Asset/portfolio management

Grappling With the Energy Transition? How To Get “Beyond the Barrel”

For the foreseeable future, going beyond the barrel will really mean maximizing returns from the barrel, including the identification and harnessing of potential gains from capital planning, asset management, and operations.

Dollar Sign with Computer Circuit Board
Pressure from ESG/sustainability concerns and investors has lowered the projected return now required to justify a renewable investment to just 3 to 5%.
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For the foreseeable future, going “beyond the barrel” will really mean maximizing returns from the barrel and applying some appreciable portion of those gains to developing low-carbon and negative-carbon energy and energy-related opportunities.

With oil and gas prices bouncing back, it’s a good time to invest in the low-carbon future the energy industry is already embracing. Energy companies such as Exxon, Shell, BP, Oxy, Suncor, TotalEnergies, Saudi Aramco, and many others have rolled out low-carbon or net-zero initiatives, and the availability of capital, massive scale, and vast wealth of expertise they and others can harness bodes well for their success.

Renewable energy generation (wind, solar), alternative fuels (biofuels, hydrogen), and carbon-reduction approaches such as direct air capture and carbon capture, utilization, and storage (CCUS) garner much of the attention. What tends to slip below the fold is the degree to which success with the energy transition will depend on digital transformation.

After all, the term “energy transition” is really just shorthand for diversification into adjacent industries and sectors such as utilities, solar and wind power, and energy storage. With the possible exception of the nascent energy-storage business, these are not greenfield opportunities. Energy majors bring to bear the scale and financial and human resources well beyond that of all but the largest investor-owned utilities, but they’ll have to be strategically savvy, tactically sharp, and operationally efficient to 1) compete in the short term and 2) build out and operate in the long term the immense infrastructure necessary to help power a largely electrified vehicle fleet or capture and sequester enough carbon to enable the continued widespread use of fossil fuels.

Big Questions
All that raises questions for energy-business leaders. How do you best invest in and manage a more-diverse product portfolio capable of generating future returns along the lines of those the industry has historically enjoyed—or better returns? How do you respond to the customer’s desire for more-precise, more-responsive service levels? How do you optimize the hydrocarbon value chain—and now, the carbon value chain—so you can nimbly manage a portfolio of profitable products and emerging offerings?

Let me address these questions though three lenses: capital planning, asset management, and operations.

Capital planning wasn’t exactly easy in the traditional oil and gas business. But if you spent a dollar to update a refinery or build a new one, the return on investment was a known quantity. That has changed. If you spend a dollar on a renewable resource, CCUS, or retail, the ROI is less clear. The good news is that pressure from ESG/sustainability concerns and investors has lowered the projected return now required to justify a renewable investment to just 3 to 5%. That’s compared to 20% to justify a new long-cycle oil project. But it can be hard to sketch out what the actual return on renewables may be. How do you sharpen the picture?

You need a holistic view of your assets, for one thing. What do you own? What did you spend on it? Is it running? For how long? Does it need maintenance? Should you replace it before end of life—or let it run to end of life? How do you leverage oil and gas revenues to build out renewables, or CCUS, or retail, or other businesses of the future? What will your supply chain look like with biofuel refineries, solar farms, and wind energy, or other installations as part of the production mix?

Many of these questions have long applied to oil and gas capital planning. But as energy businesses diversify, they are becoming more complex. Also, a deeper understanding of one’s existing assets and more-robust modeling and forecasting capabilities become more important given the shallower well of experience in these newer realms of investment.

Listen Up
The good news here is that the internet of things (IoT), machine learning, blockchain, and other technologies are enabling huge strides in asset management. The timing couldn’t be better, as asset management is what’s going to help you operate efficiently and profitably in your existing business as you manage the introduction and growth of renewables, biofuels, hydrogen, CCUS, and other emerging businesses. This is about optimizing your resources, be they dollars or people. You can’t do that without a precise, real-time understanding of what those resources are.

Harnessing the best of asset management can also blunt the impact of the energy industry’s retirement wave. Consider the experienced refinery engineer who can sense trouble brewing by the subtle change of how a machine sounds. When she retires, you’re probably going to need automated sensors to lend their ears to whomever takes her place. What’s more, that engineer’s skill probably won’t translate to a wind farm. To understand the talent you need, you must understand your assets intimately.

There are other benefits to automated asset management, perhaps foremost the ability to support predictive maintenance and forecasting. The convergence of IT and operational technology with machine learning and prescriptive operations and maintenance can enable greater asset intelligence. That can apply both in-house as well as to cooperation with OEM and outside engineering specialists. Real-time equipment monitoring, based on critical values and trends, enables efficient asset-maintenance strategies and better management of costs, risks, and performance. In addition, this wealth of data can inform the design and operation of new and better assets down the road.

Digital Transformation
Such automation is blurring the lines between asset management and operations, particularly on the maintenance side. But it’s also enabling an operational agility that, not long ago, would have seemed fanciful: think personalized offerings from live order and inventory management and pay-for-outcome pricing. IoT and machine learning will enable real-time visibility into everything that’s happening in your company. Its distillations will pour straight into supporting and improving the choices of everyone from line managers to C-level executives.

These insights will help ensure profitability while maintaining quality of service across a wider breadth of services and modes. Consider the example of integrating IoT pipeline-gauge data related to a specific customer’s product. Suddenly, you’ve got real-time tracking and the capability for remote adjustment. That not only helps you optimize your operations; it also can drive customer loyalty.

Automating operations in such ways also shifts routine tasks from staff to systems enabled by machine learning and artificial intelligence, freeing up capacity for higher-value tasks and, ideally, opening up the headspace needed to define and pursue further operational improvements and exploit new market opportunities to serve new and existing customers.

Energy companies that put customer experience in the crosshairs of their strategies while weaving together formerly siloed processes, intelligent technologies, and real-world data from operations, customers, and partners will be best positioned for the energy transition now afoot. Getting there will take a digital transformation capable of providing comprehensive insights into operations, products, and services through real-time monitoring, integrated data sources, AI, predictive analytics, and machine-learning capabilities.

Moving beyond the barrel won’t be easy. But for forward-thinking energy companies—and the sustainability of a warming planet—it will most certainly be worth it.