what changes you expect in oil & gas industry

Change Management:

Whenever an investor approaches a new industry, it is good to know what the risks
are that a company in that sector must face to be successful. General risks apply to
every stock, such as management risk, but there are also more concentrated risks
that affect that specific industry. In this article, we'll look at the biggest risks that oil
and gas companies face.
SEE: Measuring And Managing Investment Risk
Political Risk
The primary way that politics can affect oil is in the regulatory sense, but it's not
necessarily the only way. Typically, an oil and gas company is covered by a range of
regulations that limit where, when and how extraction is done. This interpretation of
laws and regulations can also differ from state to state. That said, political
risk generally increases when oil and gas companies are working on deposits
abroad.
Oil and gas companies tend to prefer countries with stable political systems and a
history of granting and enforcing long-term leases. However, some companies simply
go where the oil and gas is, even if a particular country doesn't quite match their
preferences. Numerous issues may arise from this, including
sudden nationalization and/or shifting political winds that change the regulatory
environment. Depending on what country the oil is being extracted from, the deal a
company starts with is not always the deal it ends up with, as the government may
change its mind after the capital is invested, in order to take more profit for itself.
Political risk can be obvious, such as developing in countries with an unstable
dictatorship and a history of sudden nationalization - or more subtle - as found in
nations that adjust foreign ownership rules to guarantee that domestic corporations
gain an interest. An important approach that a company takes in mitigating this risk
is careful analysis and building sustainable relationships with its international oil and
gas partners, if it hopes to remain in there for the long run.
SEE:Understanding Oil Industry Terminology
Geological Risk
Many of the easy-to-get oil and gas is already tapped out, or in the process of being
tapped out. Exploration has moved on to areas that involve drilling in less friendly
environments - like on a platform in the middle of an undulating ocean. There is a
wide variety of unconventional oil and gas extraction techniques that have helped
squeeze out resources in areas where it would have otherwise been impossible.

Geological risk refers to both the difficulty of extraction and the possibility that the
accessible reserves in any deposit will be smaller than estimated. Oil and gas
geologists work hard to minimize geological risk by testing frequently, so it is rare
that estimates are way off. In fact, they use the terms "proven," "probable" and
"possible" before reserve estimates, to express their level of confidence in the
findings.
Price Risk
Beyond the geological risk, the price of oil and gas is the primary factor in deciding
whether a reserve is economically feasible. Basically, the higher the geological
barriers to easy extraction, the more price risk a given project faces. This is because
unconventional extraction usually costs more than a vertical drill down to a deposit.
This doesn't mean that oil and gas companies automatically mothball a project that
becomes unprofitable due to a price dip. Often, these projects can't be quickly shut
down and then restarted. Instead, O&G companies attempt to forecast the likely
prices over the term of the project in order to decide whether to begin. Once a project
has begun, price risk is a constant companion.
SEE: Uncovering Oil And Gas Futures
Supply and Demand Risks
Supply and demand shocks are a very real risk for oil and gas companies. As
mentioned, operations take a lot of capital and time to get going, and they are not
easy to mothball when prices go south, or ramp up when they go north. The uneven
nature of production is part of what makes the price of oil and gas so volatile. Other
economic factors also play into this, as financial crises and macroeconomic factors
can dry up capital or otherwise affect the industry independently of the usual price
risks.
Cost Risks
All of these preceding risks feed into the biggest of them all - operational costs. The
more onerous the regulation and the more difficult the drill, the more expensive a
project becomes. Couple this with uncertain prices due to worldwide production
beyond any one company's control, and you have some real cost concerns. This is
not the end, however, as many oil and gas companies struggle to find and retain the
qualified workers that they need during boom times, so payroll can quickly rise to add
another cost to the overall picture. These costs, in turn, have made oil and gas a very
capital-intensive industry, with fewer and fewer players all the time.

The Bottom Line

Oil and gas investing isn't going anywhere. Despite the risks, there is still a very real
demand for energy, and oil and gas fills part of that demand. Investors can still find
rewards in oil and gas, but it helps to know the potential risks that go along with
those potential rewards.

Refine Your Financial Vocabulary

Gain the Financial Knowledge You Need to Succeed. Investopedias FREE
Term of the Day helps you gain a better understanding of all things
financial with technical and easy-to-understand explanations. Click here to
begin developing your financial language with this daily newsletter.

The advent of the digital oil field helps produce cost-effective energy
while addressing safety and environmental concerns.

