How North American Energy Can Compete – Enablement of a Digital Oilfield with a “Connected Field”

Did you know that accountants were hesitant to adopt spreadsheet programs like excel? Or that it took us decades to fully adopt trains, automobiles and computers? Do you think these things changed our lives? Of course! How could we conceive where we are today without them? But it took a while for them to gain “steam” (pun intended).

The situation with the Digital Oilfield in North America follows these familiar lines. It is a transformation that I cannot adequately explain since I only know how to build the enabling technology. How it’s going to be used is up to each person acting individually and resulting in a collective connected effect. Sure, I can give some examples or find people who have done this or that. But that’s the tip of the iceberg. The “killer example” is going to be different for every team in an energy company.

The enabling technology for the Digital Oilfield is called a “Connected Field”. It takes the Oilfield improvement areas listed below and binds them together. It’s the enablement of seamless intercommunication and coordination that truly leverages a Digital Oilfield. Without it, it’s an Oilfield that uses new Oilfield technology – not the exciting “Digital Oilfield” that truly propels the energy business to the next level.

There are so many ways to get a Connected Field wrong for a Digital Oilfield. Even with the right telecom vendors, it’s so easy to say “we don’t need QoS (Quality of Service)” – simply because the decision maker doesn’t know what it is. The fallacy is that there is a belief we already have a Digital Oilfield. There are already real world examples of a true Digital Oilfield using a Connected Field. And they are all in the Middle East; lowering their costs and increasing their supply. I cover a real world example later, so it will be easy to see the difference.

But let’s go back to the beginning. What is a “Digital Oilfield”?  The concept was first presented in the seminal study: “The Digital Oilfield of the Future: Enabling Next Generation Reservoir Performance”, IHS Cambridge Energy Research Associates, Inc., 2003.

A Digital Oilfield makes the following improvements to the Oil & Gas business – and a Connected Field enables most of them; that is, you need a connected field to truly leverage the benefit to the full extent.


So what is a “connected field”? It is a data communications system that has these characteristics:

  • Completely and seamlessly covers the area of interest (like cellular data might cover all of the downtown of a city). This allows users to just turn on a device (sensor, video, etc.) reducing or eliminating the need to involve IT to justify a business case to obtain capital to expand the network. It just works. Technicians are not required to tune antennas at the user level. A rig can just move itself and still have full connectivity to all its services while it is moving and when it reaches its destination.
  • It is a committed That is, it is not a “best effort” network, shared with other companies and people in the area (like cellular data).
  • It allows full control – that is, it has quality of service (QoS) capabilities to prioritize business critical applications or applications requiring better service to function correctly (voice, video).

Let’s examine what is not a connected field:

  • Cellular data from any major telco. The reason why it is not is that it has no QoS and is best effort (no committed bandwidth) and may not cover the entire field without boosters (which are technically illegal according to the Telecommunications Act).
  • MPLS networks – in themselves, they would help if the purchaser buys QoS. If the cost of buying the right networks with QoS was used to price the rent option, it is likely that the system could be built from scratch less expensively. That is, a Digital Oilfield should consider the “rent vs buy” options like any procurement decision.
  • Satellite – the price per Mbps with QoS and dedicated bandwidth is horrendously expensive. Unless the company (including all teams and phases that work in the area) only expects to operate in the area for 6 months or less, it’s frequently the case that it is cheaper to build.
  • SCADA (legacy 450 & 900Mhz) – really this is only for “tin can on a string” SCADA data – that is monitoring / telemetry. There are now new SCADA radios that can supply QoS and bandwidth rates at 18Mbps or above but most Oil & Gas companies, especially in North America are not using them. Most of the SCADA radios in use today use technology that was developed during World War II and they have not been updated. We’re talking punch card era technology.

And of course, I hear all the skeptics. So what does a Digital Oilfield do  in practice? Here’s an example:

Petroleum Development Oman (PDO)

  • Connected field coverage: 45,000 sq. km (17,000 sq. miles)
  • Increased a mature (brownfield) oilfield’s production by 100K barrels/day. At $90/barrel this is $3.2 Billion/year in additional revenue within one year. (Ok, yes, price of oil… but this was done in 2012 – even at $30 that’s $1 Billion)
  • Reduced drilling & completion days to online from 39 days to 14 days ($1M per drill saved). Including completions, saved $5M per well.
  • 10 month payback.

What does the Connected Field network look like for PDO?

