Energy Visions 2018
Technological advances driving business transformations and efficiencies
Oil and gas markets are moving toward rebalancing after several years of low prices, evident in the higher price deck, lower oil supplies and more market optimism compared to one year ago. But major uncertainties still remain that weigh on price expectations, investment decisions and the broader outlook for Canadian production growth. The push-and-pull dynamic between the Organization of the Petroleum Exporting Countries (OPEC) and US shale producers has only added to this uncertainty, creating doubt about near- to medium-term prices. (Explore this trend more deeply.)
Given the increasingly uncertain global context, many Canadian producers have shifted priorities from making large-scale investments to creating better margins and higher returns, all while operating with a greater consideration of environmental impacts.
As a result, producers have had to adapt their strategies. A major factor is that technology is disrupting old ways of working. Oil and gas companies are looking to better use technology, data analytics and automation to capture more value and ensure reliability, flexibility and competitiveness in today’s complex energy landscape.
“Digital transformation will benefit places that are highly skilled at internalizing digital technologies. That probably bodes well for Canada, but it will require a shift in policy and mindset away from focusing on raw resources as a source of value and toward systems and platforms of technology as the source of value.”
“In Canada’s energy industry, innovation and improved recoveries go hand in hand. Innovation helps to reduce operating costs and environmental impact. As a result, technology enhancements strengthen Canada’s position in the global energy market.”
Spending on technology and research and development has increased in line with rising oil prices as companies turn to digital transformation to help deliver sustainable cost reductions, increase efficiencies and improve margins.
Developments include the use of advanced analytics, automation, autonomous trucking, along with other operational enhancements through the use of sensors, robotics, artificial intelligence (AI), 3D pad planning, improved seismic mapping, enhanced reservoir characterization, remote surveillance, predictive analytics and nanotechnology in drilling fluids.
For example, increased automation and advanced analytics allow oil and gas companies to analyze large amounts of data, making it easier for them to monitor assets, make quicker decisions and manage production. Automation also has the potential to transform the industry’s workforce: within the next decade, oil and gas companies could employ more data scientists than geologists.
The ability to reduce costs and increase operational excellence through technology is clearly working for Canadian companies. The International Energy Agency’s 2017 Digitalization & Energy report estimates that digital technologies could cut production costs up to 20%. What’s more, Strategy& estimates that using digital technologies in the upstream sector could result in cumulative savings of US$100 billion to US$1 trillion by 2025.
Digital transformation in the oil and gas industry has been significant. Organizations, particularly in the upstream sector, that undergo digital transformation can help reduce operating costs by increasing efficiencies and recovery rates. This in turn speeds up payment processes, allows for more accuracy and makes operations safer. Digital technology using wireless connections has already begun to transform operations, creating new capabilities that will let producers be faster and more flexible and efficient.
The benefits of digital transformation are expected to be long term, facilitating exploration, production and operational improvement that can deliver better results along the value chain. But with every new opportunity comes risk—and with digital, it’s the risk of cyber attacks. Despite an increasing awareness of cyber risks, our 2018 Global State of Information Security Survey shows most Canadian organizations don’t actively examine their defences—and only half run drills at least annually for cyber attacks.
It’s important to balance risks and be proactive in monitoring and protecting digital assets. Despite cybersecurity risks, digital technologies will be key for oil and gas companies to weather market volatility and stay competitive in the years ahead.
The widespread use of digitization in the oil and gas sector could decrease production costs by 10% to 20% while also boosting global technically recoverable resources by about 5%, where shale would likely see the greatest gains.
The pace of innovation and digital transformation in the oil and gas industry is being driven by the increasingly open exchange of ideas, including new alliances and partnerships with suppliers, government bodies and producers. New developments are building on the strengths of previous advances. Some of these leading developments include the following:
According to the National Energy Board, the technology has been tested successfully on several occasions with some commercial-scale projects in operation. While still being confirmed, initial economics estimates point to higher upfront costs that are then offset by increased recovery rates and reduced steam requirements, as well as by low costs of propane or butane.
