Energy & Utilities Perspectives Feb 2018

Energy and Utilities

Energy & Utilities Perspectives Feb 2018

 

 

From Tried and True to Something New – the Energy and Utilities Industry Wrestles with Disruptive Innovation 1

“Disruption” and “utility” are two words that were never meant to go together. The always-on, 24/7/365 nature of water and power is the industry’s defining characteristic. It’s not surprising then that executives and board members in the energy and utilities industry group would find disruptive innovation, and its related effects on people, processes and culture, to be a “significant impact” risk for 2018.

Although regulatory change and scrutiny remains the top risk concern for this highly regulated industry group, the speed of disruptive innovation and new technologies ranks a close second in a recent survey, Executive Perspectives on Top Risks for 2018, from Protiviti and North Carolina State University’s ERM Initiative. The remaining three concerns, all ranked as “significant impact,” are: resistance to change, talent, and risk culture. All risks, except for regulatory concerns, mark an increase this year over last.

As I wrote in October, utilities today are collecting exponentially more information than just a couple of years ago. Sensor data is pouring in from smart meters and other connected supervisory control and data acquisition (SCADA) systems, and utilities are spending billions of dollars a year on analytics and integration to make better decisions that benefit both their customers and shareholders.

Much of that investment is going toward dashboards, modeling tools and other visualization technologies that collect, streamline and integrate information for a real-time, minute-by-minute picture of the grid and other systems. Accurate and timely information can lead to better predictions about peak usage periods, possible transmission and distribution bottlenecks or interruptions, and even when particular customers are likely to have problems paying.

Additionally, emerging technologies, such as microgrids and blockchain, have made it possible for communities – from local governments to consumer groups – to create their own energy co-operatives. And advances in battery storage are likely to make rooftop solar an increasingly viable alternative to traditional utilities – though the impact of the recently announced tariffs on solar panels is yet to be seen.

In the oil and gas sector, advances in data analytics are driving efficiencies in drilling, creating competitive advantages for early adopters of 3D seismic imaging and precision targeting. At the same time, back-office automation is helping to create more efficient and error-free royalty payments and billing, and mobile dashboards are helping executives in the field keep tabs on complex operations at a glance.

The adoption of these technologies is quickly becoming a differentiating feature in the energy and utilities sector, with companies that are able to adopt them quickly and harness their efficiencies reaping the benefits of greater productivity and increased bottom lines.

Yet the general feeling among energy executives remains one of concern. That’s not surprising, given that the industry acknowledges its own resistance to change and the challenges in attracting and retaining top talent (two top-5 risks that also grew this year over last). Many organizations have been doing things the same way for decades and are having trouble evolving from their long-held “tried and true” mentality to a more agile and adaptive culture that leverages technological advancements for increased efficiency and effectiveness.

To be able to invest in these new advancements, energy and utilities organizations need access to talent that is adept at new technologies – however, those same skill sets are in demand by all industries, creating a fierce competition for qualified people. This only magnifies the concern for organizations that are already struggling with keeping or finding industry expertise.

Technological disruptions will continue to evolve the risk landscape for the energy and utility industry for the foreseeable future. Organizational cultures need to adapt to meet these challenges while the industry continues to strengthen its attractiveness to a new generation of engineers, data analysts and automation specialists who are looking for rewarding and challenging work in their newly popular fields. The fact that there is sharp awareness of these risks and challenges among top executives is encouraging and hopefully will result in more meaningful discussions and changes within the industry.

For a more in-depth analysis of these and other top risks, you can download the energy and utilities industry findings of our Top Risks Survey here. For the complete report inclusive of all industries, also free, visit our website.

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To Thrive, Utilities Must Have a Data Analytics Strategy and a Business Intelligence Plan

The big data revolution transforming industries worldwide is bearing fruit as companies improve their understanding and analysis of their information to increase efficiency, reduce costs, predict outcomes and enhance customer satisfaction. The utility industry, however, continues to be one of the laggards in the race to harness big data. In light of the prolonged sluggish demand for power, there are certainly opportunities for utilities to boost their bottom lines by using information more effectively.

One reason for the industry’s feet dragging is that utilities today are collecting more information than ever before, leaving them a bit overwhelmed. Data pours in from connected supervisory control and data acquisition (SCADA) systems along the transmission grid, smart meters, distributed generation resources, and customer-centric technologies designed to track and conserve power. Billing, workforce management, maintenance and other operational processes are also throwing in reams of data.

To stay on top of and extract benefits from the enormous volumes and speed of information now available, it becomes critical for utilities to develop a robust data management strategy. Cost, accessibility and governance are key considerations when formulating the data strategy for this new information asset. Important questions in developing this strategy include:

  • How can the company effectively store all the data it receives?
  • How can this data be integrated with other systems?
  • How can the information be accessed efficiently to make better decisions and benefit customers?
  • What data is useful and what data is noise?

