Oil and gas: The role of digital investments in a physical industry

By: Scott Sanderson and Thomas Jackson

The mandate to “transform” businesses using digital technologies has reached the oil and gas industry. Most larger oil companies and oilfield service (OFS) companies have made one or more pilgrimages to Silicon Valley, Tel Aviv, and other high-tech hubs around the world. Many have their own incubators to nurture emerging technologies and/or have venture funds that make investments in select technologies/companies they hope will move the needle. R&D continues, with digital technologies added to the R&D portfolio of more traditional technologies in drilling, completions, tools, fluids, catalysts, etc.

Nonetheless, many companies admit the industry is in the early stages of a digital revolution. “Random acts of digital” proliferate, and the holy grail of “transformation” remains elusive.

Is there a coherence to it?

First, let’s admit: Drilling is physical. There is no way to do it without putting a bit in the ground and turning to the right. Refining is physical. There is no way to do it without providing feedstocks, catalysts, and energy to reactors and processing units.

However, that is not to say digital technologies cannot and should not have a role to play, even a transformative one. A challenge is to find and deploy digital technologies that provide additional value to the physical processes.

Technologies in various phases of development promise improved understanding of the subsurface, reduced time to generate prospects, improved ability to automatically and dynamically respond to changing drilling conditions, enhanced completion design, improved understanding of distribution chains to optimize product distribution and pricing—the list goes on. The question, “Will they work?” is almost as important as “How will they be matured and brought to market?”

Oil and gas is (primarily) a B2B industry, and a “Big B 2 Big B” business. Startup technologies struggle with access to prove concepts; breakthroughs exist but are a challenge to scale; sales cycles are agonizingly long. Proofs of concept do not “go viral,” as the market is not 200 million consumers demanding new functionality from their devices, but several dozen large, well-established, multibillion-dollar companies who have historically been well-served by traditional petrotechnical, engineering, design, and operating processes.

Very few startups will be able to scale on their own. One risk we see is smaller companies may attempt to sell a general-use digital technology to O&G clients by asserting that it can provide “insights.” However, one must know what those insights are, and how they can enable a customer to make more oil, for less money, faster and with less risk. Startups struggle to do this; their faith in their technology is unbounded, but they often lack the understanding to speak “oilfield” to their customers and consequently appear naïve in their assertions.

A proliferation of oil and gas digital startups going public at multibillion-dollar valuations is unlikely. Rather, in most cases, scaling these technologies may be done by the well-established oilfield service sector, and the appropriate exit strategy for the startup may be M&A. The OFS sector is sophisticated, has innovation in its DNA, can critically diligence the technology startups, is able to integrate new technologies into the value chain, has access to customers, and also has the ability to physically scale a digital technology. Yet, because success never comes easily for the OFS sector, it tends to be more inclined to acquire going concerns with established EBITDA and has to be careful about cannibalizing current business models as it innovates. However, if the oil and gas sector is to move beyond “random acts of digital” and truly transform how it does business, a strong partnership with an OFS sector, which brings the best of digital technologies to bear for the industry, will likely play a significant role.