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Big Data Could Revolutionize Oil And Gas Industry

Oil and gas drillers are suffering through their darkest hours at least since the financial crisis in 2008 and 2009, if not the worst period since the 1980s. Oil prices could fall to the mid to low $30s per barrel, not only forcing cut backs in production, but potentially forcing an increasing number of producers out of the market entirely.

Hercules Offshore (NASDAQ: HERO) just announced plans to file for bankruptcy after the shallow water rig supplier suffered from a rapid decline in business. Samson Resources Corp., held by private equity firm KKR & Co. (NYSE: KKR), plans on filing for bankruptcy protection in September.

With oil prices still searching for a bottom, more companies could be on the firing line.

Still, exploration and production companies have made significant strides in bringing down the cost of drilling. Everything from wringing out savings from suppliers, to achieving efficiency gains in drilling through better well spacing and focusing on prime acreage.

But those are still just incremental gains, and particularly with lower rates from oilfield service companies, those costs could rise again when the boom times return.

The real opportunity is in revolutionary cost-savings; savings that will take drilling into a new era.

Big Data

The next phase of cost reductions will come not from exploration companies twisting the arms of their suppliers, which will be tenuous at best, or from inventing a new piece of drilling hardware, but from innovative solutions in computers, data analytics, and number crunching. This will allow companies to reduce the cost of drilling, find new oil fields quickly and cheaply, dramatically increase drilling precision, and cut down on the number of dry wells.

Decades ago, data was collected on paper. Only in the 1980s and 1990s was drilling data put in digital format. But the volumes of data collected by companies was not integrated and was not easily analyzed. Putting all of those databases together is a massive hurdle.

But a new era is here in which data collection reaches new heights, and turning it into a format that can easily be interpreted, with decision-making stemming from that, could be revolutionary. It is being called “Big Data,” an umbrella term to describe an array of digital data collection, storage, analysis, and interpretation. It can occur up and down the supply chain, and can be used across departments within a company – engineers, logistics, and management.

Big Data is revolutionizing all sorts of industrial sectors, and oil and gas is one of them. There are several ways Big Data will provide a big boost to the oil patch in the coming years.

First, the exploration phase will be easier and cheaper. New data analytics can give E&Ps a more accurate picture of oil basins, with much more accurate seismic data, allowing companies to pinpoint where to put their drill bits. The data collected will be larger, faster, and more frequent.

Second, while in production, data analytics can boost recovery. Royal Dutch Shell (NYSE: RDS.A) for example, uses fiber optic sensors to analyze well production, and also put together a more accurate picture of remaining reserves in a project. The sensors, provided by HP (NYSE: HPQ), will allow Shell to collect truly gargantuan volumes of data. For instance, one of Shell’s wells can generate a petabyte’s (1 million gigabytes) worth of data. Shell is deploying these sensors at over 10,000 sites.

Moreover, prior iterations of data collection tended to be done ahead of a drilling project. Now data can be collected in real time during drilling and during production. Shell is using cloud computing to analyze the vast data that it is collecting. It has tapped Amazon’s (NASDAQ: AMZN) cloud computing infrastructure to analyze and store its data.

Third, in the midstream sector, new data collection will greatly enhance monitoring, allowing companies to detect safety issues before they arise. New technologies will cut down on the potential for an oil spill, and reduce the cost of maintenance. Instead of sending out work crews to conduct inspections, sensors and data collection can conduct real time analysis on critical infrastructure assets.

Finally, all of the data collected in the field will be able to be shared quicker, cheaper, and more continuously with management in executive suites. Software platforms provided by companies like IBM (NYSE: IBM) will allow E&P companies to gather and analyze real-time drilling conditions. Various systems will be able to communicate with each other, allowing companies to improve data integration. This will create better analysis and ultimately help inform important business decisions.

Early results find that improved data and analysis can boost oilfield performance by 6 to 8 percent, significant, but not game changing. However, those figures will rise in the coming years as Big Data continues to advance and E&P companies figure out how to better integrate the data platforms into their operations.

To be clear, the use of Big Data has been happening for quite some time, but the potential has still not been fully explored yet, as many oil companies have not figured out how to take advantage of the opportunities. Often, E&P companies are headed up by an executive with an engineering or business background. Innovation in software – unlike, say, innovation in drilling equipment – is slow to reach the executive’s radar. Such things are thought to be the purview of the IT department.

But that will change when executives understand the production gains that are available. An April 2015 survey from Accenture (NYSE: CAN) and Microsoft (NASDAQ: MSFT) found that 9 out of 10 oil industry professionals believe more sophisticated data analytics would boost workforce productivity, allow management to make faster decisions, and increase company value.

“Making the most of big data, IIoT and automation are indeed the next big opportunities for energy and oilfield services companies, and many are already starting work in these areas,” Accenture concluded. IIoT stands for Industrial Internet of Things, a term for the increasing use of digital technology in manufacturing and industrial processes. “Our survey tells us that companies who do not continue to invest in digital technologies risk being left behind.”

Implications for the Industry

Oil and gas producers are scrambling right now to cut costs, amidst the worst downturn in decades. Big Data offers one way to achieve real cost savings and production increases.

Ironically, companies that are struggling the worst (and need cost savings the most) probably won’t have the bandwidth (no pun intended) right now to truly take advantage of Big Data. They are focused on merely keeping the lights on, and may not have the vision to incorporate analytics. Collecting data is easy enough, but some of the most exciting gains will be in integrating systems, overhauling workplace operations – and crucially – making business decisions from these opportunities. This all takes a degree of forethought, something that is simply not available right now for smaller oil companies.

As a result, it will be the larger integrated oil companies – which are making investment decisions that span decades – that really push forward on Big Data. Shell is an example of that.

The weaker drilling companies may not survive the oil bust, but the companies that do make it through will be implementing different aspects of Big Data, and will be stronger for it. The oil majors are already doing so.

For investors, that means getting exposure to this era of innovation difficult. Companies like IBM or HP are massive, so there isn’t necessarily catalyst events on the horizon. The same is true for the oil majors, which are driven much more by oil prices and top line production figures. There aren’t easy “pure plays” for Big Data, as it is an amorphous term describing an era of digital innovation.

At the very least, it is important to understand the trend underway. A shakeout in the oil industry is taking place, and the companies investing in the future will excel, while others will be left behind.

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