The U.S. leads the world in oil and gas production. Twenty years ago a barrel of oil was under $20. Ten years ago it was over $140. Today it is $45 to $60. How do you prosper with this kind of price volatility in a super capital-intensive industry? You turn to the cloud – a lesson for us all.
Many of us have heard how America went from a beggar in the oil market to the king of the hill, with significant global, political implications. We did it with technology. Fracking became the buzzword of U.S. oil and gas. American production just kept increasing and increasing. But the Arabs struck back by flooding the market with its oil in an attempt to drive down prices to points below the American production costs.
Unforeseen by those in the middle east would be the U.S. industry’s response to drive down its production costs and increase per well output through digital technology. Here is where the cloud came in and ironically, the oil price rise and then crash in 2014 was the trigger. Traditionally, Oil and Gas – like most engineering based, capital-intensive industries have been very conservative towards adopting new technologies. Fracking itself is a good illustration. Let’s take a look.
Most folks don’t realize that fracking is over 150 years old and was invented right after the American Civil War in November 1866. Used occasionally on certain wells, modern fracking, as we know it didn’t advance until 1947. Floyd Farris of Stanolind Oil and Gas began a study where 1,000 gallons of gelled gasoline and sand were injected into a gas producing limestone formation. The results were not great but in 1949 Halliburton met with more success and by the 1960’s fracking was used commercially.
By the 1970’s fracking’s widespread use even garnered the attention of President Gerald Ford. In his 1975 state of the union address, President Ford promoted the development of shale oil resources, as part of his overall energy plan, as a means of reducing foreign oil imports. The last needed innovation came in the 1990’s when George P. Mitchell created a new technique, which took hydraulic fracturing, and combined it with horizontal drilling. Still, it did not gain widespread traction until the 2012.
Why? Traditional “vertical” oil production in the U.S. had been in a long decline. What enabled the US oil and gas industry to extract oil from shale rock was higher prices. If it weren’t for higher oil prices, the significant capital investment needed for horizontal fracking, wouldn’t have occurred, and US oil production would have continued to decline. Instead, the world was awash in American oil.
The writing was on the wall. America would go from a net importer to a net exporter. The OPEC and the Russians were not happy. Not only did their revenues plunge due to the price crash but also their international political power waned with the price war.
The oil price crash of 2014 and the global drive in digitization and disruption coincided to push the US oil industry to seek cost cuts through innovation and new technologies. Big Tech was only too pleased to help Big Oil, seeing a new revenue stream in an industry long thought to be a dinosaur that was too slow to embrace new ways of doing things. Witness the fracking story we just reviewed.
Not anymore. The industry has always been very data intensive. Unfortunately, a lot of the data gathered was just not used. Now, many oil and gas firms, especially the world’s biggest, are using data analytics, digital oil fields, digital twins, robotics, automation, predictive maintenance, machine learning, and even AI with almost all of it resting on the cloud.
All the major cloud providers are ready to support the Oil and Gas business. Amazon Web Services seems to have the broadest, claiming applicability in upstream (exploration and extraction); midstream (pipeline, LNG transportation, etc.); and downstream (refinement and delivery to end customers). Microsoft Azure appears to emphasize the upstream side of the business, as does Google Cloud.
In the end they all are stressing similar benefits:
- Reduce Time to First Oil
- Reduce the Cost per Barrel
- More Sensors and Data
- Security and Compliance
What is going to happen next? Well, capital is still the dominant cost in using fracking to extract oil. But the efficiency of its deployment seems to know no limits. EOG Resources, the largest shale producer has slashed its capital outlays by 42% without a blip in production volume. BTW, EOG’s production costs are as low as $2.25 a barrel. The Saudi’s are $3.00 per barrel.
Where’s the bottom? Stay tuned…
By John Pientka
John is currently the principal of Pientka and Associates which specializes in IT and Cloud Computing.
Over the years John has been vice president at CGI Federal, where he lead their cloud computing division. He founded and served as CEO of GigEpath, which provided communication solutions to major corporations. He has also served as president of British Telecom’s outsourcing arm Syncordia, vice president and general manager of a division at Motorola.