveness are severely reduced. OPEC has its work cut out to stop the oil price from sinking further.

Energy is becoming a political weapon. The EU has been adversely affected twice through interrupted supplies as innocent parties in disputes between Russia and the Ukraine. With the recent establishment of the ‘Gas Troika’, there are concerns that a cartel for gas may be in the making, although the nature of the gas market currently does not lend itself to commodity trading in the way that oil does. With the expansion of Liquefied Natural Gas (LNG), gas becomes a global and more commoditized product.

To counter this, countries and companies alike are taking steps to secure continuous supply:

• China is building 70 new Very Large Crude Carriers (VLCCs) to reduce the risks associated with importing over 90 million tonnes of oil using a fleet of VLCCs that are 90% foreign owned.

• Europe is looking to LNG supplied from North Africa to reduce its dependence on imported gas from Russia, using a very small number of pipelines.

Regulatory requirements are increasing and oil companies are being closely scrutinized for safety and environmental issues.

Emerging Markets and Production
The rapidly developing economies of China and India will continue to impact global energy demand. They also highlight the growing disparity between refinery and user locations. As a result, the trend to build new refineries either in the main producing countries (mainly the Middle East) or in the emerging markets (China and India) will continue—albeit potentially after a respite during which the investment decisions are revisited and reconfirmed.

Businesses are reorganizing and restructuring to reflect the new political and economic realities. Portfolios of the NOCs, International Oil Companies (IOCs) and second tier oil and gas companies are continuously being reviewed to maximize the benefits of existing assets, new fields, and new growth markets.

Human Resources
The ‘Great Crew Change’ is still a major area of concern. 40% of the industry’s skilled professionals will retire by 2010 and the numbers of university graduates coming into the industry are sharply down from prior periods. Paradoxically, the financial crisis may well mitigate this situation through a combination of lower levels of activity and individuals choosing not to retire, due to their personal financial situations. Remote working and management, leveraging real-time capture of geophysical and drilling operations (for example) will facilitate the capture / retention of additional knowledge critical to future operations.

The percentage of local staff employed in emerging markets, in both local and international companies, will continue to rise steadily as a result of the increasing knowledge base within the emerging countries, political requirements to acquire a license to operate, and the cost differential that it represents.

Renewable Sources and Nuclear Energy
In the short- to medium-term, natural gas, renewable resources, and new environmentally friendly energy sources are not economically viable enough to directly affect overall industry economics.

Nuclear energy is back on the agenda of governments as an acceptable, clean alternative but there is resistance from the ecological lobby. The number of coal-fired power stations is increasing in India and China. The Western world builds new power stations to meet global energy demands. The role of oil and gas companies in the sustainability debate is increasing. The companies are given the role of developing sustainable and durable sources of energy and production. Social and ecological responsibility is increasing on corporate agendas. Companies that do not comply with this movement are punished from a legal and marketing perspective.

Issues in the Value Chain
There are real concerns that one of the reactions to the financial crisis will be to cut plant maintenance programs. History has shown this to be potentially a very dangerous—and expensive—course to take. A balance can be found in investing in systems that allow companies to optimize their plant maintenance activities and still maintain full levels of safety.

At the pumps, the other end of the value chain, consumers are not willing to pay more for differentiated products. The recognized brands are suffering increasing competition from price-fighters and foreign oil companies. These companies are winning tenders for lucrative highvolume contracts, such as motorway fuel stations. The incumbents must counter this by reinforcing brand loyalty, building fuel stations in cheap locations to compete on price and trying to lock in customers by providing single-brand fuel cards to large corporate customers.

Operational Excellence
Political risks, the need for financial transparency as well as Health, Safety, and Environmental legislation, forces companies to increase the excellence of their operations.

Predictive analysis, as an extension of the digital oilfield, will help optimize production and better interpret increasing stores of data about license areas as well as reduce the cost per barrel.

Fit-to-purpose asset monitoring is key to balancing asset performance against cost (maximizing uptime across the equipment life cycle, as well as optimizing oil and gas output throughout the life of the reservoir). This includes refineries, pipelines, tankers and particularly workers who need to be kept safe, often in remote and difficult environments.

Decision-making based on real-time information and intelligence is vital across many business areas. For example, oil and emissions trading, oil type and volume supply from upstream to downstream, drilling and production in remote and / or hostile environments.

Impact technologies

The business needs to be able to take an educated view on future requirements against available resources, in a number of areas including oil and emissions trading, and downstream volume and type requirements. Business Intelligence (BI) in the form of predictive analytics and dashboards are of great value here.

