Proven Method for Assessing the Value of a Digital Oilfield Investment - Part 3

By: Scott M. Shemwell, D.B.A.
Digital Oilfield 3

Parts one and two of Proven Method for Assessing the Value of a Digital Oilfield Investment are available here and here, respectively.

Equipment Integrity Management
A provider of engineered products to the drilling sector was determining the value proposition for a new service in support of their existing product line. The service involved monitoring fluid management systems using RFID based asset management. Using the company’s extensive knowledge of its products life cycle performance on drilling rigs, the company sought to provide a new maintenance management service designed to dramatically reduce drilling rig downtime.

The company proposed to charge a one-time fee for the service as well as an ongoing monthly charge. Moreover, there were varying levels of service, similar to the Platinum, Gold and Silver airline frequent flyer models. The challenge this supplier had was to convince its drilling contractor customers of the value of this service.

The cost of downtime was reflected as a function of loss production and offshore drilling rig idle time. The values assigned to rig idle time are straightforward and a function of the current day rates for a class of vessel multiplied by possible time offline as a result of failure. Loss of production was calculated as a function of the number of days lost because of equipment failure that delayed hydrocarbon production multiplied by the spot price for that class of petroleum

Intangible costs included fines for non-compliance, i.e., EPA etc. This project was completed prior to the Deepwater Horizon incident in 2010; however, it did reflect “what if” scenario capability in the event of a catastrophic failure incident.

The company identified three areas of hard value in field operations as well as four categories of soft value (initially zero value) that resulted in a five year NPV @10 percent for its customers of over $3.5 million. The model developed became the way the supplier demonstrated to its customers the value from its new solution.

Unconventional Oil
A Canadian unconventional oil exploration and development company had a significant need to manage remote operations and coordinate a complex supply chain. KPIs included lowering costs and decreasing process cycle times. Moreover, key areas of concern included:

    • Scheduling and logistics
    • A new Steam Injection process
    • There are large number of wells and significant data from the drilling program
    • Health, Environment, Safety are paramount
    • There is a need to track equipment and material to and from its central staging area on site including better project cost management
    • It is important to know the exact location a fleet of pickup trucks as part of its safety program
    • Plans to establish a data room

The project involved the development of an integrated information management system composed of data and information such as interpreted well logs, drilling permits and daily reports, equipment integrity as well as other information of interest to assure safe operation in a very remote area.

Thirty-one Components of Value in five Categories were identified. Working with the operator, the Digital Oilfield solution provider developed a detailed description of each component that assisted the internal “sales” process. The model include items such as the cost of capital, cost of downtime, as well as process debottlenecking.

In this case, the operator decided not to build a full NPV multi-period model but believed that the preliminary model was satisfactory. In other words, this robust model allows users to either build very complex enterprise wide valuation assessment or fit for purpose simple models. You can either strike a valuation assessment nail with a claw hammer or a spike with a sledgehammer.

Concluding Comments
By some accounts, the digital oilfield is entering the next generation. Capitalizing on the knowledge of the last decade of digital oilfield transformation, one might expect a more rapid take up from industry as the construct matures. Moreover, issues around asset and equipment integrity continue to grow post-Macondo.

If one accepts the hypothesis that digital oilfield projects are becoming mainstream and subject to the same capital budgeting processes of other investments, an economic value proposition assessment process must be put in place. Such as process must take into consideration the unique aspects of information technology investments as well as frame the value proposition in the “financial language” of the organization.

Nowhere is this more important that the IT vendor community, which must demonstrate a believable and defendable economic value propositions to their customers. Tools exist that can meet the needs of operators and their suppliers. Such tools increase the successful take-up of digital oilfield initiatives and EVPM has been accepted by the industry and used for multiple digital oilfield value assessments.

Parts 1 and 2 of Scott Shemwell’s “Proven Method for Assessing the Value of a Digital Oilfield Investment” are still available on PennEnergy.com. Shemwell is also the author of “Governing Energy,” a bi-weekly blog covering contemporary issues in organizational governance and its new role in operations.


Footnotes:
Part 1:

- Weik, Martin H. (1961). The ENIAC Story. ORDNANCE—The Journal of the American Ordnance Association. Washington, D.C. http://ftp.arl.mil/mike/comphist/eniac-story.html
- Doherty, Walter J. and Thadani, Ahrvind J. (1982, November). The Economic Value of Rapid Response Time. IBM Corporation. http://www.vm.ibm.com/devpages/jelliott/evrrt.html
- Marginal Utility in Economics. About.com Economics. http://economics.about.com/od/utility/p/marginal_utility.htm
- Shemwell, Scott M. (1997, September). The Economic Value of Timely Information and Knowledge, Key to Business Process Integration Across Boundaries in the Oil & Gas Extended Value Chain. Proceedings of the Gulf Publishing 3rd International Conference and Exhibition on Exploration & Production Information Management. Houston.
Part 2:
- Shemwell, Scott M. & Murphy, D. Paul. (2004, November). Knowing the economic value of information. World Oil. pp. 63-66.
Part 3:
- Shemwell, Scott M. (2008, May 21). Case Study: Optimizing Operational Performance for a Canadian Unconventional Oil Exploration and Development Company. Society of Petroleum Engineers 2008 Digital Energy Conference. Houston.
- Larsen, Eldar and Hocking, Paul. (2012, September). The Next Generation. Oilfield Technology. pp. 45-48.
- Shemwell, Scott M. (2012, March). Integrity Management: Issues & Trends Facing the 21st Century Energy Industry. A PennEnergy Research Center Report.



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