Oil & Energy
How New Technology Will Disrupt Oil, Gas Industry
At a certain point in its lifecycle, every industry faces its moment of reckoning with growing pressure to transform due to factors such as increasing competition, changing consumer preferences, government policy and other secular headwinds.
The transformation usually takes the shape of improved supply chain discipline and streamlining business operations in order to achieve better operating margins.
For the oil and natural gas industry, the moment of truth arrived a few years ago after years of weak benchmark prices, shrinking margins and massive capital flight, which forced the sector to seriously rethink the way it does business with energy companies, increasingly turning toward tech heavyweights for help in cutting costs and streamlining operations.
A good case in point is a partnership struck between Haliburton Co. (NYSE:HAL), Microsoft Inc. (NASDAQ:MSFT) and Accenture Plc. (NYSE:ACN) in 2020.
For years, Haliburton, one of the world’s largest oilfield services companies, has been plagued by shrinking margins and chronic underperformance. The company eventually made a deal with the two cloud giants to migrate its existing data centers to cloud and enhance digital offerings.
Halliburton is hardly alone: after years of dilly-dallying, oil and gas companies are now rapidly moving their IT infrastructure out to the Cloud and adopting Business Process Management (BPM) systems.
This frequently results in a leaner, more agile organizational model whilst delivering significant cost savings.
Barclays estimates that the upstream market digital services industry will grow from less than $5 billion in 2020 to a more than $30 billion annual tab by 2025, thus enabling $150 billion in annual savings for oil producers. Opportunities for cost savings include cutting capital expenditures (capex) as well as selling, general and administrative (SG&A) costs and transportation operating costs.
According to Barclays, the digital age is finally dawning for the energy sector with the market poised to erupt over the next five years.
Over the past few years, Microsoft has struck cloud partnerships with several Big Oil companies including ExxonMobil (NYSE:XOM), Chevron Inc. (NYSE:CVX) and Haliburton while Google’s parent company Alphabet Inc. (NASDAQ:GOOG) has significantly expanded its partnership with Schlumberger Ltd.
(NYSE:SLB), another oilfield services giant. Meanwhile, Amazon Inc. (NASDAQ:AMZN) offers digital services to the industry through Amazon Web Services oil and gas division, and counts BP Plc. (NYSE:BP) and Shell Plc (NYSE:SHEL) among its top clients.
In many cases, Big Oil’s digital makeover is quite extensive. For instance, Halliburton kicked off multiple digital transformation projects during the pandemic.
Thailand’s PTT Exploration and Production and Kuwait Oil Company were among the notable oil and gas companies that were awarded Halliburton contracts to implement digital transformation and enhance efficiency and production at their oilfields.
For years, Big Oil has been using tech companies’ enterprise software in their highly complex operating systems–including rig management operations and precise drilling techniques.
However, they have traditionally been somewhat reluctant to hand over their treasure troves of valuable data mainly on cyber security concerns as well as the need to maintain competitive advantages, preferring instead to develop most of their software developed in-house or by companies within the oilfield services sector such as Haliburton.
This is now changing as they look for ways to improve operational efficiencies in a bid to squeeze higher cash flows and profits from their existing operations.
Is the new approach working? The evidence seems to suggest so, with shale drilling costs on an encouraging downtrend. J.P. Morgan estimates that Permian’s Delaware Basin oil drillers now require oil prices of just ~$33/bbl to break even down from $40/bbl in 2019.
Artificial Intelligence (AI): Let’s face it: Our electric grids are simply ill-suited for the energy shift. After all, renewable power is highly intermittent by nature whereas our grids are designed for near-constant power input/output. Indeed, wind and solar energy have the lowest capacity factors of any energy source.
For the energy transition to be successful, our power grids have to become a lot smarter. Luckily, there’s an encouraging precedent.
Five years ago, Google announced that it had reached 100% renewable energy for its global operations including its data centers and offices.
Today, Google is the largest corporate buyer of renewable power, with commitments totalling 2.6 gigawatts (2,600 megawatts) of wind and solar energy.
In 2017, Google teamed up with IBM to search for a solution to the highly intermittent nature of wind power. Using IBM’s DeepMind AI platform, Google deployed ML algorithms to 700 megawatts of wind power capacity in the central United States, enough to power a medium-sized city.
IBM says by using a neural network trained on widely available weather forecasts and historical turbine data, DeepMind is now able to predict wind power output 36 hours ahead of actual generation. Consequently, this has boosted the value of Google’s wind energy by roughly 20 percent.
A similar model can be used by other wind farm operators to make smarter, faster and more data-driven optimizations of their power output to better meet customer demand.
Houston, Texas-based Innowatts, is a startup that has developed an automated toolkit for energy monitoring and management.
The company’s eUtility platform ingests data from more than 34 million smart energy meters across 21 million customers including major U.S. utility companies such as Arizona Public Service Electric, Portland General Electric, Avangrid, Gexa Energy, WGL, and Mega Energy.
Innowatts says its machine learning algorithms are able to analyze the data to forecast several critical data points including short- and long-term loads, variances, weather sensitivity, and more.
Innowatts estimates that without its machine learning models, utilities would have seen inaccuracies of 20% or more on their projections at the peak of the crisis thus placing enormous strain on their operations and ultimately driving up costs for end-users.
Further, AI and digital solutions can be employed to make our grids safer.
Three years ago, California’s biggest utility, Pacific Gas & Electric, found itself in deep trouble after being found culpable for the tragic 2018 wildfire accident that left 84 people dead and, consequently, was slapped with hefty penalties of $13.5 billion as compensation to people who lost homes and businesses and another $2 billion fine by the California Public Utilities Commission for negligence.
Perhaps the loss of lives and livelihood could have been averted if PG&E had invested in some AI-powered early detection system like Innowats.By employing digital and AI models, our power grids will become increasingly smarter and more reliable and make the shift to renewable energy smoother.
By: Alex Kimani
Kimani report for Oilprice.co
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.