Everyone needs it, few know how we get it, and many feel compelled to slow down efforts to
finding and producing oil. One of the primary assets of successful, thriving societies is a lowcost energy source. What drives low cost? Supply greater than demand! What drives supply?
Finding supplies in sufficient quantities so producing oil and gas is economically viable. Finding
and producing hydrocarbons is technically challenging and economically risky. The process
generates a large amount of data, and the industry needs new technologies and approaches to
integrate and interpret this data to drive faster and more accurate decisions. Doing so will lead
to safely finding new resources, increasing recovery rates and reducing environmental
impacts.
The term big data has historically been regarded by the oil and gas industry as a term used
by softer industries to track peoples behaviors, buying tendencies, sentiments, etc.
However, the concept of big data defined as increasing volume, variety and velocity of data
is quite familiar to the oil and gas industry.
The processes and decisions related to oil and natural gas exploration, development and
production generate large amounts of data. The data volume grows daily. With new data
acquisition, processing and storage solutions and the development of new devices to track a
wider array of reservoir, machinery and personnel performance todays total data is
predicted to double in the next two years.
Many types of captured data are used to create models and images of the Earths structure
and layers 5,000-35,000 feet below the surface and to describe activities around the wells
themselves, such as machinery performance, oil flow rates and pressures. With approximately
one million wells currently producing oil and/or gas in the United States alone, and many more
gauges monitoring performance, this dataset is growing daily.
The oil industry recognizes that great power and imminent breakthroughs can be found in this
data by using it in smarter, faster ways. However, resistance regarding workflows and analysis
approaches remains in place, as it has for the last 30 years. How does the industry bridge the
vocabulary and cultural gap between data scientists and technical petroleum professionals?

Ideas, applications and solutions generated outside the oil and gas industry rarely find their
way inside. Other industries seem to have bridged this gap, but in talking to experts in the
broader technology industry, the oil industry is seen as a no mans land for new-age
entrepreneurs, while major technology providers spend billions trying to enter it (e.g., GE, IBM
and Microsoft).
Breaking into the oil and gas industry is difficult for analysts, but the need and potential for
reward are great. Nine of the top 10 organizations in Fortunes Global 500 are oil and gas
companies. More than 20,000 companies are associated with the oil business, and almost all of
them need data analytics and integrated technology throughout the oil and gas lifecycle.
Throughout the 1990s, the oil and gas industry focused on data integration, i.e., How do we
get all the data in one place and make it available to the geo-scientists and engineers working
to find and produce hydrocarbons? Since the turn of the century, technology development has
mainly focused on software that integrates across the major disciplines to speed up old
workflows. The industry has had many amazing technical professionals, but the idea of a data
scientist is new, and should be considered alongside the petrophysical, geophysical and
engineering scientists. The next decade must focus on ways to use of all of the data the
industry generates to automate simple decisions and guide harder ones, ultimately reducing
the risk and resulting in finding and producing more oil and gas with less environmental
impact.

Technically Complex, High Risk

Despite its astronomical revenues, the profit margin of the oil and gas majors is 8 percent to 9
percent. Finding and developing oil and gas while reducing the safety risk and environmental
impact is difficult. The layers of hydrocarbon-bearing rock are deep below the Earths surface,
with much of the worlds hydrocarbons locked in hard-to-reach places, such as in deep water or
areas with difficult geopolitics.
Oil is not found in big, cavernous pools in the ground. It resides in layers of rock, stored in the
tiny pores between the grains of rock. Much of the rock containing oil is tighter than the
surface on which your computer currently sits. Further, oil is found in areas that have
structurally trapped the oil and gas there is no way out. Without a structural trap, oil and
gas commonly migrates throughout the rock, resulting in lower pressures and uneconomic
deposits. All of the geological components play an important role; in drilling wells, all
components are technically challenging.
Following are three big oil industry problems that consume money and produce data:
1. Oil is hard to find. Reservoirs are generally 5,000 to 35,000 feet below the Earths
surface. Low-resolution imaging and expensive well logs (after the wells are drilled) are the
only options for finding and describing the reservoirs. Rock is complex for fluids to move
through to the wellbore, and the fluids themselves are complex and have many different
physical properties.
2. Oil is expensive to produce. The large amount science, machinery and manpower
required to produce a barrel of oil must be done profitably, taking into account cost, quantity
and market availability.
3. Drilling for oil presents potential environmental and human safety concerns that
must be addressed.

Finding and producing oil involves many specialized scientific domains (i.e., geophysics,
geology and engineering), each solving important parts of the equation. When combined,
these components describe a localized system containing hydrocarbons. Each localized system
(reservoir) has a unique recipe for getting the most out of the ground profitably and safely.

