What's New in Production

“The best way to predict the future is to create it.” 

Predictions inevitably accompany the new year’s arrival, and Peter Drucker’s aphorism is a good way to launch a look at one of them, “The oil and gas organization of the future,” a report by McKinsey & Company. This outlook takes a necessarily wide view, but its observations certainly can apply to every subset of the industry, including production.

The report first sets the stage: “Today’s oil and gas organizations were developed in a time of resource scarcity. To get at those hard-to-find, difficult-to-develop resources, companies built large, complex organizations with strong centralized functions. This model allowed them to tackle terrific technical challenges, manage great political and operational risks, and deploy scarce talent across the world as needed.”

“While these reasons were all valid during a decade of high growth, this organizational journey also led to substantial complexity for large players—adding cost, stifling innovation, and slowing down decision-making. At the same time, independents like BG Group, Devon Energy, and EOG Resources grew increasingly successful in exploration and unconventional plays, but they still struggled to scale operations without copying the bureaucratic operating models of the majors.” 

This organizational model is no longer necessary. In McKinsey’s view, the industry is entering a time of great change, with major societal, technological and political trends reshaping the environment in which oil and gas companies operate. The company thinks three potentially game-changing disruptions will lead oil and gas companies to rethink their operating models fundamentally: 

A world of resource abundance is leading to sustained lower oil prices and a focus on cost, efficiency and speed. Talent is no longer scarce; exploration capability is less of a differentiator; megaprojects are not the only way to grow; and market opportunities may only be economical for the earliest movers in a basin. Meanwhile, conventional, deepwater, unconventional and renewable assets each require a distinct operating model that cannot be delivered optimally from a single corporate center.

Profound technological advances are disrupting old ways of working and enabling step changes in productivity. Jobs, including knowledge work, are being replaced by automation on a large scale, and those that remain require increased human-machine interaction. Data generation continues to grow exponentially, as every physical piece of equipment wants to connect with the cloud. This explosion of data—combined with advanced analytics and machine learning to harness it—creates opportunities to fundamentally reimagine how, and where, work gets done.

Demographic shifts mean that employees are demanding changes in the working environment and expressing concerns about the role of oil and gas companies in society. Millennials will constitute a majority of the U.S. workforce by the early 2020s and have already started their climb into management and even executive roles. “Digital natives” in the driver’s seat will bring their own expectations of technology, collaboration, pace and accountability. Oil and gas companies may need more profound changes to meet demands for meaningful work and social responsibility, to attract the next generation of top engineering and leadership talent. 

Big ideas. You may be asking, how do organizations adapt, in response to these disruptions? McKinsey answers with its five “big” (and thought-provoking) ideas. Space limits the elaboration of all of them, but one in particular, “digital organization,” deserves a close look:

Organizations have been digitizing for decades, but the digital revolution is still only just beginning. Within a few years, the Internet of Things will consist of more than a trillion sensors that generate and share data. Artificial intelligence and machine learning are no longer science fiction, and human-machine interaction is becoming ever more frequent. These innovations are about to change the way oil and gas companies work, in three substantial ways:

A step-change in safety and productivity will result from digitizing both technical and non-technical work in a way that automates 60% to 90% of routine manual activity, while identifying true best practices. This means better safety, because fewer people will be at risk, and automation will be reducing the risk of human error. It also means great improvements in workforce productivity. For instance, one engineering, procurement and construction (EPC) firm was able to use advanced analytics to sift through thousands of capital projects and discovered a few simple practices that improved engineering productivity by more than 20%.

New job classes and capability profiles will rise, and many of these new jobs (such as data scientists, statisticians, and machine-learning specialists) simply don’t exist in oil and gas companies today. Within ten years, oil and gas companies could employ more PhD-level data scientists than geologists, either in-house or through partnerships with increasingly sophisticated vendors. Meanwhile, existing roles will be redefined. For instance, the automation of repetitive technical decisions also will free up engineers’ time.

There will be new ways of managing people and performance. Many human resource departments are already investing in advanced analytics to mine large data sets about their workforce—training history, productivity, calendar entries, email, surveys, social-media profiles, and so on—to identify the drivers of employee performance, recruitment, retention and employee engagement.

“May you live in interesting times.” The old Chinese curse is not only not Chinese, it’s not even a curse. The times ahead promise to be the best yet.