As technology, economic and political trends continue to disrupt the industry, an excellent new report from McKinsey outlines five ‘big ideas’ for the oil and gas organisation of the future.
The global oil and gas industry, according to the authors, is facing three game-changing trends.
First, from resource scarcity to resource abundance, leading to significantly lower prices and a much greater focus on cost, efficiency and speed.
Second, advances in technology, disrupting old ways of working and enabling step changes in productivity; including automation, cloud connected equipment, the resulting data explosion and advanced analytics.
Third, demographic shifts, especially the entry of millennials into management and executive roles. Such ‘digital natives’ bring their own expectations of technology, collaboration, pace and accountability.
As a consequence of the above, the current highly centralised, top-down, complex organisational structures of most oil and gas companies are no longer sustainable with oil prices below $50 a barrel.
Five ‘big ideas’ for the oil and gas organisation of the future are presented.
- Organisational agility – the relentless pace of industry change requires oil and gas companies to respond quickly to changing conditions, to become agile, fast moving, flexible organisations.
- Digital disruption – the report argues that the digital revolution is only just beginning in oil and gas. Over the next few years the Internet of Things, big data, artificial intelligence, machine learning and human-machine interaction will change the way in which oil and gas companies work in at least three main ways: 1. A step change in safety, productivity and reduced human error resulting from the automation of 60 to 90 percent of routine manual activity. 2. The rapid emergence of new job classifications and capabilities including data scientists, statisticians, and machine-learning specialists. Within ten years, oil and gas companies could employ more PhD-level data scientists than geologists. Many existing roles will be redefined. 3. New ways of managing people and performance including the use of advanced analytics to mine large data sets about the workforce to identify the key drivers of employee performance, recruitment, retention and engagement.
- The millennial-managed organisation – in many oil and gas companies, millennials are already starting to occupy managerial and executive positions. As a consequence, companies will need to redesign working environments and cultures to meet the different expectations of millennial leaders; including technology-enabled remote working, flexible working hours, on-demand sabbaticals, alternative career paths, more rapid progress cycles and a new ‘social’ work environment supported by Enterprise Social tools.
- The decentralised company – most of the forces underpinning the drive to centralisation of oil and gas companies over the last few decades have now been eroded. The collapse in crude prices has made large overhead costs unaffordable; slow decision-making has become a threat to long-term viability. At the same time, the rise of lower-risk asset types has caused a re-think concerning the role of the corporate centre. Success in unconventional and late-life operations requires local coordination and integrated decision making at the front line, not layers of review from corporate, according to the authors. As a result, the report predicts that many oil and gas companies will move towards a more decentralised structure depending on the amount of risk involved.
- A redefinition of what’s core – with the need to control costs and become more flexible, there will be a movement away from control in-house and tactical contractual arrangements towards the establishment of long-term strategic partnerships within a broad network of tier-one and tier-two suppliers, paralleling the trend in many other industrial manufacturing sectors.
Seven Ways Digital Technology Can Help
While the McKinsey report looks at these trends from a global perspective, the need for change is equally relevant in our own North Sea oil and gas sector. As operators attempt to recover from the shock of the last few years, transforming work methods will be the key to sustained competitiveness. The effective use of digital technology will be critical to this transformation.
Below we suggest seven steps to follow in using digital technology to support new ways of working:
- Undertake a Digital Landscape Analysis: as we enter an era of turbulent digital change and digital disruption in the global oil and gas sector, a detailed Digital Landscape Analysis should be undertaken evaluating the current and future state of digital disruption in the industry, the key technologies involved, emerging opportunities & threats and likely impact on your own organisation. Evaluating the extent to which your organisation needs to transform digitally has become critical to future growth and competitiveness; using emerging digital technologies to rethink and improve the way things are done in at least three main areas: – externally (customer and partner relationships), internally (digital operating advantage) and underlying business model. How are similar organisations and competitors responding? Who is ‘leading digital’ in the industry? Who are the exemplars of ‘best practice’?
- Agree a Digital Vision and Strategy: based on the above, a clear digital vision and strategy should be agreed. A digital vision and strategy fully aligned with and supportive of agreed business goals and objectives as outlined in the McKinsey report. The strategy should cover the use of digital across all value chain activities (operations, firm infrastructure, communications, data, HR, partner relations etc), driven by the need to become a fast moving, flexible, decentralised organisation.
- Cloud is the Key: for North Sea operators, migrating a substantial part of their IT infrastructure to the cloud is critical to supporting all of the above. Business transformation cannot take place without leveraging the full potential of what the cloud has to offer. For more details, please see our current series of blog posts on cloud computing.
- Collaborate to Compete: a common theme running through the McKinsey report is collaboration, internally across fluid teams and externally with strategic partners. As the industry moves towards more open collaborative ways of working, the right combination and effective use of collaborative software and tools will become mission critical. Software and tools such as Microsoft SharePoint, Office 365 and Enterprise Social tools such as Yammer (soon to be merged with Office Groups).
- Bringing Data to Life: with data and predictive analytics becoming core to the industry, new tools for delivering actionable insight from complex data sets will be required. Tools such as Power BI which can transform complex data into visual insight. Data integrity and effective data management become critical too.
- Be Agile: a key conclusion of the McKinsey report is that oil and gas operators need to become agile. This will require an agile approach to IT, delivering certainty in software development.
- Measure Performance: finally, as the industry becomes digital, there will be a need for a robust approach to performance measurement, ensuring that digital actions and initiatives deliver intended benefits and high ROI.
As always, comment and feedback are very welcome.