Digitalisation powers value creation
Upstream producers are lagging behind other sectors in leveraging the technological revolution
The oil and gas (O&G) industry is in the middle of a value-creation crisis and has delivered subpar shareholder returns for the past decade. The energy demand collapse following the Covid-19 pandemic has both enhanced the urgency of change and acted as a catalyst for it.
To survive, O&G companies need to transform their legacy businesses to achieve a step change in performance and, at the same time, innovate their business models to tap into new value pools. Success in leveraging digital technologies is critical on both of these fronts.
To evaluate the industry’s digital maturity, management consultants Boston Consulting Group (BCG) recently conducted a Digital Acceleration Index (DAI) study of almost 50 companies using a combination of online surveys and deep-dive interviews.
80pc – Companies citing difficulty recruiting talent
Given that this year most O&G companies have announced capex cuts of 10-30pc and opex cuts of 5-20pc, the need to use digital to power fundamental transformation is greater than ever.
The study generated several major insights and led to a forthcoming BCG report titled Digital Powers Value Creation in Oil and Gas. The report focuses on two key themes: upstream O&G companies are struggling to deliver value from digital, and digital maturity correlates with value delivery.
While there is new urgency for transformation to improve performance, the industry has been delivering subpar value to investors for years. From 2010 to 2018, producers in credit rating agency S&P Global Ratings’ 1200 list generated only 2pc annualised total shareholder returns (TSR), the lowest among the ten industries measured. And from January 2019 to February 2020, this fell by 9pc, making O&G the only industry to actually destroy shareholder value.
O&G’s poor performance compared with other industries also shows up in the DAI results. No upstream O&G company scored high enough in our survey to classify as a digital leader. That is somewhat surprising given that nine out of ten respondents said they have a digital vision for the company, and two out of three said they have clearly defined digital ambitions.
Part of the explanation for the poor performance may be that only one of six O&G executives said their digital strategy is fully understood throughout the company. This lack of clarity clearly impacts the ability to move from strategy to execution. On five of the six DAI execution measures, the O&G industry trails all other industries (see Fig. 1).
The DAI survey also sheds some light on the factors underpinning these execution issues. First, only one out of three companies have strong digital champions to lead the cultural change; this is a serious problem given most large O&G companies are biased towards command-and-control cultures and tend to value predictability over agility.
Another important issue is digital talent. Among the survey respondents, 80pc report being dissatisfied with their ability to attract and retain digital talent. Finally, many feel that execution has been hampered by a piecemeal, incremental approach to digital improvements that does not fundamentally rethink ways of working.
There are, of course, some pockets of excellence in the industry. For example, within the field of big data analytics, seismic interpretation has for a long time been a frontrunner pushing the boundaries of supercomputing.
But most of these pockets are very specific within single disciplines. To unlock the full value potential from digital initiatives, companies must reinvent and optimise core workflows end-to-end. To do so, they need to liberate data using horizontal technology layers that cut across silos and deploy multidisciplinary operating models that can make fast, effective decisions. We believe that companies that do so have a great opportunity to create value (see Fig. 2).
Correlating value delivery
Another major finding from the DAI survey was a strong correlation between digital maturity and value creation, measured by TSR, portfolio breakeven and free cash flow (see Fig. 3). Of course, correlation is not the same as causality. However, we have observed these correlations consistently across industries. Moreover, business leaders and investors consistently credit digital as an important source of value creation.
When analysing TSR from Feb 2017 to Feb 2020, we see that upstream O&G companies with the highest DAI scores average six percentage points higher in terms of TSR than those in the lowest-scoring category. Given that the average TSR in the industry over the past decade has typically been only a few percentage points positive or negative, a swing of six percentage points could make the difference between creating and destroying shareholder value.
There is also a correlation between digitising and a lower breakeven. While many factors determine the breakeven, the correlation with digital suggests that digitally mature companies can positively affect the breakeven by increasing production, reducing capex and/or reducing opex. Finally, evidence also suggests that companies advanced in adopting new ways of working—such as agile and multidisciplinary teams—have higher free cash flow.
Havard Holmas is partner and associate director, Sylvain Santamarta a managing director and senior partner, and Marie-Helene Ben Samoun a managing director & partner at BCG.
This article is taken from our forthcoming Digitalisation Review, which will be published in November.