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The Circular Economy, Oil and Gas Upstream Industry Rethinking by Schlumberger and other assorted news

Circular Economy

Given the pressure on resources, the Circular Economy is gaining traction. In this excellent article from Nature, Barbara Kiser and colleagues explain how to get the circulation going, including with a number of examples:

The increasing pressure placed on resources through population growth and the rising demand for energy creates a challenge for industries reliant on consistent supply of materials. Rolls-Royce — which designs, develops, makes and services integrated power systems for use in the air, on land and at sea — meets the challenge with an advanced recycling programme called Revert. This is a collaborative effort between Rolls-Royce and its material suppliers that has been implemented across 100 manufacturing facilities.

Begun more than a decade ago, the programme is designed to help reduce costs and risks while also reducing environmental impact and safeguarding material supply. Through Revert, metal removed during the manufacture of components and from unserviceable engine parts is collected, segregated by specific alloy type, cleaned of all coatings and contaminants, and returned to the material supplier for recycling. This additional level of stewardship produces a very high-quality recyclate with the necessary chain of custody and certification for the material supplier to be able to process it back into aerospace-grade alloys.

Revert is thus a triple win — providing value to the supplier, the user and the environment. The material supplier benefits from a reliable source of high-quality material to feed back into their production processes. Rolls-Royce benefits by securing long-term agreements with material suppliers that safeguard supply in exchange for the return of the Revert material. Society and the environment benefit through a reduction in environmental impact, and job creation — Revert has created some 60–70 jobs local to the Rolls-Royce site in Derby, UK, to collect and process material. The programme has cut demand for virgin material, generating energy savings of more than 300,000 megawatt-hours per year (equivalent to powering 27 million homes for a day), and a reduction in carbon dioxide emissions of 80,000 tonnes per year (equivalent to the amount emitted by the average family car circumnavigating the world 13,000 times).

As a result of Revert, much of the material used by Rolls-Royce can be reused as part of a closed-loop system. Between 90% and 100% of the titanium and nickel alloys removed during machining operations, such as milling and turning, are captured and reprocessed back into aerospace-quality material. In addition, almost half of a used aircraft engine can be recycled such that the recovered material is of high enough quality to be safely used to make a new engine. Any metallic materials that cannot be Reverted, owing to either cost or limitations in technology, are recycled as part of mainstream recycling programmes local to Rolls-Royce operations.

Also intriguing is the example of a company in Canada called Enterra Feed, which, among other things, transforms waste into feed (protein) for insects, which in turn end up as feed at fish farms. Closed loop indeed!

In the same vein, this article in the Harvard Business Review by Terence Tse et al, provides some guidelines on how businesses can better integrate in and reap benefits from the circular economy. Aspects of the sharing economy and servitization are of course part of that: If assets are utilized more (sharing) the same amount of work can be completed with less assets. Requires offerings of outcome rather than products.

 

Oil & Gas

Servitizing Services: Schlumberger CEO Paal Kibsgaard made a plaidoyer for  transformation of the O&G services industry towards integrated, bundled solutions and partnerships between providers and operators to improve performance and reduce costs in the face of the industry’s worst crisis in decades. We’ll provide an analysis in an upcoming post. The presentation can be found here.

Excerpt

The apparent cost reductions seen by the operators over the past 18 months are not linked to a general improvement in efficiency in the service industry. They are simply a result of service-pricing concessions as activity levels have dropped by 40-50% and most service companies are now fighting for survival with both negative earnings and cash flow. The unsustainable financial situation of the service industry together with the massive capacity reductions mean that the cost savings from lower service pricing should largely be reversed when activity levels start picking up.

The fact remains that the industry’s technical and financial performance was already challenged with oil prices at $100 per barrel as seen by the fading cash flow and profitability of both the IOCs and independents in recent years. Over the past decade, our industry has simply not progressed sufficiently in terms of total system performance to enable cost-effective development of increasingly complex hydrocarbon resources. This can be seen by the escalating industry cost per barrel.

So what needs to change to overcome these challenges to the benefit of all the operators in the industry?

We firmly believe that the combined capabilities of the E&P operators and the leading service companies have the potential to realize the required performance upside for the industry. Still, this requires a willingness to modify the existing commercial model because the procurement-driven contracting model of the late 1990s is today the main obstacle to create the needed performance progress.

In the procurement-driven approach, all aspects of project scope selection and technical design for new hydrocarbon developments are done by the technical teams of the operators. The work scope is then fragmented into a myriad of small parts and subsequently put out for bid by the procurement organization, seeking the lowest price for each element and expecting that this will bring both the lowest project cost and the highest project value.

The rationale behind this approach is driven by two factors.

First, service companies are generally perceived to have little to offer towards creating fit-for-purpose designs or optimize planning and execution and are therefore engaged too late to have a meaningful impact on the technical and financial performance of the projects. This limited engagement is in spite of the service industry producing the lion’s share of the hardware and software technologies used to develop the world’s hydrocarbon resources.

Second, the procurement-based contracting model can only compare pricing levels for the least common denominators, which are the basic products and services that all qualified suppliers offer because the impact of any differentiation is too complex to model and evaluate.

