The United Nations predicts that by 2025, the global population will reach 8.1 billion and by 2050, it will reach 9.6 billion. Most of this growth will occur in developing countries – primarily in Africa and India – and will increase the need for energy. Despite this, it is forecasted that global energy demand will reach a peak within the next two decades and then begin to plateau, primarily due to improved energy efficiency and optimization.
According to a study by McKinsey & Company, the increased use of electric vehicles, decreased demand for plastics, and better plastic recycling could reduce oil demand to 26% of global energy supply by 2035 and to 18% by 2050. In contrast, natural gas may grow from being approximately one-fifth to becoming nearly a quarter of the global energy supply by 2050. In a nutshell, what we are likely to see is stagnant or declining industry demand and growth, regardless of the increase in global population.
Although the oil & gas industry is relatively mature, digital maturity of the industry is comparatively moderate. The World Economic Forum estimates that $1.6 trillion of value could be unlocked in the oil & gas industry by initiating focused digital transformation programs.
As much as $600 billion could be realized by upstream companies, while midstream and downstream companies could see additional value creation of $100 billion and $275 billion, respectively. In addition, more than $600 billion in savings for customers, productivity improvements, water usage, and emissions reductions could result. However, static regulations, an aging workforce, and the inability to share information across the industry are holding that value hostage.
Digital technologies are drivers to reduce cost
According to Deloitte’s survey of oil & gas industry executives, cost reduction is a top priority for all sectors of the industry – upstream, midstream, and downstream. In this same survey, executives recognize the value of deploying digital technologies to achieve operational efficiencies, productivity, growth, and profitability, as long as the payoff can be realized quickly. Three key areas of focus are cloud, mobile devices, and data analytics.
Similarly, McKinsey’s research suggests that digital technology deployment can reduce CAPEX by up to 20% and operating costs up to 5%. As a key cost driver, operational procurement and supply chain functions are feeling the pressure to reduce cost, meet production targets, and delivery metrics, within a highly volatile environment.
Answering cost pressures with supply chain and procurement
Applying technology strategically to supply chain and procurement functions can help achieve many of these industry priorities. Adopting a strategic sourcing solution not only saves the company as much as 9% annually, but also typically pays for itself within a year. Data sharing through sourcing solution integration with Product Lifecycle Management (PLM), material management, and vendor management systems provides easier and more predictable forecasting and frees up resources to focus on more strategic activities. Better spend control can reduce contract leakage of up to $20 million per $1 billion of spend. These savings apply to both direct materials and to non-hydrocarbon inventories, such as pumps, pipes, fittings and other requirements for MRO. These savings can help oil & gas companies fund other priorities or simply boost the bottom line.
There is also room for improvement when sourcing complex services at the field level. In an industry where safety and productivity are paramount, automating processes can reduce the risk of human error, eliminate routine manual activities, and improve access to real-time information. Whether for planned or unplanned services, being able to request and approve services from the field will result in a higher degree of confidence in the estimation, contracting, and execution of these services. Allowing field services managers to approve the proof of service at the field level will drastically reduce delays and backlogs that can contribute to prolonged downtime and a negative revenue impact while ensuring that service level agreements are met. Digital systems can facilitate the careful balancing of sourcing and procurement goals (reduced cost, for example) with supply chain objectives (on-time and accurate delivery) and quality and safety requirements.
Time for action
There is no time like the present for oil & gas enterprises to expand their digital capabilities. Senior executives need to prioritize and sponsor these initiatives to ensure success at lower organizational levels. A digital strategy roadmap is a must for every company in the industry, as is developing an internal culture of learning and adoption of these solutions. In addition, integrating data should be at the center of any initiative to enable the visibility into spend and organizational productivity that can truly move the needle.
Companies do not need to do this alone. While committing to the investment in digital is imperative, companies can leverage the vast ecosystem of innovators, integrators, and partners that can help them navigate the digital journey.