By Geoffrey Cann
I’ve been invited to meet with a senior Board leader from a large oil company, and the topic is digital transformation. The problem? The Board gets it, but not Management.
The Board Gets It
It is easy to assume that the blocker to digital innovation is the Board. And why not? I imagine that Board members are chosen for a number of good reasons, such as promoting diversity of discussion, providing unbiased oversight of management, and injecting a level of technical depth to Board deliberations.
Big oil company Boards generally share the same composition. The typical Board includes a retired audit partner from a big accounting firm to oversee the money, a senior lawyer to advise on negotiations and legal matters, and very senior operators (former VP Ops) to provide insight into the running of the business. Consumer-oriented retail businesses have big-time former marketers, upstream companies have retired pipeline CEOs, and services companies have retired oil company executives.
But digital topics are relatively new, and predate the growth experiences of many of these same former executives. Aside from cyber worries, which have been been on the menu for years, most Board members aren’t even on social media.
Pick a public oil and gas company at random, and trace the social profiles of the Board members. I’ve tried this experiment repeatedly, and it’s clear that folks on the Boards pay little attention to the killer platforms of our age — Facebook, Twitter, LinkedIn. Board people are pretty much invisible on line.
Hence my surprise at this request for a meeting. It appears the Board has been reading my book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, with a mixture of enthusiasm and alarm. Enthusiasm for the possibilities that digital technologies will bring to the oil industry, and alarm at the reaction from management.
What the Board Sees
Here’s just a few of the curious announcements from the world of digital, mostly in other industries, that I think spark interesting conversation around the Board table:
SCOTLAND RENEWABLE POWER
Sift the surreal news from the UK over the appalling Brexit crisis and take note of Scotland’s terrific renewable energy story. The wind turbines toiling in the off shore have generated enough electricity to supply 200% of Scotland’s residential power needs in the first half of the year. Not every nation will be able to replicate this feat unless they have few houses, lots of coastline, and plenty of wind, or perhaps lots of sunshine.
Nevertheless, Scottish power is another marker in the remarkable story that is renewables. Constantly growing performance and falling cost, a hallmark of a technology that operates on Moore’s law of exponential change — look up one day, and “suddenly”, a nation formerly dependent on coal-fired power is exporting its wind. Boards are now wary of the argument “that can’t happen here, to us, now or ever”.
The insurance industry got served this week, with the startling announcement that Tesla will now offer insurance for its vehicles, at a significant discount to internal combustion engine vehicle insurance. The economics look compelling—electric drivetrains have many fewer moving parts leading to lower repair costs, and autonomous transportation has far fewer accidents. Tesla’s vehicle cameras reinforce the analysis that it’s the human drivers who are the problem in almost all mishaps. Accidents between Tesla’s cars and gasoline cars will soon assign the blame to the gasoline cars, and with it, higher insurance premiums.
Most of all, Tesla likely gains from the huge data treasure trove that it accumulates as its vehicles share road, traffic, and driver behaviours, all leading to better analysis of insurance costs and premiums.
Expect a race to lower insurance premiums or lower payouts with the arrival of all the projected electric cars announced by the auto industry. No EV benefit analysis I’ve ever seen incorporates lower insurance costs because the incumbent providers lack the data about electric cars, but now they must to match Tesla. No auto maker provides an insurance quote when you buy a car, but now they must or be uncompetitive.
FACEBOOK ANNOUNCES LIBRA
You know an idea has merit when its announcement is met by howls of objection from the incumbents. Facebook’s crypto currency announcement provoked just such reactions, from central bankers, politicians, and regulators. Of course, the cryptojunkies applauded, as you would expect. Facebook’s enormous reach suggests the big initial market is the huge cut of the population who are unbanked (lack a bank account), transact in the cash marketplace, but own a smart phone (even a $50 job from China can run a Facebook app). That’s several hundred million people.