Therefore, the procurement organizations simply assume that all suppliers are equal as long as they meet the minimum qualification criteria, which creates a constant drive towards commoditization and fragmentation.

The consequences of this procurement-driven approach are three-fold:

First, a failure to drive forward a sufficient rate of intrinsic performance improvement in quality and efficiency because there is no real incentive for the service providers to create any performance differentiation.

Second, a highly fragmented approach to technology system innovation and system performance as project solutions are a mosaic of individual services and products with no common data model or optimization platform.

And third a complete lack of concept and design phase collaboration between the operators and the suppliers, which has large implications on project cost and performance.

Altogether, this contracting model leads to suboptimal technical solutions and corresponding project performance from both a design and executional standpoint as well as financial returns.

Based on this, we believe that project performance can only be improved by finding ways of breaking with the past and replacing the existing model with a new approach based on collaboration and commercial alignment between the operators and the largest service companies. From the Schlumberger side, we are ready to engage on a completely different level and we are well advanced in evolving our company to excel in such a new industry environment.

 

Schlumberger completes Cameron merger

Britain’s oil industry to lose another 45,000 jobs in 2016 according to Sir Ian Wood

In Texas 72,000 O&G jobs lost last year, another 40,000 expected to be lost this year

 

Power

Utility grade solar (i.e. excluding roof-top solar) will add more capacity to the US grid than any other source in 2016, followed closely by wind and natural gas. In 2015 investment in renewable capacity globally was greater than in all other sources combined. Turning points?

Utilities to invest over US $ 16 billion in drones and robotics over the next 10 years for inspections and maintenance of T&D systems and lines. A whole new service industry is being created.

Power distribution business model challenged: Almost half (45%) of utility industry executives surveyed by Accenture worldwide, and 64% in Europe, reported that the traditional electricity distribution model is no longer fit-for-purpose. Unless the industry undergoes a digital, regulatory and business model transformation, utilities warn of increasing pressure on supply reliability and prices. And:

Utilities recognize that PV-plus-storage represents an existential threat to their businesses if they don’t get into the game early.” Although storage promises to fast become a new battleground, with 66% of executives expecting competition in this area to rise in the next five years – up from 48% in 2013, utilities executives are not standing by. As many as 77% are already investing or plan to invest in storage solutions in the next 10 years.

10 years doesn’t cut it though. A few weeks ago we published an article about how to recognize industries that are being disrupted, mainly by digitization and argued that solar has digital characteristics and that the utility model will be disrupted sooner than most utilities think.

Innovations, volumes and reducing costs trends are reinforcing each other in solar PV. Once costs (of electricity produced) reach a certain level (competitive relative to alternative forms of power generation) demand becomes independent of subsidies and grows rapidly. This is already the case in countries with medium to high insolation and is expected in northern latitudes over the next few years. As costs decrease new applications and new ways to market are developed, essentially expanding the power generation market while displacing competing technologies (fossil, nuclear and other renewable fuels, e.g. biomass) and incumbent competitors. Many energy scenarios have underestimated solar PV demand / growth over the years, including those by the International Energy Agency, though this is being rectified. Cost declines in solar PV are due to a combination of technology innovations, enhanced automation reducing material waste, production steps and labor costs, and increasing availability of symbiotic technologies (battery storage, Internet of Things), which improve performance.

 

Sharing Economy

This writer from the NY Times thinks that the Uber model doesn’t translate. But it doesn’t seem he understands the underlying economics

Google urges Congress to set federal standards for self driving cars

 

IIoT, Data and Technology

Industrie 4.0 slow to catch on among Germany’s smaller manufacturers

Upstream O&G companies spend smarter on digital technologies to drive value: Microsoft & Accenture survey

Monitoring subsea and offshore assets is improving according to ABB

Bosch launches own Cloud for its IoT services (is this a real platform?)

An Indian company, Persistent Systems, is working with IBM’s Watson AI/analytics platform to improve engineering processes. This will be interesting to watch.

Caterpillar Marine through its ESRG Technologies (acquired in 2015), a leading provider of vessel monitoring and data analysis in the marine industry, is expanding its scope from engines to all equipment on board a vessel. Direct competitor to Rolly Royce and Wärtsilä

GE bets on partners for Predix momentum. Don’t agree with the author that Siemens has strong IIoT platform

Fanuc robots with new software made by Preferred Networks, a Tokyo machine learning company, are learning to do jobs overnight. If it works commercially it will have big repercussions

Global drone maker DJI to launch farm services

 

Technical Services

Who will service the service providers? Billions of IoT devices are becoming a new asset class. Many of them require service. Who will do that? Another new industry?

 

Economies

US manufacturing has doubled volumes in three decades, but lost millions of jobs. That’s why a lot of people think it’s dead when, in fact, it’s not. Productivity improvement has been explosive due to technology.

Driven by technology, US expected too overtake China in manufacturing by 2020

 

Titos Anastassacos is Managing Partner at Si2 Partners, a consultancy helping clients leverage services to win in industrial markets

 

If you are a Service professional (manager, practitioner, consultant or academic) in an industrial setting join our group Service in Industry on Linkedin

 

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