Oil & Gas has gone through a crippling crisis in the last three years. What are service providers doing to help Oil & Gas recover? This question plays a central role in our 2016 Energy Operations Blueprint, HfS’ inaugural report on the services provided to the oil and gas industry. Infosys is an As-a-Service Winner’s Circle provider with strong roots in the oil and gas industry and a clear vision for the services needed to pull the industry out of the slump it has been in since the oil price collapsed in 2014. Since the 2016 Blueprint, the oil price has rebounded and is stabilizing between $50 and $55 per barrel, giving the industry some more breathing room and a momentum for change.
Time to have a conversation with Robin Goswami and John Ruddy. Robin heads Infosys’ Energy practice in the Americas. John in the president of Noah Consulting, Infosys’ 2015 acquisition that bolsters its capabilities in Oil & Gas.
Derk Erbé, Research Vice President, Supply Chain, Procurement, and Energy: Robin and John, thanks for sharing your vision for the Oil & Gas industry with our audience at Horses for Sources and candidly discussing the challenges of operating in a struggling industry. Infosys impressed us in the Energy Operations Blueprint, with its vision for the evolution of services that this industry needs to pull itself out of the downward spiral since 2014. Even though this is a very volatile environment with challenging economic circumstances, Infosys has continued to invest. How do you see the current situation in Oil & Gas?
Robin Goswami, Vice President and Head of Energy Practice Americas, Infosys: We are starting to see some recovery but there is a growing realization that this is not going to be a quick recovery, but more of a gradual one, like what we saw in the ’80s downturn.
In 2014, everybody thought this would be a six-month downturn, by early 2015 it looked like a one-year downturn. Only in late 2015, was there a realization that this could last a lot longer and would be much harder to predict. The last ten years now seem more like a spike, with the market having settled to a new normal of $50 a barrel of oil.
Due to the downturn of the last couple of years, companies have stopped most capital projects, whether in IT or the field. They are trying to optimize what they have. At some point, they must start looking at different ways of doing things including radically different ways of leveraging technology. This is where offerings like Infosys Mana – the knowledge based artificial intelligence will play a significant role in driving automation and innovation. So far, this has happened in spurts and pockets. We’ve seen a couple of companies try to do it, but most of these have been the smaller to medium sized ones in a desperate situation. We have not seen the bigger companies do this just yet, but lately, are starting to see a changed mindset and some positive signs as a result.
We’ll see a lot more interest in the things that we’ve been trying to talk about for the last year, year and a half or so. Automation, how can that help to significantly reduce operational expenditures? Analytics, how can you leverage analytics to get a lot more efficient and predictive analytics around equipment failure.
John Ruddy, President, Noah Consulting: The industry is learning how to be profitable in a $40 per barrel world, and that the days of anything more than $60 are over. They are learning that they need to be profitable at this price point, and that’s driving much leaner, much more efficient operations and much more reliance on automation, machine learning, and analytics. We’re starting to see modest growth because our clients recognize that this is their direction. They’ve stabilized following the workforce reduction, which was very significant. I believe they’re now starting to become leaner, more agile organization that they need to be to survive in today’s market.
Derk: Do you feel they are making the shift in mindset from cutting down costs in existing processes and with workforce reduction towards how to create value in a different way and create new value?
John: Now that the price is somewhat stabilized, we see the emergence of a focus on how they become a lean, responsive organization. We see a big focus on operational technologies around real-time data, and that the digital oil field wave that happened 10 -15 years ago is now re-emerging with IoT being the main catalysts, with even more sensors, and even more data and even more automation are happening.
We see a big push into more Cloud based As-a-Service models out there. In fact, the operators are forcing the software providers to move there more quickly than the software providers had anticipated. There is a very strong desire on the demand side for an As-a-Service ecosystem and the operators at one point were reluctant and are now pushing very hard for that type of a model to be offered by the vendors.
Derk: We’re on the verge of a very interesting period in oil and gas. Would innovation go slower or faster if the oil price were slightly higher?
Robin: Innovation would go faster if the oil price were slightly higher. Our clients have been focusing on primary goals, ensuring that they stay just cash flow positive. They don’t have the cushion to invest in innovation. If the oil price was slightly higher, I think that the money would be there. I also feel that if the price were to push 80 or 90 a barrel all of this would be forgotten, and we would be back to doing business the way we were before. But if the price consistently stays in the 50s, it will drive some efforts and activity to bring up the level of investment in innovation.
Derk: There is this fine line for innovation, investments and having the ability and willingness to innovate. Where do you think we’ll find the sweet spot?
John: I think $50 to $60 per barrel might be the sweet spot for a lot of innovation, a lot of demand to be addressed, especially with the smaller workforces that are out there and to a certain degree, a refreshment of the workforce regarding the average age coming down. I think you’re going to find more millennials driving automation as well. The voice for innovation will be a little bit louder perhaps than it was pre-downturn. I do think that the $50 to $60 sweet spot would have allowed more innovation to be applied to the clients. There are modest pockets of it happening with prices in the $40 range. $50 to $60 will open the floodgates for people to be innovative. Anything more than that ($60) and people don’t care about innovation anymore.
Derk: The industry has adapted to this ‘new normal’ of $60 per barrel as the peak price. What does that mean for the focus of your oil and gas practice and your competitors?
