At a certain point in its lifecycle, every industry faces its moment of reckoning with growing pressure to transform due to factors such as increasing competition, changing consumer preferences, government policy and other secular headwinds. The transformation usually takes the shape of improved supply chain discipline as well as streamlining business operations in order to achieve better operating margins.
For the oil and natural gas industry, the moment of truth arrived a few years ago after years of weak benchmark prices, shrinking margins and massive capital flight forced the sector to seriously rethink the way it does business with energy companies increasingly turning toward tech heavyweights for help in cutting costs and streamlining operations.
A good case in point is a partnership struck between Haliburton Co. (NYSE:HAL), Microsoft Inc. (NASDAQ:MSFT) and Accenture Plc. (NYSE:ACN) in 2020. For years, Haliburton, one of the world’s largest oilfield services companies, has been plagued by shrinking margins and chronic underperformance. The company eventually made a deal with the two cloud giants to migrate its existing data centers to cloud and enhance digital offerings.
Halliburton is hardly alone.
After years of dilly-dallying, oil and gas companies are now rapidly moving their IT infrastructure out to the Cloud as well as adopting Business Process Management (BPM) systems. This frequently results in a leaner, more agile organizational model whilst delivering significant cost savings.
Barclays estimates that the upstream market digital services industry will grow from less than $5 billion in 2020 to a more than $30 billion annual tab by 2025, thus enabling $150 billion in annual savings for oil producers. Opportunities for cost savings include cutting capital expenditures (capex) as well as selling, general and administrative (SG&A) costs and transportation operating costs.
According to Barclays, the digital age is finally dawning for the energy sector with the market poised to erupt over the next five years. Over the past few years, Microsoft has struck cloud partnerships with several Big Oil companies including ExxonMobil (NYSE:XOM), Chevron Inc. (NYSE:CVX) and Haliburton while Google’s parent company Alphabet Inc. (NASDAQ:GOOG) has significantly expanded its partnership with Schlumberger Ltd. (NYSE:SLB), another oilfield services giant. Meanwhile, Amazon Inc. (NASDAQ:AMZN) offers digital services to the industry through Amazon Web Services oil and gas division, and counts BP Plc. (NYSE:BP) and Shell Plc (NYSE:SHEL) among its top clients.
In many cases, Big Oil’s digital makeover is quite extensive.
For instance, Halliburton kicked off multiple digital transformation projects during the pandemic. Thailand’s PTT Exploration and Production and Kuwait Oil Company were among the notable oil and gas companies that were awarded Halliburton contracts to implement digital transformation and enhance efficiency and production at their oilfields.
For years, Big Oil has been using tech companies’ enterprise software in their highly complex operating systems--including rig management operations and precise drilling techniques. However, they have traditionally been somewhat reluctant to hand over their treasure troves of valuable data mainly on cyber security concerns as well as the need to maintain competitive advantages, preferring instead to develop most of their software developed in-house or by companies within the oilfield services sector such as Haliburton.
However, this is now changing as they look for ways to improve operational efficiencies in a bid to squeeze higher cash flows and profits from their existing operations.
Is the new approach working? The evidence seems to suggest so, with shale drilling costs on an encouraging downtrend. J.P. Morgan estimates that Permian's Delaware Basin oil drillers now require oil prices of just ~$33/bbl to break even down from $40/bbl in 2019.
[link] [comments] https://www.reddit.com/r/stocks/comments/12ays6h/digital_age_for_big_oil_using_big_tech_hal_msft/
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