Finding It
To locate oil, geologists and petrophysicists use data that indicates the type of rock in nearby
wells, as well as seismic data, produced by sending sound waves deep into the subsurface,
which bounce back to receivers. The data collected from wells has higher resolution but is
accurate for only a small area (10 feet) around the well, so data interpretation techniques are
used to extrapolate between wells. This requires scientists to insert considerable
interpretation into the analysis. Geophysics is the study of the Earth, but in the oil business,
geophysicists focus primarily on seismic data. They use this data to create a subsurface
picture, but the resolution is several hundred meters at best. Over time, many breakthroughs
in finding new deposits of oil and gas have occurred through the combination of geology,
petrophysics and geophysics, ultimately developing better models of the Earths subsurface,
but this area still has the most uncertainty. Find a way to paint a clearer, more accurate image
of the subsurface and youve found the Holy Grail of the oil and gas industry.
To date, 3D seismic data has been the industrys most impactful scientific breakthrough. This
data vastly improves the picture of the Earths subsurface and removes the need to drill a
multi-million dollar hole, with very little data, to explore what is in the rock. Seismology,
rightfully so, has received the most research attention (billions of dollars yearly), trying to
better tune data acquisition and processing, in an effort to get a clearer image.
R&D spending in geophysics centers around four main categories acquisition, processing,
interpretation and hardware optimization all rich in the three Vs of big data (volume, variety
and velocity). One raw seismic dataset is usually in the hundreds of gigabytes, resulting in
terabytes once the numerous and expensive processing and interpretations are finished. These
processing algorithms calculate many billions of data points with each run, and hundreds of
these runs occur globally every day, all for one goal create a clear, accurate picture of the
Earths subsurface and identify all of the major components of the hydrocarbon systems.
With the lower seismic data resolution, data from other existing nearby wells is used to
enhance the overall Earth picture. Well log data is captured on every well and is interpreted to
generate specific information about the rock that was cut and the fluids that exist. While the
resolution of this data is one to two feet, it has limited accuracy as mentioned earlier. The
problem: lots of data, different scales, different types, with a critical need to get the most
clarity possible through integration.
Finally, while much time is spent on using captured data to make the subsurface clear,
equivalent time is spent on acquisition machinery and techniques. Seismic acqusition crews,
well-logging crews and other services deploy machinery on and in the Earth, taking readings
that are processed often manually to produce a best possible picture used for planning,
locating and drilling wells, and as the guide for economic planning and reporting.

Producing It
Producing oil and gas involves drilling and completing the wells, connecting them to pipelines
and then keeping the flow of the hydrocarbons at an optimum rate, all integrally related to the
subsurface environment. The path to optimizing production is dependent on the type of rock

and structure of the reservoir. These decisions depend heavily on models created in the
exploration phase described earlier.
Today, every well thats drilled uses extensive machinery, measurement devices and people
all of which produce video, image and structured data. This area is probably the fastest
growing in terms of the volume, variety and velocity of data being captured. Improving drilling
and completion operations can significantly reduce costs. For reference, the widely publicized
shale oil wells typically cost between $7 million and $10 million each. Offshore wells can cost
tens or hundreds of millions of dollars. The cost goes up as the seafloor and the reservoirs
deepen requiring more technology to do it safely and successfully.
The average finding and development (F&D) cost of operators is between $7 and $15 a barrel
(the wide range dependent on geographies and geologies). If there is enough oil to make the
economics work, they will proceed; if there are smaller pockets of oil, development costs must
be lower in order for the economics to make sense.
Some simple math: If oil companies found a one million barrel oil reservoir (at a price of $100
per barrel), that seems like good money, right? $100 million! However, to find it, you have to
shell out up to $30 million for the acquisition, processing and interpretation of the seismic
data. The operators must then produce it, and the cost of land, drilling and getting oil to
market is significant. Land can cost as much as $30,000 per acre for access and often requires
120 acres for one well. Typical deals involve thousands of acres, plus drilling costs of between
$5 million and $10 million for U.S. onshore wells and up to $100 million for offshore drilling. If
you are a major integrated oil and gas company, your profit on $100 million will be $1 million
to $12 million (a bit higher for independent operators). Many will lose money overall. Analytical
approaches that impact the success rate of finding or reducing the cost to develop and
produce oil and gas can make energy more affordable, safer and environmentally conscious.

Solution
The integration and mining of data produced in the hydrocarbon finding and producing process
offers amazing potential for answering some of the big questions facing the oil industry. The
biggest question: Where is more oil? The next biggest question: How do we get substantially
more out of the ground safely, with minimal environmental impact? The less sexy, but possibly
more relevant question is: How do we use data that has such potential to unlock these
answers?
The oil and gas industry can learn much from the data, yet it is generally used the same way it
was historically used. The industry must look at broader areas and functioning of individual
components to create different views and perspectives. For example, Drillinginfo, a leading
data and intelligence provider of upstream data for oil and gas decisions, has begun to break
the barriers of geography and discipline to consider many potential variables and, based on
thousands of wells, create a statistically predictive model for a given areas producibility.
Most analysis in oil and gas is done within technical disciplines and within a relatively small
geographical study area. This would be easier if the Earths properties were not so variable.
Depositional systems vary greatly based on rock types and the different layers caused by
ancient rivers, mountains, plains and deserts. How do we learn between reservoirs when all of
the drilling environments are seemingly different systems? Typically, the data is gathered and
stored in different databases, file cabinets and various geoscientists and engineers desks.
Grains of similar rock behave the same everywhere else on Earth. While they are never laid
down the exact same way, the lessons learned in one area could be extrapolated or applied to
another area. Today, this process is very manual and labor intensive.

