BP rides the wave of digitalization with reduction in operating costs and revenue boost on the horizon

Oil and gas industry has always been at the forefront of innovation; how else would it be possible to extract oil from the harsh and deepwater environments around the world if not through an innovative approach, adoption of new ideas and technologies, and taking risks?

In recent years, there has been a lot of talk about digitalization within the oil and gas sector and whether the industry’s adoption and implementation of digital technologies is fast enough so as not to stay behind other industries in the market.

While it is nearly impossible to go into details of every major company’s approach to digitalization, some oil supermajors do stand out in their approach to digital transformation, especially since the market downturn between 2014 and 2016.

It seems that, after the previous oil price collapse, the industry realized that one of the ways to stay afloat and move forward in a new, more sustainable way is to adapt and embrace the digitalization.

Wei Liu, Wood Mackenzie Director, Upstream Supply Chain Consulting, said last year: “The downturn was a wake-up call. It challenged the industry’s conservative culture and forced companies to structurally adjust to be more resilient in a low oil price environment. Despite the industry being technically sophisticated and one of the earliest digital adopters, until this point digitalization was not seen as strategically imperative”.

Back in October 2019, energy intelligence firm Rystad Energy estimated that as much as $100 billion could be eliminated from E&P upstream budgets through automation and digitalization initiatives in the 2020s.

According to Rystad, about $1 trillion was spent in 2018 on operational expenditures, wells, facilities, and subsea capital expenditures across more than 3,000 companies in the upstream space.

“There are varying degrees of potential savings within offshore, shale and conventional onshore activity budgets, but in total, around 10 per cent of this spend can be erased through more efficient and productive operations thanks to automation and digitalization”, Rystad said at the time.

However, what we did not know in 2019 is that the beginning of 2020 would bring about an unprecedented chain of events which would lead to another downturn in the oil and gas sector, the third one in twelve years.

Following another oil price crash in combination with the coronavirus pandemic, which destroyed the oil demand, the oil market found itself in an uncharted territory where the survival is, among other things, dependent on the ability to transform and adapt to new circumstances.

One of the ways of doing this might just be through digital transformation, which could increase production efficiency and enable OPEX reductions, as well as provide a reduction in lost time.

As an oil supermajor with resources far greater than many others have, BP has been doing its part to unlock the value of technology and tap into its benefits. This has become especially noticeable during 2020.

As part of its plans to mitigate the effects of the climate change and its goal to become a net-zero company by 2050, oil major BP has also placed focus on its innovation and bolstering digital efforts as a way to create additional value and reduce its carbon footprint.

BP’s management in June revised its long-term price assumptions and, as a result, announced non-cash impairment charges and write-offs in an aggregate range of $13 billion to $17.5 billion post-tax for 2Q 2020.

At the time, BP said it had a growing expectation that the aftermath of the pandemic would accelerate the pace of transition to a lower-carbon economy and energy system so that their economies would be more resilient in the future.

Come August 2020 and BP also revealed parts of its new strategy that would reshape the company from an international oil company to an integrated energy company.

BP then unveiled its aim to increase annual low carbon investment ten-fold to around $5 billion a year by 2030. The oil major said it would be “building out an integrated portfolio of low carbon technologies, including renewables, bioenergy, and early positions in hydrogen and CCUS”.

In an effort to further digital transformation ‎in energy systems and advance the net-zero carbon goals of both companies, BP and Microsoft last week agreed to collaborate as strategic partners.

This includes a co-innovation effort focused on digital solutions, the continued use of Microsoft Azure as a cloud-based ‎solution for BP infrastructure and BP supplying renewable energy to help Microsoft meet its 2025 ‎renewable energy goals.‎

Looking to provide more insight into its business plans and new strategy launched back in August, BP last week held its Capital markets day presentations and drilled down into its business plans, providing more of a window on them than ever before.

Over the course of three days, BP presented its Energy Outlook, plans for growth in low carbon electricity and energy, integrating energy systems, financial frame, and plans to drive digital and innovation across the business.

“Now it is all about delivery – and we know we will need your support to be successful”, Bernard Looney, BP CEO, said.

During day three of this event, BP detailed its plans to increase investments into digital.

David Eyton, BP EVP, innovation & engineering, said: “We plan to double capital investment in digital to around $1.5 billion gross on average per annum out to 2025. We expect this to enable around $1 billion net reduction in BP’s operating costs by end of 2023, and to provide access to a prize of around $1 billion net in enhanced revenues by 2025.

