BY ENERGY WORKFORCE ENERGY TECHNOLOGY COMMITTEE MEMBER ANTHONY THOMAS, PIPER SANDLER
The early excitement surrounding oilfield digitalization fueled a wave of investment into the development of digital tools and platforms for oil and gas. Numerous applications were developed, trialed and deployed across a wide range of applications in the energy value chain. Despite the significant value promised by these technologies, many early adopters struggled to realize the expected efficiency gains and cost reductions, as several impediments to rapid, enterprise-level technology adoption materialized. Compounding these technology adoption headwinds, a global pandemic and market downturn further disrupted the digitalization of the oilfield. As the market recovers and a prolonged upcycle is in view, interest in digital technologies has grown.
OVERCOMING OILFIELD NORMS
Operational success in the oilfield requires safe, consistent execution across multiple remote locations. A strong culture of autonomy and individual accountability drives fragmented, remote teams to be highly proactive and results oriented. Unfortunately, this autonomy can make it difficult to deploy technologies across the disparate and separately managed teams, assets and geographic regions. Further compounding the issue, the incentives of specific teams do not always align with those of corporate.
Field teams in the oilfield take great pride in having a “boots on the ground” mentality. This mentality, paired with a strong sense of accountability, can drive reluctance to reduce the level of human intervention in day-to-day operations. Much of this mentality can be justifiably traced to the highly fragmented and remote nature of operations. High-fidelity sensors and low-cost data transmission and storage have increased the accessibility, reliability and usability of modern digital tools, paving the way to full automation of remote assets. Despite the rapid proliferation of these modern tools, service providers continue to pair often unnecessary human intervention with digital automation. These duplicative efforts (and costs) can reduce or eliminate potential efficiencies, and therefore stymie future technology adoption.
STRUCTURAL MARKET CHALLENGES
The oilfield services market is highly fragmented as a wide range of services, typically from different providers, are required to meet the needs of upstream operators. This fragmentation makes it more challenging for new market entrants with innovative technology offerings to gain a foothold and achieve the scale needed to drive profitability. The service providers in this fragmented market are often pitted against each other in competitive bids by operators with limited contractual coverage to mitigate cost inflation. A critical issue in the modern oilfield is that service providers bear the cost of deploying these novel solutions, while the benefit accrues to the operators.
The pace of technology adoption is also stymied by widely utilized incumbent solutions built on aging technology infrastructure. Operating workflows and processes use decades-old tools that do not easily interface with modern, cloud-based digital solutions. Broadly deploying these newer digital tools can require significant updates to core IT infrastructure and costly integrations. These integration costs either increase the overall cost of technology adoption to the customer or decrease the margins and returns of the technology developer.
Market cyclicality has resulted in significant disruptions to the employee base of traditional energy companies. Unfortunately, the departures of long-tenured employees have resulted in the loss of decades of institutional knowledge and expertise. The slowing pace of entry of new college graduates into traditional energy jobs further strains knowledge transfer and operational continuity. Younger employees spend fewer years in their roles as they seek upward mobility and more rapid growth in responsibility. For companies attempting to sell and implement technology solutions into these structural headwinds, the sales cycle gets longer and more complicated as customer champions change roles or leave the industry. These human capital challenges have been exacerbated by the wild commodity price swings in recent years, forcing companies to rapidly shift priorities and budgets.
CHANGE IS ON THE HORIZON
This cycle feels different, and the pace of technology adoption seems to be accelerating.
For investors, a sense of pragmatism has taken the place of the initial hype around digital technology. Constrained capital flowing into oil and gas, high-interest rates and recessionary fears have moderated M&A transaction volume in recent years. ESG pressures placed further downward pressure on traditional energy investment. Oil and gas companies responded by increasing their focus on core capabilities and profitable organic growth. Venture-like returns in upstream assets attainable in the early days of the shale boom are no longer readily available to investors. There are, however, opportunities to invest in energy technologies that address some of the most pressing problems in the oilfield and achieve attractive rates of return.
Many energy companies created technology groups to evaluate, trial, manage and deploy digital technology solutions. Following a flurry of digital deployments, companies realized they had too many applications. Over time, these digital tools remain underutilized. Application fatigue is a natural response to the number of point solutions trialed and/or adopted and is a key driver of the increased need and appetite for enterprise-level coordination. This coordination will result in improved field connectivity and system-wide efficiency.
This market trough (coming or current, depending on your perspective) will be followed by an upcycle that should be more measured and longer in duration than prior ones. More than a decade of underinvestment in offshore exploration has resulted in a significant decline in offshore production. Historically, a significant amount of cutting-edge technology was developed to address challenges in high-risk offshore environments. Over time, as these technologies were refined and their associated costs compressed, they were deployed more broadly across land applications. Underinvestment in the offshore sector has undoubtedly negatively impacted the development and adoption of new technologies.
Declining productivity in U.S. shale basins has driven demand for technologies that can extend the life of existing fields and reduce the costs of future developments beyond “tier 1” fields. During the early innings of the shale boom, operators were rewarded for delineating acreage and growing production at the expense of profitability. Today, both oil and gas operators and service providers are heavily incentivized to return capital to investors. This focus on profitability has driven both groups to turn to technology to increase performance, reduce costs and drive better financial returns.
Continued annual growth in global demand for oil and gas has provided strong support for higher commodity prices. In response to growing demand during prior cycles, service providers rapidly built and deployed additional capital equipment, leveraging low-cost debt and equity capital availability. In the absence of readily available capital for this asset buildout, service providers must instead do more with their existing base of equipment and people by leveraging technology. Over time, technological differentiation should drive increased margins and multiple expansions.
Tools for developing and deploying technology are increasingly accessible, affordable and powerful. The cost of digital storage and processing power has decreased significantly over time. The performance of sensors and edge devices continues to improve. Cloud-based solutions have largely replaced their on-premises predecessors. As the tools for technology enablement have evolved, so has the employee base responsible for deploying and maintaining platforms that utilize these modern components. Digital natives who have more recently entered the workforce are taking on roles with increasing responsibility, decision-making authority and budget oversight. Today’s workforce is increasingly dispersed as remote work persists. Coordinating activities of this modern workforce requires an increased reliance on digital tools for coordination and execution.
It’s an exciting time for companies and investors who stand to benefit from this cycle of technology development and adoption.
ENERGY WORKFORCE ENERGY TECHNOLOGY COMMITTEE MEMBER
ANTHONY THOMAS II, DIRECTOR, PIPER SANDLER & CO. ENERGY & POWER INVESTMENT BANKING
Anthony Thomas joined the energy & power investment banking group at Piper Sandler in 2022.
Prior to joining the firm, Thomas was a senior executive at GoExpedi and an investor at Montrose Lane. Before Montrose Lane, he was an executive at Ringers Gloves and an investment banker at Tudor, Pickering, Holt & Co. Thomas began his career as an engineer at Schlumberger. He has worked on a wide range of transactions as an advisor, investor and corporate executive across energy and energy technology sectors.
Thomas earned bachelor’s and master’s degrees in mechanical engineering from the Massachusetts Institute of Technology. He holds a Master of Business Administration degree from the Wharton School of the University of Pennsylvania.