The data strategy also must ensure that the information is retained and prioritized for analytical and regulatory purposes while being ever mindful of both security and scalability. It must be designed with an eye to the future, allowing for growth in both data volume and new and varied data assets yet to come.

To illustrate the trend, consider that smart meters and advanced metering infrastructure (AMI) are now capable of transmitting customer usage data several times an hour – versus utility workers physically reading meters once a month. And this data torrent is affecting all utilities, regardless of size or business model.

On this backdrop, it’s no surprise that the industry is spending billions of dollars a year to implement analytic technologies. GTM Research predicted last year that utilities worldwide would spend more than $10 billion through the year 2021 on analytics and integration services to leverage the value of AMI investments alone. Some years earlier, the same research organization anticipated that from 2012 through 2020 utilities globally would spend $20 billion on power utility analytics – anything from grid sensors on the transmission side to AMI on the consumer end – with investment increasing annually and hitting $3.8 billion in the final year.

To provide actionable information, much of that energy analytics investment must go toward dashboards, modeling tools and other visualization technologies that collect, streamline and integrate information for a real-time, minute-by-minute, picture of the grid and other systems. Accurate and timely information like this can lead to better predictions about peak usage periods, possible transmission and distribution bottlenecks or interruptions, and even when particular customers are likely to have problems paying.

More specifically, visualizing utility data can help utility companies:

  • Perform load management and real-time forecasting. Harnessing data to foresee power supply and demand can help provide more affordable services to consumers.
  • Identify problems quickly. Utilities that can immediately address transmission and distribution interruptions or other glitches along the grid can avoid service outages, or at least minimize their duration.
  • Detect theft. Illegal power connections steal some $89.3 billion from utilities around the globe annually. While the majority of that theft occurs in emerging markets, local U.S. utilities are no strangers to this illegal activity and typically provide customers with hotline numbers to report unlawful connections. Data analytics visualization can help spot when and where those connections go live.
  • Improve management. Providing customers with better visuals made possible by data analytics can help explain pricing swings, service disruptions or other variables that affect consumers. Ultimately, that will give customers the information needed to conserve energy and may even defuse potentially volatile utility-customer interactions.

While the deluge of data is without doubt currently challenging the ability of utilities to integrate and make sense of such data in the most profitable way possible, the opportunities are clear, and we’ve outlined some of them. Utilities should be investing in a comprehensive data analytics strategy today, to inform and guide management on decisions that will deliver benefits for years to come as the proliferation of data continues to grow. Effective use of visualization tools can further put this information to work, and the companies that take advantage of the available technologies and use them as part of a well-honed business intelligence plan can quickly transform from laggard to leader in today’s challenging environment.

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Avoiding IoT Inertia in the Oil and Gas Sector Requires an IoT Strategy

To understand how the practical application of Internet of Things (IoT) technologies can potentially transform traditional operations and create value for businesses, just look to the oil and gas sector. Digitalization of oil fields began in the industry years ago. And now that sensors are more affordable, even small and midsize companies have the ability to track, in real time, data generated from assets ranging from oil wells to pipelines to truck fleets.

The IoT opportunities for oil and gas are diverse and abundant. In fact, a recent report by Research and Markets forecasts that the global oil and gas IoT market, which includes analytics, platforms and devices, will grow to nearly US$31 billion by 2026. Among the factors expected to fuel that growth are the sector’s shortage of skilled talent, the increasing number of cyber attacks it’s facing, and its aging infrastructure. IoT technologies can help oil and gas companies address these challenges.

However, while oil and gas firms generally have been at the forefront of IoT technology adoption, many companies are now experiencing “IoT inertia” in two key areas: digitizing other parts of their business and managing the growing volumes of IoT-related data effectively. Ironically, some of the same issues expected to drive the expansion of the IoT in the oil and gas sector — skilled labor shortages, cybersecurity and technological constraints — are contributing to this state of inertia.

Lack of Skilled Labor

As oil and gas companies face the so-called “Great Crew Change” underway throughout the energy industry, they are racing to recruit millennial talent not only to replace seasoned workers for many roles but also to assume new jobs essential for the digital era — like data scientists and business analysts. While IoT technologies can ultimately help these firms to overcome labor shortages in certain business areas, such as field service, they still need specialized tech talent to help them get the most from IoT initiatives and big data.

Investing in leading-edge technology will also help oil and gas companies attract in-demand workers. Talented people aspire to be contributors in a contemporary, dynamic and digitally focused business with its best days ahead, rather than be bound to a slow-moving dinosaur of a company that is not structured to be innovative and dynamic even though it may have a strategy that asserts it will be.