A single view of information across all the business’s data sources by way of Enterprise Information Integration will give the business the on-demand intelligence that is required. Most companies have greatly progressed in information integration by domain, thanks to Enterprise Resource Planning (ERP) and Enterprise Application Integration (EAI) solutions. The critical points remain on data and business process standardization and harmonization, and their administration on a global scale (cf. Master Data Management). The real-time integration of information from operations with business information systems is key to further the success of a company.

Virtualization helps to maximize the return on investment in expensive IT infrastructure.

Enhanced Smart Field Technology will allow the management of drilling assets and production facilities (including down-hole sensors and monitors) via transmission of real-time data in an easily actionable format.

Optimized Enterprise Asset Management tools, with strengthening influence from mobile and Radio Frequency Identification (RFID) technology, will provide the condition and location of assets and staff in remote and hostile environments. This will enhance safety and reduce exposure to risk and improve efficiency by reducing downtimes.

The agile business will require real-time access to content information from any location through Enterprise Content Management (ECM). This can ensure faster design review by engineers around the globe when meeting strict deadlines and enhance safety by ensuring controlled documents are read. It will also minimize downtime by making sure correct versions of design documents are used in line with geophysical decisions, and drilling / production requirements are met when ordering spare parts. New Web 2.0 technologies can facilitate knowledge transfer and collaboration.

Upstream
The top tier Exploration and Production (E&P) companies are focused on variations of the ‘digital oilfield’ or 'smart field' approach. This is where huge quantities of data are collected, often on a real-time basis, and assimilated into actionable information for making decisions. The raw data may come from manned operations facilities or from sensors strategically placed to allow monitoring of critical operational parameters in remote or hostile environments, before being transmitted to secure central control rooms.

The challenge facing the upstream industry is to make the best business decisions from these mountains of data. To do so requires the data from a number of different disciplines within the organization to be brought together quickly and viewed holistically prior to a decision being taken.

These decisions range from selecting where to spud a specific well, optimizing well bore design during drilling, and asset utilization during production to maximize the total production from a reservoir. For this, the industry will look to data mining and analytics, predictive dashboards and collaborative technologies to improve the return on investment (ROI) from these huge capital projects. While secondary to capital project ROI, they expect an acceptable level of return for the costs incurred on remote sensors, mobile applications, Near-Field Communications, collaboration software, and decision dashboard implementations.

Midstream
Midstream activities are characterized by optimized utilization of existing assets, coupled with relatively low short-term returns on large capital projects. With refining capacity being a critical bottleneck in the oil and gas value chain, optimizing every step of these processes is critical.

To maximize profits, facilities must be managed by utilizing a wide range of data. The use of transportation systems (such as pipelines) must be continually monitored for optimal performance. Existing refinery capacity and capabilities must be matched to specific crude streams to maximize the output of finished products on a seasonal demand basis. This requires matching the available crude streams, driven by cost per barrel through trading operations, with specific refineries and flexible real-time logistical support for incoming and outgoing products.

Predictive dashboards, real-time inventory management and Enterprise Asset Management demand the more focused use of RFID, remote monitors and GIS in maintaining maximum throughput and productivity.

More complex supply chains require oil and gas companies to optimize through collaboration. Global collaboration portals are solutions to help companies achieve this while maintaining the level of flexibility that the market requires.

Additionally, regulatory compliance requirements (such as REACH— Registration, Evaluation, Authorization, and restriction of Chemical products to be sold in European countries) must be met along the complete supply chain by using cross-company solutions.

Downstream
With razor-thin margins and increasing costs, customer satisfaction and brand loyalty are keys to market share, and therefore success, in downstream oil and gas. This involves many aspects of the general retail industry, which are best encapsulated in the phrase ‘customer relationship management’ (CRM). Agility to react to—or, better still, accurately predict— and meet customers’ changing needs, combined with continuous efforts to improve the buying experience, will differentiate one company from another.

CRM, Near-Field Communications, real-time inventory management coupled with flexible logistics, and enterprise portals are focused on improving the buying experience. Fraud detection technologies, Mobile Applications, and Web technologies will improve companies’ ability to have a real-time view of their assets and focus on improved profitability.

General
Across the global Oil and Gas industry, the effort and cost required to keep pace in the following areas will continue to increase:

• Need to provide safe working conditions for employees and customers.
• Environmental responsibility.
• Compliance with federal, state, and local regulations.
• Statutory and audit compliance.
• Identification and mitigation of terrorist threats.

Adaptations of existing technologies and, to a lesser extent, the implementation of emerging technologies in Corporate Performance Management, Identity and Access Management, Mobile Applications, and Green IT will play an increasing role in the industry’s portfolio of tools that ensure overall corporate objectives are met.