Friday, September 06, 2019

Technological Utopia or Economic Apocalypse? Today’s Oil Industry Embraces Both

Everyone knows that the oil industry is a very different animal than before the 2014 oil price crash. It can be difficult to assess what the animal is, however, thanks to “binary twin” narratives of utopia and apocalypse that have come to shape the industry.  With their ability to simultaneously generate euphoria and fear, the narratives destroy confidence.  Thankfully, a recent summer seminar brought together the two narratives in a single event and provided illuminating insights for a clearer path forward.

Those who attended the AAPG-HGS “The State and Future of Technology, Finance and Economics, Exploration and Production” on August 20 at Summer NAPE had an opportunity to explore the implications of both narratives as representatives of technology, finance, and operations participated in three separate panel discussions and fireside chats.  This innovative format was developed and organized by Mark Hamzat O. Erogbogbo, with assistance by AAPG.  Hamzat’s vision as a corporate strategist made the structure of the event uniquely valuable.

The event took place the at the George R. Brown Convention Center.
New Technologies
Thankfully, the euphoria-producing narratives appeared first, in the all-morning session dedicated to new technologies.  The extremely high cost of drilling, completing, and producing shale oil and gas has been dramatically reduced by using new technologies that improve efficiencies and allow companies to trim their workforce and drill fewer wells that have higher recovery factors. Further, the use of blockchain technology is allowing better monitoring of performance as well as more efficient back-office operations.

The euphoria is generated not only by the results produced by the new technologies, but also from the potential profitability of investments in start-ups.  A number of companies such as Chevron, Shell, Saudi Aramco, and Equinor invest directly in start-up technologies. Companies such as Frost and Sullivan and Darcy Partners act as both scouts and mentors along the way. Many operators have new technology and innovation centers, and they dedicate at least some of their operations to being a living laboratory for beta-testing the innovations. The efforts often center around machine learning-focused simulations, modeling, information management (Sidd Gupta at Nesh) and imaging, along with blockchain technologies (Andrew Bruce at Data Gumbo). Making the land and legal work more efficient is also the focus of a breakthrough (Ashley Gilmore at  AI platform integrated to the human eliminating safety events, NPT, CAP/OPECX, and upcoming wearable sensors for improved safety (Travis Laman at DeltaPerform) and water treatment and sourcing improvements (Josh Adler at Source Water) have made strides in oil field services.

Guiding the start-ups are companies such as Frost and Sullivan (Ethan Smith), while Microsoft provides enterprise digitalization support.  The potential for technology to be dramatically transformational and to turn now marginal (or money-losing) plays into sustainable, profitable, and environmentally friendly ones was the underlying theme. The fact that technology is accessible to all was emphasized by Invatare’s Trond Ellefsen; with the notion that companies of all sizes and scales of operations can find a way to be profitable.

Finance and Economics
The fear-inducing apocalyptic narrative kept the audience awake in the usually soporific after-lunch sessions. Economics and financial executives, Jeff Henningsen, Ed Hirs, Casey Minshaw, and Jim Harden, pointed out that North American exploration and production companies saw their net debt rise from $50 billion in 2005 to nearly $200 billion by 2015.  Service companies also entered into massive debt positions, since large capital expenditures were required to be able to meet the needs of their clients.

As several pointed out, in 2018, uncertainty gripped the industry as it seemed that some of the largest companies would not be able to restructure their debt. The debt problem continues to make headlines in The New York Times and The Wall Street Journal, and more apocalyptic of financial reporters regularly question whether or not the debt trap will trigger another financial crisis. The result is that there is little appetite for funding new ventures, and private equity funds are retreating rapidly from the scene from the high of $70 billion in 2015.  However, consolidations are the norm, and will continue to be so as they are viewed as a solution that has both short-term and long-term efficiency benefits.  The price of oil is expected to continue to stay fairly low, and the public is expected to remain hostile toward carbon-derived energy. Although the outlook was gloomy, there were glimmers of optimism and enthusiasm with respect to mergers and acquisitions, and the technological transformations that would make operations profitable.

Exploration and Production
The third session featured operations, and the fireside chat structure of this session, facilitated by Godswill Nwankwo made it possible for individuals to speak openly and informally about their views of the trends of the last few years, and the directions that are most likely to be the true path forward. New technology’s potential combined with tight funds united for a general consensus that the oil field of the future will have fewer people, more automation, and better placement of laterals. AI Driller’s Felipe Armaza and Stage Completions’s Carlos Piñeda pointed out that people who will thrive in this environment will be the ones who manage data from diverse sources, make data-driven decisions quickly, and who are able to detect when the models may not be accurate.  Shell Technology’s Hani Elshahawi pointed out the importance of being agile with respect to technology and innovation. What it means for all geoscientists and engineers is that not only do they need to be able to integrate data and work with multiple software platforms and applications, they also need to understand how the real-world physical fundamentals (the rocks, the reservoirs, the produced fluids), look and behave in the digital realm.  

The binary opposition of the two prevailing narratives in today’s energy industry is likely to stay in place for the foreseeable future, and while it can be confusing for a person who is trying to launch a career or put together a deal, understanding the underlying reasons for them can equip one for success.

Susan Nash, Ph.D. 

Brief biographical sketch:
Susan Nash is Director of Innovation, Emerging Science and Technology at the AAPG where she works to promote investment, knowledge transfer, and innovative application of technologies that protect human safety and the environment while they increase the efficiency, supply and distribution of energy.  She has over 20 years of experience in geology as well as economic and technology development. Nash has published in the areas of machine learning, new technology, economic development, and the use of narrative strategies in persuasive documents.  Her Bachelor of Science, Master of Arts, and Ph.D. degrees were earned at the University of Oklahoma.