In January 2018, the first commercial fleet of autonomous haul trucks at a company’s mining projects was announced. According to the company, the fleet will lower operating costs, enhance safety performance and increase efficiency when compared to the existing operations.
Another promising development has been successful tests of in-situ heating through an electric current rather than steam or solvents. The thermal-assisted gravity drainage helps reduce costs since it eliminates the need to use water, and the process is less intensive than steam-assisted gravity drainage (SAGD) projects.
A company also recently successfully tested the use of non-compressible gas co-injection, and the company says the technology improves energy efficiency and steam optimization and reduces instantaneous steam to oil ratio (iSOR) by 10% to 15% while maintaining production.
Oil traders are increasingly exploring new options to use blockchain to help process paper records that document trades and shipments. Joint venture billing and smart contracts for royalty payments are other uses that have emerged in the industry. (Explore blockchain in the oil and gas royalty sector more deeply here.)
The delays surrounding oil pipeline projects often make headlines, as the economic consequences of pipeline bottlenecks not only weigh on Alberta’s finances but Canada’s as well. While pipeline debates remain a challenge for Canadian oil producers, some are using technology and innovation to address the current impasse over improved market access. (Explore this trend more deeply.)
An important factor impacting investment in the Canadian energy industry and the attention put on technological innovation is the broader shift in strategy among major oil players. The pain felt because of prolonged low oil prices has led companies to avoid diving back into investments in higher-cost, higher risk greenfield projects.
As prices recover, international oil companies have targeted the cheapest and highest-quality assets available and prioritized areas with attractive geology, large efficiency gains and low above-ground risk. The clear winner of the cautiously optimistic upstream environment has been US shale.
But with companies beginning to look for new opportunities, Canada has been able to reap some of these benefits as the first country outside of the United States to see large-scale development of shale resources. According to a January 2018 news report by Reuters, non-oil-sands oil and gas capital spending in Canada, which includes the shale sector, rebounded in 2017 and is expected to grow to CA$33 billion in 2018.
Greenfield oil sands projects generally have a higher price tag, a factor that’s exacerbated by market access constraints. While oil sands have made cost recovery improvements, largely owing to technology, investors have been attracted to greenfield projects that have lower break-even prices and quicker commercialization times. For example, breakthroughs in oilfield operations have significantly cut the costs of major deepwater projects. Per its most recent updated guidance, the full field break-even price on the Johan Sverdrup megaproject in the Norwegian North Sea has fallen to US$20 per barrel, largely owing to greater cost efficiencies. In the Gulf of Mexico, the estimated break-even price averages below US$50 per barrel.
Long term, doubling down on technology will put oil sands companies in a better position to attract investment, especially if the world is heading toward a supply crunch early in the next decade (owing to years of underinvestment in global upstream). Technology advancements that drive down costs and better address environmental issues bode well for the investment profile of the oil sands, especially with the potential for higher political risk in other heavy-oil producing regions, such as Latin America.
In Canada, federal and provincial governments haven’t matched efforts to attract foreign investment in Canadian assets as seen in other competitive jurisdictions like the United States. At the same time, continued impasses over pipeline projects, the cancellation of Canadian energy infrastructure megaprojects and uncertainty around the impact of National Energy Board reform are sending mixed signals to investors.
The global investment landscape has become increasingly competitive. Traditionally, Canada has received 10% of overall North American chemical and petrochemical investment, but the Calgary-based Resource Diversification Council says it has dropped to less than 2% over the past five years. So technology certainly has a place to reduce operational costs and help better position Canadian producers in global markets.
Canada’s energy sector is using technology to achieve operational excellence, discover cost savings and stay competitive. The time for digital transformation is now.
Partner, National Energy and Alberta Consulting Leader, PwC Canada
Tel: +1 403 509 7397
National Tax Leader Energy, Utilities, Mining and Industrial Manufacturing, PwC Canada
Tel: +1 403 509 6373