Proving the Business Case for the Internet of Things

IoT adoption by oil and gas industries could be crucial to survival, believes Cisco

Steve Rogerson
April 28, 2015
 
IoT adoption by oil and gas industries could fuel a GDP increase of up to 0.8%, or $816bn, over ten years, according to a study by Cisco.
 
For a $50bn oil and gas firm, increased IoT adoption translates into an 11% bottom-line (EBIT) improvement. For the entire industry, increased IoT adoption generates $600bn in value at stake, according to Cisco. The 14-country survey revealed that oil and gas professionals believe operational efficiency of existing projects and maintenance of assets and infrastructure are their top two areas of increased investment over the next two years.
 
Worldwide oil production is outpacing demand, and oil prices have more than halved since June 2014. Many factors – including soft demand, increasing US production and diminishing storage for crude oil – suggest that the days of $100-a-barrel oil may not return. This presents potentially disastrous consequences for oil and gas firms that are not prepared to accelerate their digital transformation. Innovative oil and gas firms, however, believe today’s turbulent market landscape provides an opportunity to grab competitive advantage by harnessing new technologies.
 
The survey uncovered the urgency for the oil and gas industry to adopt digital technologies powered by the IoT to stay competitive. The survey identified intelligence from data as the key area needed to improve operational efficiency, and data analytics as the top IoT driver for faster, better decision-making.
 
Industry adoption of IoT could increase global GDP by up to 0.8%, or $816bn, concluded the survey. To calculate this number, Oxford Economics began by incorporating into its global economic model Cisco’s $600bn IoT value at stake estimate for the oil and gas industry over the next decade, including productivity gains, reduced opex and capex, and IoT adoption costs of $180bn.
 
This estimate is based on both increased supply and greater demand, resulting in a positive supply shock for the global economy. Lower oil prices stimulate more spending on goods and services, with most of the gains being realised through the consumer sector. Oxford also projects that global consumer spending could be up to 1.5% higher than the base-case forecast by 2025. This aggregate increase includes a second round impact of higher economic activity, raising overall employment and decreasing unemployment around the globe. 
 
“Cisco Consulting Services estimated that the adoption cost of the internet of everything would be about $180bn for the industry,” said Kathy Bostjancic, director for US macro investor services at Oxford Economics. “Over a ten-year period, the multiplier impact would be about three to four times when it’s translated to the global economy. That's quite a positive multiplier impact.”
 
Cisco estimates that this IoT-driven value will come from improvements in asset utilisation, process or supply chain efficiency, employee productivity, capex savings, and market innovations. For a midsize oil and gas company with $50bn in annual revenue, IoT can generate a $538m annualprofit increase and an 11% bottom-line (EBIT) improvement. About 72% of these benefits are derived from cost reduction, while the remaining 28% are from increased revenues.
 
Survey respondents named operational efficiency of existing projects or reserves and maintenance of assets and infrastructure as their top two areas of increased investment over the next 24 months. Leaders must improve operational efficiencies and asset life to stay competitive without cutting costs through layoffs and project cancellations.
 
While survey respondents understand that connecting things is a necessity, true value lies in the intelligence of extracted and analysed data from the things. This intelligence allows oil and gas firms to drive business and operational transformation.
 
Nearly half of the respondents named data as the area of IoT they need to improve most to make the most effective use of connected technologies.
 
Effective data management and analytics can generate operational and business benefits. Offshore oil platforms generate between 1 and 2Tbyte of time-sensitive data per day.Slow satellite communications are the most common link to transmit these data, requiring over 12 days to move one day’s worth of oil-platform data to a central repository such as the cloud. An effective data strategy involves being able to detect automatically whether the data need to be sent to the cloud for analysis, or whether they should be analysed at the edge of the network, where the data are collected, for example from sensors on drilling equipment. Edge analytics allow oil and gas companies to gain greater real-time insight, thus providing specific business and operational advantages.
 
Survey respondents ranked faster problem resolution as the number one business benefit of connected technologies, while improved production efficiency was the top operational benefit. Respondents believe IoT will boost operational efficiencies primarily in the upstream segment of the value chain, naming production as the main beneficiary.
 
Analytics-driven insights will drive the opportunity for process change and optimisation. More than half of respondents believe IoT has the potential to automate anywhere from 25 to nearly 50% of manual processes. Production optimisation was identified by 56% of respondents as the process with most IoT-driven automation benefits, ahead of maintenance and business operations.
 
Protection of company information – including customer, transactional and geological data – was identified as the chief security concern. The US Department of Homeland Security stated that 53% of all cyber-security incidents in the six months ending in May 2013 occurred in the energy sector, and the number of attacks was increasing. Process control systems were the second-biggest security concern, followed by IT systems.
 
Effective IT–OT convergence can optimise business processes, enhance information for better decisions, reduce costs, lower risks and shorten project timelines. Oil and gas companies need to make improvements in this regard: 59% of survey respondents did not believe that their firms’ IT and OT strategies were aligned.
 
“For the first time, pressure is being brought to bear on organisations across the globe to re-engineer the way they do things, and that requires a lot of thought,” said Graham Hill, executive vice president at KBR. “It requires the bringing together of technology and people. If the going gets tough in the industry and you are looking to make cost savings, you will want remote monitoring and remote operation, which is going to require an awful lot of information traffic – intelligent, real-time diagnostics, and then intervention.”