Cybersecurity Concerns

Oil and gas infrastructure, like all critical infrastructure, is a prime target for hackers. Cyber attacks and malware targeting industrial control systems, and the SCADA systems used to manage them, are becoming more sophisticated, frequent and persistent. Unsecured IoT devices and applications offer entry points and pathways to these critical systems — and to business networks and processes that may span a company’s global operations — so appropriate configuration and diligent management of these solutions are a priority.

That’s a big ask of oil and gas companies, which typically have low cybersecurity maturity and limited IT resources. That’s why so many firms in the industry have been slow to expand their use of IoT technologies beyond the field. It is also true that many of these technologies aren’t built with security in mind, and companies are often reliant on vendors to make critical updates to their products. Robust procedures around the testing and rollout of these tools is thus essential.

Technological Constraints

While IoT technologies can help oil and gas companies improve operational efficiency, that opportunity is often foiled by an outdated communications infrastructure that doesn’t support IoT connectivity. Many oil and gas firms also lack the cloud-based infrastructure and advanced analytics tools needed to extract relevant information from the raw data sets coming from the growing population of machine sensors, and turning it into information the business can act on.

Lack of interoperability and standardization of devices and solutions are other hurdles to broader IoT adoption by oil and gas companies. The technology firms themselves are hindering progress toward IoT commercialization by developing solutions independently of each other and using different platforms and frameworks. These current practices impact all industries trying to broaden their use of IoT technologies to enhance business performance, not just oil and gas.

Focusing on Near-Term Gains to Achieve Long-Term Progress

Further evidence of the intense push-and-pull that energy companies are experiencing as they look to digitize is found in the latest Executive Perspectives on Top Risks Survey from Protiviti and North Carolina State University’s ERM Initiative. Ranking second among the top five risks for this industry: Rapid speed of disruptive innovations and/or new technologies within the industry may outpace our organization’s ability to compete and/or manage the risk appropriately, without making significant changes to our business model. And ranking third: Resistance to change may restrict our organization from making necessary adjustments to the business model and core operations.

The speed of innovation and the resistance to change are colliding, and that is contributing to the IoT inertia at many oil and gas companies. Companies aren’t moving fast enough to adopt IoT technologies and apply them in new ways, and as they amble, new developments in the space — and opportunities — are passing them by. At this pace, they will not be able to keep up with change, let alone drive it and differentiate themselves.

Our discussions with these businesses have helped us to identify another factor lending to IoT inertia: They are trying to plan too far into the future.

Companies that develop long-range plans — three to five years out, or even longer — for adoption and application of IoT technologies may inadvertently undermine their success by trading flexibility for certainty. IoT technologies are evolving rapidly. So, too, is the IoT itself. That means overly ambitious and complex plans for IoT and other digital transformation efforts aren’t likely to hold up, even on a short timeline.

We suggest that oil and gas companies create strategies for progress that are centered on achieving well-defined goals within short time frames — a more agile way of thinking. For instance, an oil and gas company that wants to explore the use of IoT technologies to improve worker safety could equip a crew at one location with wearables that provide real-time alerts about potentially hazardous conditions or violations of safety procedures. Launching a pilot program will allow the company to determine whether these types of devices should be rolled out to other sites, which types of workers benefit most from wearing them, and how the business can best use the data from these devices.

That’s just one example of how an oil and gas company could start laying a foundation to help take its use of IoT technologies to the next level. Our recent white paper on the IoT outlined some of the opportunities for oil and gas firms as they evolve into digital companies: improving rig uptime and oil recovery rates, reducing oil spillage, and reducing costs are among them. IoT technologies can also help businesses in the sector to innovate and to increase efficiency through advancements in pressure, temperature, flow rate monitoring, and more. But without a viable strategy that will allow them to make measurable progress toward their IoT goals, these companies will continue to struggle with IoT inertia.

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Drastic Measures in the Oil Patch Helped Survival – But Can They Translate into a Sustainable Cost Management Program?

The oil bust, which began shortly after prices peaked at nearly $108 per barrel in June 2014, has pummeled U.S. producers. According to the U.S. Energy Information Administration, oil and gas production jobs declined 26 percent and rig count plunged 78 percent from October 2014 through May 2016. Meanwhile, global oil and gas capital spending dropped 40 percent over 2014 and 2016. Leading producers swiftly responded, by extending payment terms with suppliers, aggressively renegotiating contracts seeking price concessions, and deferring or cancelling projects, among other cost avoidance or cost savings actions. These drastic measures managed to slash well costs by at least 30 percent and, in some cases, upwards of 50 percent. However, in today’s “pay me now or pay me later” mentality, producers and suppliers both recognize that the price concessions were temporary to weather the storm, and once crude prices rebounded, suppliers would come looking to make up for lost profits. This is, of course, unless producers have the ability to aggressively manage the potential increase in costs.

