Proven Method for Assessing the Value of a Digital Oilfield Investment - Part 2

By: Scott M. Shemwell, D.B.A.
Digital oilfield 2

Part one of Proven Method for Assessing the Value of a Digital Oilfield Investment is available here.

Overview of the EVPM
The EVPM model has been developed with the upstream petroleum industry and as a direct result of the need to understand the value of IT initiatives with heavy industry such as the digital oilfield. It is the result of over a decade of development of a useful solution that meets the needs of the sector.

EVPM is a multi-dimensional model composed of five Components of Value:

    • Cost Takeout defined as the COMPLETE elimination of a specific activity or process. For example, the consolidation of disparate data centers into a Cloud based data solution.
     • Cost Avoidance by identifying and correcting an error that was not budgeted for correction but would have caused an expense had it not been corrected, we are avoiding a cost. For example, the correction of an engineering design flaw before the product goes into production.
     • Productivity & Efficiency Gains through increased productivity that improve existing resource utilization. For example, removing a bottleneck that is restraining manufacturing capability, or correcting a process by reducing or eliminates “wait time” during the production process.
     • One-time Cash Flow Impact defined as the impact from decreasing and/or eliminating one-time cash flow. One example is the elimination of redundant information/data storage.
     • Intangible benefits are those that improve business operations and are therefore necessary to control, protect and/or enhance company assets. However, they do not lend themselves to quantification and are subjective by nature. Examples include implementing a knowledge management solution that improves communications between departments or reducing inventory shrinkage using web cams in a warehouse.

Moreover, each of these components have subgroups of both Capital Expenditures (CAPEX) and Operating Expenditures (OPEX). This recognizes that over the life cycle of a digital oilfield project, OPEX will be required as well to assure continued safe and optimal asset performance.

Additionally and often not specifically recognized, value is not necessarily attained across all functions of the organizations evenly. For example, field operations is the logical recipient of value but perhaps not as clear are back office administrative functions. Moreover, as will be shown in the following case studies, the model enables management to address intangibles such as HSE cost/benefit.

The model enables organizations to develop the subjective components and ultimate place a value or range of values that then be subject to “what if” scenarios to better illuminate various variables and their impact on the value of a digital oilfield initiative. Finally, the costs and economic values are assessed using Net Present Value (NPV) metrics or other financial determinates as required.

The formal EVPM has been in use over the last decade and has been used frequently to assess the value of digital oilfield initiatives. In the following section, we will address three different initiatives by an Independent, an industrial supplier to the upstream sector and an unconventional oil production company.

Case Studies
This section addresses three different engagements utilizing EVPM for digital oilfield initiatives. These have been selected as they provide a broad perspective about how EVPM is used by a number of parties to develop digital oilfield value propositions.

Real-time Control
An independent operator used this process to assess the value proposition for the installation and operating of a real time control system in an oil brownfield. A team was assembled representing the different departments that would be impacted by this project. The group identified 37 different line items of Components of Value among 12 process owners.

In addition to factoring in the cost of the control system and its depreciation over a ten-year period, the company assessed payback as a function production in terms of days and number of BOE (barrel of oil equivalent). Relatively modest improvements in production projections effectively made the valuation conservative.

Intangible items included a better response to HSE events and the system as a showpiece within the organization. In both cases, these line items were given an initial value of zero. In other words, the value proposition would stand on the merits of “hard” data and not hard to measure or unmeasureable metrics. This is another strength of the model routinely used as it allows management to identify certain areas of “perceived” value that may not be known initially. Experience can factor into later assessments of value and/or subsequent digital oilfield projects.

Finally, as previously noted both CAPEX and expected OPEX were taken into consideration over the ten-year period. This resulted in an NPV @ 10 percent of almost $9 million that justified the project.

Parts 3 of Scott Shemwell’s “Proven Method for Assessing the Value of a Digital Oilfield Investment” is available here.

Part 1 is available here.

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