Tech and energy are teaming up, creating a market that could grow 500% in the next 5 years

  • As oil prices stay depressed, energy companies are increasingly turning toward big tech for help streamlining operations and cutting costs.
  • Barclays said that the last 12 months have seen a “dramatic shift” in partnership adoption, with numerous announcements that are just “early signs of things to come.”
  • The firm estimates that the oil-focused digital services industry will grow from less than $5 billion today to more than $30 billion annually over the next five years in the upstream market alone, leading to $150 billion in annual savings for oil producers.
  • A range of companies could benefit, including oil producers Exxon and Chevron, data services providers Microsoft and Amazon, as well as oilfield services companies Schlumberger and Baker Hughes.

As the energy industry faces a time of reckoning — pressured by consistently low oil prices, high operating costs and a growing sustainable investing movement — oil and gas companies are increasingly turning to Silicon Valley for help streamlining operations and boosting efficiencies.

By some estimates, the addressable market for digital oil and gas solutions could grow 500% over the next five to six years, saving oil producers roughly $150 billion, while creating an ever-larger market for tech companies in the highly competitive — and high margin — business of cloud computing.

Opportunities for savings include cutting capital expenditures as well as selling, general and administrative operating costs and transportation operating costs.

“The digital age is finally dawning for Oil & Gas … We see a market poised to erupt over the next five years,” Barclays said in January in a note to clients. “The last 12 months has seen a dramatic shift in adoption, with numerous announcements of cloud and digital-platform partnerships that we think are just early signs of things to come,” the firm added.

In the last year, Microsoft has announced partnerships with Exxon and Chevron, among others, while in May Google parent company Alphabet renewed and significantly expanded its partnership with Schlumberger. Amazon Web Services offers digital services to the industry through its oil and gas division, and counts BP and Shell among its clients.

Energy giants have, of course, been using tech companies’ enterprise software for years, and oil and gas companies’ highly complex operating systems — including precise drilling techniques and rig management operations — have depended on sophisticated data-based decision making for decades.

But oil companies were traditionally somewhat reluctant to hand over their treasure troves of valuable data thanks to cyber security concerns and wanting to maintain competitive advantages, among other things. This meant that for the most part software was developed in-house or by companies within the oilfield services sector.

Now, however, driven by lackluster returns in the energy space and rapid advancements in the tech sector, the two sectors are increasingly coming together, creating partnerships between two industries that in other ways are very much at odds with one another.

“The magnitude of the capacity for processing and storage makes it possible to do things we didn’t dream of within the industry,” said John Gibson, Flotek chairman and CEO and former chairman of energy technologies for energy investment bank Tudor, Pickering, Holt & Co.

“The whole industry needs an uplift in performance, profitability and free cash flow, so working together with the data to improve industry performance has become a mandate … We need the tide to rise for everybody,” he added.

A number of factors are driving the transition, including years of lagging returns in the energy sector.

As recently as six years ago, when oil fetched more than $100 per barrel, producers’ costs weren’t looked at under a microscope. U.S. West Texas Intermediate began a downward trajectory in 2014 and while prices have rebounded from the extreme lows of 2016, WTI remains far from its prior highs, meaning oil and gas companies have had to adapt.

Source: https://www.cnbc.com/2020/02/22/tech-and-energy-are-teaming-up-creating-a-market-that-could-grow-500percent-in-the-next-5-years.html

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