After hitting a low of $27 per barrel in January 2016, oil prices have rebounded to a range of $45 to $58 per barrel, albeit with moderate volatility. Yet prices are still a far cry from their highs a few years ago, and it doesn’t appear they will rise materially anytime soon. Barring a regional conflict or some other unforeseen cataclysmic event, they may never reach previous levels. The International Monetary Fund is projecting a West Texas Intermediate crude oil price of 53.40 per barrel in 2022, for example, and December 2025 crude oil futures contracts were recently trading a dollar less than that. Against that backdrop, plentiful oil supply, flat demand, increasing oil production, and rising business costs paint a discouraging outlook for any significant increase in oil prices, and thus revenues, over the next several years.

That kind of operating environment demands that organizations become more efficient, find ways to reduce and sustain cost savings, and drive the realized savings to the bottom line. The question for energy companies is whether they can transform their emergency cost-reduction strategies into long-term programs that not only sustain the benefits thus far derived, but also effectively manage and track costs over the long haul. This is becoming particularly critical as suppliers try to reverse some of the concessions they made during the oil market’s collapse.

Unfortunately, findings from Protiviti’s 2017 Procurement Survey, Bridging the Gap Between Finance and Procurement, indicate that procurement functions across all industries need to beef up their operations to generate greater value and take advantage of the potential value they uncover. Even with the severe measures employed during the oil market crash, the energy industry is not immune to procurement shortcomings. In fact, it scored worse than other business sectors in a handful of categories.

For example, only 27 percent of energy organizations in the survey said that they were recognizing absolute savings from their procurement functions, versus 35 percent of respondents in other industries. Two-thirds of energy respondents also said that they either did not track their spending or did not feel confident in their savings numbers. The survey revealed that the energy companies were lagging behind organizations in other industries in their deployment of spending analytics.

What’s more, very few energy organizations thought that a substantial portion of procurement-driven savings ever made it to the bottom line. Energy companies cited the following as the top reasons that savings failed to contribute to earnings:

  • Loosely controlled budgets that permit savings to be spent elsewhere
  • Changes to commodity prices, inflation and other variable expenses or simply a wrong assumption about their cost trajectory
  • Advancements in operational specifications that resulted in more expensive equipment, materials, labor and services

The good news is that the survey also provided some answers on how to brighten that picture. Answers from finance and procurement functions, while often diverging on their opinion of procurement’s performance and value, have helped define what steps procurement personnel need to take to build a sustainable cost reduction and management platform to maintain long-term savings. In broad terms, these are:

  • Evolve from sourcing to category management – Value from sourcing activities erodes over time as resources are redeployed to support other commercial sourcing efforts. Shifting to a more comprehensive category management program not only sustains sourcing benefits, but it also provides additional cost reduction and value improvements.
  • Increase supplier relationship management – Supplier relationship management has evolved from a discipline of simply managing spend and finding the lowest-priced supplier to a process in which procurement functions work more closely with suppliers to identify weaknesses, mitigate risk, measure risk performance and assess other operating variables.
  • Drive savings to the bottom line with a centralized structure – The centralization of the finance and procurement functions is key to meeting this goal. Our survey indicated that seven in 10 organizations that had such a structure were able to drive more than 60 percent of their procurement savings to the bottom line. Fewer than 20 percent of respondents lacking centralization were able to match that.
  • Invest in more robust spend analysis tools – A formal and robust spend analysis is perhaps the most essential building block of the procurement success – this was a key finding in our survey confirming what we knew informally. The survey results indicated that tools supported by third parties are frequently the most effective.
  • Increase focus on working capital management – Organizations that drill down on processes in the inventory, receivables and payables departments stand a better chance of boosting the bottom line with savings. Strategies include decreasing the time between ordering goods and paying for them, managing inventory to reduce the time that goods sit in storage, and increasing the number of days before suppliers are paid and/or maximizing discounts and rebates.

Oil producers could certainly benefit from carefully considering the above findings. Internally, oil and gas companies should continue to enhance collaboration between procurement and finance. (This is where the energy industry has an edge: 91 percent of energy respondents in our survey said that procurement and finance were aligned, versus 80 percent of respondents in other industries.) Externally, energy companies need to move from a price to a cost focus to sustain previous savings. Rethinking opportunities to leverage technology for internal operations is also important, such as implementing innovations like robotic process automation to help provide a competitive advantage in managing costs and growth.

Price booms and busts are nothing new in the oil patch, and producers have adroitly addressed the most recent bout with effective cost-cutting strategies that helped them survive. With the industry facing years of flat oil prices, those organizations would be wise to turn those emergency strategies into formalized standard programs for the long term.

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Tyler Chase
Tyler Chase
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