But plenty of small businesses run on Facebook, and plenty would love to do away with currency hassles of buying and selling across markets. I can speak directly to this as a merchant doing business around the world selling a book. I surrender an unpleasantly large cut of the value to Amazon, Apple, and Audible for global on-line sales, and a meaningful percentage to use Square, Stripe and PayPal (many of whom are initial investors in the Libra governance structure). It would be great to find a way around these value siphons.
I wrote about the implausibility of Venezuela’s oil-backed Petro digital currency, which has come to naught. However, the idea of circumventing the dollarisation of the global economy (and with it, the threat of US sanctions and tariffs), by shifting to a globally accepted crypto currency, has surfaced in comments by the chiefs of some national banks.
If not by Facebook, how about something from Russia or China? Russia is already pushing recent tenders for its petroleum products to be settled in Euros. It’s only a matter of time, I believe, when a widely and socially accepted crypto currency that solves for the volatility problem of Bitcoin is accepted as tender for oil trades.
These are just a few examples, but they all trigger some speculation at the Board level, particularly about new and disruptive business models.
Keep Calm and Carry On
If some Boards in oil and gas are alarmed, it begs the question what is going on with management. Here’s the data that management uses to argue that everything is fine and there’s no reason to panic.
EV SALES DON’T MATTER
For all the noise about electric vehicles, they’re still no where close to the sales registered from internal combustion engines. It will be years before there’s enough EVs in the global fleet to detect a difference in fuel demand. Volumes are still in the single digit percentages of total units. Of course, both BMW and Ford fired their CEOs to speed things up, but the F-150 is still king of the Ford line up. Light duty trucks, with their bigger engines, are hot hot hot.
OIL SALES GROWING
If we’re experiencing an energy transition, don’t tell the oil industry. Oil consumption is up again this year over last, by 1.5%. Never mind that demand shrank in Europe, Central and South America, the Middle East and Africa. Only the US in North America (Canada and Mexico were either flat or declining), and the Asia Pacific region show any growth at all, and much was concentrated in China.
DIGITAL IS FOR CONSUMER
The vast majority of digital innovation appears to be in the consumer worlds of retail, media, tech products, finance, and telecoms, and not the industrial worlds of logistics, manufacturing, transportation, mining, and utilities. GE’s brave attempt to create a digital business around Predix has faltered. Never mind that some national oil companies, such as ADNOC, have strongly endorsed a sector-wide shift to digital, along the lines of Industry 4.0, and appear to be driving hard in this direction.
SCADA STILL WORKS
That warhorse technology of the 1960’s, SCADA (Supervisory Control and Data Acquisition), is still large and in charge of most industrial infrastructure. The suppliers of SCADA systems are expanding their offerings with selected digital bits and bobs, while retaining full control of the platform. Never mind that their platforms are mostly closed to outsiders.
THE BUSINESS MODEL IS SECURE
There are no new digital business models that have successfully bankrupted an oil company anywhere. The same can’t be said about retailing, banking, insurance, telecoms, and media. There’s just something different about the oil industry. Never mind that in 2017 Shell began a pilot to distribute gasoline to the car, a move that obviously undermined the whole idea of convenience retail, and Shell operates 44,000 of such retail sites.
As I see it, Boards have only a few options when they get it and management does not.
One of the reasons that management struggles with change is that what’s obvious to Boards is simply not obvious in the field. This gap can be bridged with education, such as taking management on site visits to related businesses and industries that are dealing with digital change.
RAISE THE STAKES
The Board can make changes to management’s compensation structures to drive greater interest in introducing change. Shell, for example, ties an element of management’s bonuses to achieving emissions reduction targets. How about mandating that a ramping percentage of business results be directly linked to benefits from digital adoption?
CREATE A SPIN OFF
If the existing business is struggling to address change, Boards can direct management to create a spin off business that is unshackled from the strictures of the legacy business. Many years ago, Shell and Exxon created Aera Energy in this way.
If management does not demonstrate a need or a desire to move to a new future, then it may be time to change management. Take a page from Ford and BMW, and move on.
Running a business is like driving down the highway at top speed with the low beams on. It’s the Board’s role to get management to light up the high beams.
Check out my new book, ‘Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, available on Amazon and other on-line bookshops.