As of the end of 2013, Petroleum Development Oman field has:

  • 6600 broadband connection points
  • 52 base stations
  • 13 Gbps total capacity, the equivalent of 500 connected homes or the bandwidth provided to a 4000 person office building
  • 130,000 end devices

Compare this to a field of that size in North America; there are maybe 10 cellular base stations covering the entire thing. Everything overloaded to the point that it does not work that well (e.g. “worse than dialup” is what I frequently hear).

Together the Connected Field collects 36 times more data enabling more accurate and improved decisions. It delivers 4 Mbps anywhere within the field of coverage (compared to less than 300kbps in some fields available today). You can drive around in a truck all day long and everything just works.

No messing with devices, changing networks, etc. Need to talk to the engineer in head office and start a video chat about a valve to show him/her the valve? Done! No problems. Want to implement an intelligent video system to monitor the flare stack, look for pipeline leaks, identify personnel not wearing PPE, etc.? Want a “mobile worker”? (Please do not confuse it with a “mobile OS” which is simply an operating system built to enable mobile workers that have a network.) With a Connected Field, you just do it! No need to price in a brand new network to enable the business case.

The cost of all this? Less than 1% of the total injected capital into a greenfield area. And if a true connected field is implemented that is multi-use and multi-team capable, the expenditure is less than what they spend today.

Despite the impressive track record how many Digital Oilfields are there in North America? None. Some are close with partial implementations but it’s localised and not well championed at the executive and board levels. How many in the Middle East? Quite a few. Middle East operations have the direct support of the board of directors/families and executives. Would this situation have any bearing on the current supply / demand and geopolitical climate? Hmm….

Oil & Gas Cost Reduction Projects With 50% IRR Go Undone

Even in today’s poor commodity climate – many cost savings projects with a 2-3 year payback (50% IRR) period go undone. If you don’t recall what the payback period or IRR is, please see my post:

“Who likes making money? Payback, RoI, IRR explained…”

iStock_000013530407SmallThere are two things to note about cost savings projects. They typically:

  • Reduce periodic General and Administrative (G&A) costs – so the savings that impact periodic payments do not “end” and could go on indefinitely.
  • Are beneficial in a good or bad commodity environment. There is no commodity price dependency!

Based on this, a company should always do periodic cost reduction projects – in a good or bad commodity environment since it increases the profit margin in good times and allows a company to survive longer than its competitors in bad times (and survivors always do the best in the long run).

pumpjackI have been in Oil & Gas for over 17 years. And during that time I’ve been aware of more rural connectivity projects that have these characteristics than I could possibly handle… if only they would be approved and added to the queue. To add to the malaise, network costs are a top IT cost. See my article “Top Ongoing IT Costs – Data Centres and… Networks”

Correct me if I’m wrong… but from what I recall from what Oil and Gas executives have told me, any Oil & Gas project with over a 30% IRR is always approved. However, it’s been entirely up-hill trying to convince Oil & Gas to approve these projects.

I’m going out on a limb here though…. Maybe the reason why is that they are connectivity (telecommunications) projects for rural areas? Connectivity usually falls within the IT department and from my interviews with CIOs, there is little focus on connectivity costs. That is, they feel that connectivity is not really an IT role but it gets lumped into IT so they suffer through it. I agree with them – IT is getting dumped on due to poor understanding of connectivity at the leadership levels. After over a decade doing rural connectivity, I believe that connectivity should be an engineering role and connectivity commissioning and operations should be in IT. This arrangement makes the basic procurement management build (engineering) vs rent (off the shelf) calculation possible. Let’s face it, IT is not engineering. IT is only going to rent. But most of the time, it is more effective to build in rural Oil & Gas locations.

The final nail in the coffin for this whole scenario is that connectivity is critical infrastructure (like water, electricity). This basically means you can’t do things that are expected of a company operating in the current economic environment without it. I have had to deliver the bad news to hundreds of promising Oil & Gas projects because the current network they have cannot support anything but the basics (e.g. kilobit per second SCADA – or what I call “tin can on a string” data). The cost of this one fact alone is colossal. I explain more about this in my presentation “Understanding the Remote Field Data Communications Challenge”

Anyone care to chime in? Anybody have an Oil and Gas producer or midstream company (operates rurally with large footprint) who does not focus on connectivity and would love to save money?