Data science will help the oil and gas industry learn more about each subsystem and inject
more accuracy and confidence in every decision, ultimately reducing risk. Big data analytics
will be key. While the concept is still in its infancy as far as the oil and gas industry is
concerned, here are some possible near-term big data analytical solutions:

Integration over a wide variety of large data volumes incorporating all relevant
information for finding additional hydrocarbons, and identifying the data and the best
known technologies to produce it for that particular system (the recipe).

Make daily operational data relevant to reduce operating costs and improve recovery
rate.

Decision management take into consideration all knowns and local conditions and
quickly identify if or how to proceed.

In the oil and gas industry, all data is critical, but not all pieces are critical for every decision.
So how do we break down every decision, identify every potential piece of contributing data
and quickly sift through to a decision?
Other industries are embracing big data analytics, but the oil and gas industry is just now
getting the concept. The oil and gas industry has dealt with big volume, variety and velocity,
but must start thinking beyond self-made boundaries to truly capture the benefit awaiting.
In the past decade, oil and gas technology focused on the finding half of the equation and
benefitted from imaging breakthroughs in the healthcare industry. The magnetic resonance
imaging (MRI) technology that doctors use to see inside of humans without a knife has also
proved useful to see into the rock from inside the wellbore identifying useful rock and fluid
properties. For the producing, side of the equation, the digital oil well, digital oil field and
data formatting standards have led to operators putting gauges and data gathering devices on
everything possible in the field. In the continuum of descriptive, predictive and prescriptive
analytics, the oil and gas industry is just learning how to use this data to make decisions. The
descriptive portion (per device) is being embraced. Capturing this data allows very large fields
to be managed from a central command center rather than by people physically checking
every well. In a field with thousands of wells, where one person once checked five to 10 wells
per day, personnel costs and the cost of optimizing production have been vastly reduced while
production has increased. One of the first implementations of the digital oilfield was Occidental
Petroleums Elk Hills field in Bakersfield, Calif.
A decade ago, the term digital oilfield meant installing digital gauges and transmitting
devices for production rates and pressures (instead of manual readings). Field personnel could
target wells that were down or having problems. In the next stage, companies displayed this
data in one room and then on the same big computer screen as an earthmodel built by the
geoscientists and engineers. Todays stage is a rather linear extension from this hardwarecentric integration solution, with dashboards and software making digital monitoring and
operations more effective, but more can be done.
Soon we will not just capture data and view it, which still requires experienced personnel to
make a large number of decisions. We will have smarter solutions, with built-in intelligence, so
computers can make simple decisions, while indicating a set of potential outcomes to the user
in more difficult situations, helping with faster decisions based on best practices. Ultimately,
costs for these operations will be cut and production will go up.

Soon we will have automated interpretation systems that learn while the user interprets
seismic data, and well begin completing more of the interpretations, as they improve in
understanding the users selection methods. First versions of this concept exist today. The next
stage of development must focus on merging this knowledge with other data types to identify
what is productive and what is not. Further, the economics, necessary machinery, personnel
and environment risks should be considered as the seismic work is done. This is possible! We
have the data! We have the analytical expertise. Theyve just never been introduced to each
other. The bottom line: The oil and gas industry is ripe for big data analytics, whether through
new software, new middleware, data handling solutions or data manipulation tools. The
primary focus areas should be finding it, producing it and operations.

Conclusion: It Must Happen

While we have plenty of data and challenges to undertake, how do we bridge the gap between
the two? One way the oil industry tries is through venture capital funds. Both Shell and
Chevron have their own such funds to create an outlet to explore new ideas. While not enough,
the majors have begun to embrace analytics and others are finding ways to follow.
The oil and gas industry need more cross-fertilization. As oil and gas companies awake to the
potential of analytics, many jobs will be created for data scientists, opening a portal for new
applications and ideas to enter the industry.
Many technology providers exist in the industry. The successful ones from the past decade
must embrace big data analytics to succeed in the future. This is challenging enough, but it will
also require a mindset change. Few are poised to do so, but such companies will have the
strategic data and intelligence to train new applications to be smarter and provide more
complete solutions than stranded static data in empty point software products.
The oil and gas industry has an opportunity to capitalize on big data analytics solutions. Now
the oil and gas industry must educate big data on the types of data the industry captures in
order to utilize the existing data in faster, smarter ways that focus on helping find and produce
more hydrocarbons, at lower costs in economically sound and environmentally friendly ways.