“Lastly, our aspiration is to create around 10 more, new digital businesses in the Launchpad by end 2022 – focused in intelligent sensing and intelligent commodities – each with a billion-dollar potential”.

According to Eyton, BP is looking to create value from digital and innovation through four sources.

The first two sources relate to digital investment in existing businesses to transform core operations and extend customer access.

The third source comes from reducing carbon emissions related to BP’s operations and products.

The last source comes from investing in new digital businesses which are adjacent to BP’s existing businesses.

Eyton said: “In 2020 we plan to spend around $3 billion gross in innovation and engineering, of which about half is the cost of operating our digital estate. The other half comprises capital and revenue expenditure – in research and development, digital systems, venture capital and new business building”.

Eyton further talked about investments BP plans to make in digital and low carbon capabilities.

“Through to 2025, 80 per cent of these incremental earnings are expected to come from our resilient and focused hydrocarbon business, leveraging prior investment in digital systems”.

As part of this, Eyton said that BP expects to migrate 80 per cent of applications to the cloud by 2025; and plans to transition BP to a platform-based business model.

BP’s sources of cost efficiency include the centralisation and automation of work planning, management and monitoring in well operations, oil and gas production, and refining; and, in its back office, consolidating digital technology platforms, and using Robotic Process Automation to automate manual processes.

The sources of revenue enhancement include the use of machine learning and advanced analytics.

Eyton emphasized that BP’s research and development spend of around $350 million per year will be increasingly oriented towards reducing carbon.

Some of the examples of this include lowering the carbon emissions of products in refineries, co-engineering lubricants and coolants designed for wind turbines, hybrid and electric vehicle drives and battery systems.

Other examples include developing conversion and carbon capture technologies which can drive down the cost of decarbonising fossil fuels, as well as reducing the cost of electrolysis to make green hydrogen competitive and trialing and deploying a range of local, low and high-altitude sensors to detect and measure methane emissions, and then identifying the best ways of mitigating these.

Another way of growing value for BP is in areas adjacent to its core businesses.

Eyton stated: “We are investing around $100 million per year in both our existing portfolio and new companies, focused largely on digital and low carbon. At the end of 2019 BP ventures had invested around $650 million of which about 25 per cent was in companies that play into our core hydrocarbon businesses.

“We have received exit proceeds of around $100 million so far and, when combined with strategic value, are well on target to deliver a return of more than 25 per cent on this activity set”.

In 2019, BP created Launchpad, a new business-scaling factory, which BP is using to scale new digitally-led businesses adjacent to its core.

BP expects Launchpad’s portfolio to be between 10 – 15 companies by 2022, focused on intelligent sensing, that is using advanced sensing and analytics to optimise value chains and operations; and intelligent commodities – building new, virtual exchanges for differentiated emerging commodities linked to supply chain provenance.

In combination, BP expects the Launchpad and Ventures portfolio to return net cash to BP from 2025 onwards.

“We don’t just talk about innovation in BP, we do it. And have been doing it for many years”, Eyton said.

Back in 2017, BP set out its vision to become “the leading digital upstream company”.

Three years later, BP’s transformation of operations has delivered nearly $1 billion of net cumulative incremental pre-tax cash through a combination of production uplift and cost reduction.

BP’s examples of innovations which reduce the carbon emissions from its own as well as customers’ operations include the use of predictive wind analytics, sustainable fuels production, and carbon offsetting.

Concluding his presentation, Eyton said: “[…] We know the world is on an unsustainable path, but BP’s net zero ambition is unequivocal.

“This means we must change, and innovate at pace and scale, to deliver both lower carbon and higher returns”.

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Another example of embracing the change in the way we perform our everyday work powered by digital approach has recently been announced by German oil and gas company Wintershall Dea.

Namely, the German player has revealed the introduction of new hybrid work model named Flex Forward.

Mario Mehren, CEO of Wintershall Dea, said: “Our team has proven over the past months that we can work together extremely efficiently and effectively over digital channels. All of us here have taken one big step forward together. And we have shown that we can be flexible”.

The underlying idea of the Flex Forward concept is that every team in the company defines two core working days on which all its members work at the office while the decision on location for the remaining working days is on workers to decide.

Times they certainly are a-changing but given the complexity of digitalization processes and their implementation within each company, there can be no immediate transition.

However, considering the current situation in the market, taking the slow approach might be detrimental for some players.