Robin: Oil and gas is a cyclical industry, and we’re in a down cycle, but we’ve got to continue to invest. I strongly believe that when it does come back, the folks who have invested will reap the rewards of their investments. We continue to focus on oil and gas and are seeing some positive movement. The tough part is the fact that our work is split between OpEx and CapEx and the CapEx side of the work really came to a halt. We’ve got clients who are doing work on analytics, data lake projects, or initiatives to get more efficient, but it’s small compared to the amount of work pre-downturn. You can count the number of ERP implementations currently happening in the industry on the one hand. That was completely different four years ago. At any given point in time, four or five projects were kicked off. That has not happened recently at all. In terms of competition, we used to have eight or nine competitors bid for the same projects. That has drastically changed, a lot of competition has re-focused or exited this space.
We have seen a lot of companies that in the past never looked at outsourcing who have now started to approach the market and say, “Let us explore working with outsourcing companies that can do IT a lot more efficiently than we can do it ourselves.” It has opened some opportunities. But the opportunities are still few and small. We are doing well from a perspective of winning them, but the squeeze in capital expenditure has hurt all the service providers.
We acquired Noah Consulting in late 2015. We continue to invest in oil and gas. We see a modest growth of some CapEx-projects, though not in a big way. The significant change that happened over the last year was people trying to find more efficient ways of doing their expansion. Whether it is the large or the small players, everybody is trying to use this down phase to optimize how their operating expenditure is leveraged.
We are focusing on delivering value by proposing automation (Infosys Mana) and leveraging digital to optimize the operational costs and are starting to see success.
Derk: What is the key to creating more of an innovation-minded culture and boost As-a-Service adoption in this hundred-year industry that doesn’t like to change and frankly lacked the incentive to change most of the time?
John: The key is education. A lot of it is repetition. A lot of it is helping to stimulate some of that demand and get our industry comfortable with new ideas. I’ll give an example. There is a lot of innovation happening in Infosys, for instance in our Palo Alto offices. We were out there a couple of months ago. The first thing you notice when you walk into the lobby is a science lab type experiment set up with plants. There are different basil plants. Each plant has sensors measuring the nutrients in the soil and the amount of light and the amount of water that they’re getting. Each plant is generating a growth curve, and they’re learning from each other. They’re looking at each other’s growth curves and adopting best practices and dropping bad practices, and are using our AI platform Mana.
That’s being used in the other industries, but not yet adopted by oil and gas in a large manner, but it’s applied to this little science experiment. That was an inspiration for us. We looked at that and take that same exact concept and took it out to an oilfield and have pumpers learn from each other. Have the pumpers look at the Geoscience strata for that field. They’re from the same field, comparing that pad to the one a quarter mile away and the pumpers look at the data and learn from each other and look at economic conditions.
We’re test driving those innovative concepts. It’s an industry that avoids disruptions. We’re working towards it, but it’s an educational process. We show them the possibilities and help them get more and more comfortable with innovation. Some clients are first movers, prove the benefits and the rest of the industry will follow. The onus is on us to find that first mover, and that’s what we’re out there doing.
Derk: If you were given the keys to the oil and gas services kingdom and you can rule the services world for a week, what’s the one thing that you would do to change the industry for the better?
Robin: That’s a tough one. John, I’ll let you go first.
John: Having the keys to the kingdom, one very broad-based public relations thing that I would do is I would promote natural gas as a clean fuel alternative. Why aren’t there more compressed natural gas vehicles? Why aren’t there more natural gas power plants? I know there is an uptake in those, but not to the degree it could be. There is a huge environmental and climate change concern, and our industry has the answer to that, and that’s natural gas. As king, I’d be out there to get the public comfortable that natural gas as a clean fuel alternative that should be embraced and not pushed away.
Robin: I would like the companies to look at the industry and say “Look, we all know, oil and gas will be there in our lifetimes. We will come out of the downturn at some point. Lets leverage this downturn and look to use technology to change our model. This is an opportunity for us to reset our entire cost model, our entire way of operating with technology for the next decade.”
Right from the beginning of the downturn, we’ve had a view from the outside. We are very much part of the oil and gas industry, but we have the luxury of having the bulk of our business focus on IT services, so any impact from oil and gas is well cushioned by the rest of the Infosys business. That gives us the cushion to make acquisitions, invest and enables us to continue what we are doing. That is not an advantage, unfortunately, that most oil and gas companies have. They are unfortunately dealing with the day to day of trying to keep positive cash flows and are forced to react to weekly, monthly, quarterly pressures and none of them have been able to step back and say, “Let’s assume this is a three year or a five-year downturn and let’s try to do things differently”. Definitely not when it hit in 2014.
I saw this as an opportunity in late 2014, for companies to completely change their model, move to other service models, look at analytics, automation, Internet of Things, to radically work differently with technology, not only IT, technology overall. Most of them were unable to take that opportunity. The longer the downturn continues, the more you are, in a sense, in a hole where you are trying to just survive. The amount of cash that companies had in 2014 and 2015 was just not there in 2016. Those initiatives could have been taken on in 2014 and 2015. It has become way more difficult, a lot more challenging, now. And this is the one thing I would like us to do differently.
If I had the keys to the kingdom, that is what I would do. Try to move away from the quarterly, the monthly survival and look at leveraging technology to change the model.
Derk: The saying is “never waste a good crisis” and they’re wasting a good crisis to change. Would you recommend having a different dialogue with the financial markets, because that’s part of the issue for oil and gas companies? They want to do the same for the shareholders as they did when the oil price was $100. Does that need to change or they’re addicted to doing the same as ever before?
Robin: I don’t think we have a choice, Derk. I think we have reached a stage where $80 barrel of oil is not coming back shortly. The boom won’t be back for a while and we must reset expectations and look to do things differently and leverage technology a lot more.
Posted in : Energy