The digital divide (economic problem) is mainly due to broadband availability

Great to see jurisdictions taking action with the digital divide economic problem: this is clearly a data communications (broadband) delivery issue or we wouldn’t need a United Nations Broadband Commission to educate countries about this. Mexican government’s digital divide initiative is delivering 1500 base stations to service 64,000 sqr km (25,000 sqr miles) using Redline’s product. Redline won the bid by demonstrating that Redline’s product needed less total base stations and has better longevity. A total cost of ownership (TCO) calculation. Job well done!

Who likes making money? Payback, RoI, IRR explained…

What’s a payback period? How does it compare to Return on Investment and Internal Rate of Return?

A good question. A payback period is the time it takes for the benefit of a project (cost savings or increased revenue) to pay back the initial capital of the project. For example, you have a project that costs $2,000 and takes a year to complete. After it is completed it saves you $1,000 yearly (no end date in this example). That means the project will take 2 years to be paid back after the project’s completion ($2000/($1000/year) = 2).

So how does this compare to Return on Investment (RoI)? Simple ROI = (Gains or savings – investment costs) / Investment Costs. It does not take time into account. For instance, with the above example, after 3 years the RoI is ($3000-$2000)/$2000 = 50% but after 10 years the ROI is ($10,000-$2,000)/$2000 = 400% – so the RoI keeps escalating toward infinity over time… not very useful. Internal Rate of Return (IRR) however, is!

IRR is a compounding rate of return. I won’t go into the calculation but the above example has a ~50% IRR. Since it’s compounding we can use the “rule of 72” to figure out what this really means. The rule of 72 tells us how many years it takes to double the cumulative benefit. So 72/50= 1.44 years. So at 1.44 years the gain/savings is $1,440. At 2.88 years it is $2,880. At year 5.76 it is $5,760. And so on…


At left is the compounding “hockey stick” graph. This is the hockey stick graph for my “rewirement” strategy (9% compounded yearly) – coincidently this is the same strategy that I coach about. It’s the only buy and hold strategy that works in an up or down market, has over 150 years of market data behind it, is the laziest DIY strategy and that most anyone can do (assuming you understand addition, subtraction, multiplication and division).

A slow start initially and then ZOOM! upward. Compounding in action!

If you are interested in this strategy, I read about it in a book that is freely downloadable on the internet or you can get the book from a library or a used bookstore:

“The Single Best Investment: Creating Wealth with Dividend Growth by Lowell Miller”

I liked reading it but many people tell me it’s boring… I guess I get excited enough about making money to read it through. What I coach in is the “how to” part; complementary to the book (or for people who don’t want to read it and want the summary). People are fully coached in approximately 2-4 hours depending on the person (2 hour basic course plus additional time as needed). However, I love to support “do it yourselfers”, and if you are one, you can probably figure out the “how to” part using Mr. Miller’s book with some invested time. However, if you want a jump start, please let me know!

I actually asked Mr. Miller if it was ok if I coached people using his book as the basis. He said “sure!”. You have to wonder… this strategy 100% works; always! Mr. Miller has published two versions of his book over the last decade+ before finally allowing people to read it for free on the internet. Clearly, people aren’t using it en masse. Every single person I have coached says “Why doesn’t everyone do this? It’s so easy!” and “I wish I had done this X years earlier.”  No one has ever told me “this is a waste of time”. Mr. Miller is a fund manager – which the book basically discourages using. And even after Mr. Miller tells his clients not to use him and how to do it themselves, they still want Mr. Miller to manage their money.  Such a strange world we live in!

Note: I owe recognizing the strength of this strategy as I read that book to my knowledge of IRR and payback periods. Good things to know!

Many Protests Are NOT Evidence Based

protestThis very articulate oil industry worker explains why anti-oil protests do not make sense in a surprisingly matter of fact and well delivered way.

Personally, I have trouble with being pure black and white / “anti-anything” these days; there is so much misinformation, especially from protest groups. In my youth I got keyed up by all the rhetoric like everyone else but then I learned that most of these people are so widely misinformed that it’s just dangerous to believe them. A film that highlighted this for me was the documentary “Pandora’s Promise”; in it, many key environmentalist figures question some environmental stances as non-evidence based.

RioTel Celebrates 17 Years in Business

Karin Williams shares her founding story. Karin has been my primary and enduring mentor since starting my own business and her wisdom has rung true more times than I can count. Her brand of honest, respectful business conduct I truly cherish as I have found that it’s in less abundance than I had hoped. Congratulations Karin for navigating RioTel through 17 years. A true accomplishment!