I get asked this a lot: what are oil producers (and their contractors) doing when the price of oil is so low? Why keep producing? Why do they need engineering services — and CAD, PLM, visualization, and other engineering-related technologies? The questions usually come from investors thinking about AVEVA and Hexagon (parent of Intergraph), but also from engineering service provides who are trying to figure out their next steps in a vastly uncertain world.

Uncertainty for many creates opportunity for a few. When contracts dry up, some companies shrink. They lay off underutilized resources, which often means releasing unused software licenses. That math can be complicated: if it’s a maintenance arrangement, what does it cost to re-up when business improves? If it’s a subscription, what kind of volume pricing plays into the cost of the remaining licenses? How does this tie into the long-term IT strategy?

Other companies look at the problem differently: since these smart, trained, talented humans aren’t doing the work they were previously doing on specific contracts, what else can they be doing? Can they develop new skills for themselves and for their company, so that it can market new offerings? Can they investigate new technologies that might make the team more efficient on the next project that comes along? Can they use the downtime to reconcile processes that grew out of necessity but don’t serve the enterprise as a whole? There’s a lot that smart people can do when they have enough time; the question is one of nerve: how many people do you keep on an overhead payroll in an industry that still bills (largely) by the man-hour?

I know of EPCs that are using this slower period to develop new offerings for plant services — they, like industrial manufacturers, are figuring out that making and selling the asset is only the start of what could be a very profitable lifetime relationship with a client. Others are honing in on specializations: nuclear power technologies, chemical processes, tundra-specific construction techniques … the list is long. Once things do pick back up for new projects, they’ll be able to market specific expertise that enables them to vault over their competitors. These companies may actually add licenses, or shift from one capability to another as they look at new opportunities.

But let’s not forget that the new projects in oil & gas capture attention but existing plants get the majority of expenditures every year, and much of that continues even when the price of oil is so low. Why? Because operating plants need maintenance. They need to be kept in regulatory compliance. They need to be made more efficient, so that even at lower prices, they can be somewhat profitable. There’s a terrific chart in KBR’s investor presentation from December 2014 (by Rystad Energy, here) that shows the breakeven point for different types of oil production, from an average of $29/barrel for onshore projects in the Middle East to a high of $74 for oil sands and $62 for shale in North America. But those averages are just that, averages; some are much more efficient and can show others how to boost their profitability even at the low prices we’re seeing today. Oil producers are evaluating what can be done to push their average breakeven lower; what will that cost and how quickly can it be accomplished?

Another big factor in the engineering world of oil and gas is how old many producing fields are. Some are candidates for life-extension technologies but many need to be safely decommissioned and dismantled. Lots of engineering hours there, too.

I’m sure oil economists are looking hard at trends, prices and politics to forecast future oil prices; there doesn’t seem to be a consensus about how low the price go or when it will start to trend upwards again. What is clear, though, is that demand is going to continue to grow as emerging consumers want power, heat/cooling and automotive fuel. Conservation in North America and Europe simply shifts the demand for energy from those regions to Asia, South America and Africa. And let’s not forget the plastics and chemicals derived from petroleum product. Bottom line: the price for oil will recover at some point to some level. Oil producers will be in business for a very, very long time. They’ll need engineering contractors to help with new and ongoing projects.

What does this mean for our PLMish world? A couple of thoughts:

• Vendors will need to work harder to enable engineering teams to work with data from many sources, since efficiency gains on existing assets is a major focus for operators. Many assets are old; they often don’t have CAD models or, if they do, they’re out of date. CAD models, laser scans, PDFs of old drawings, photogrammetric input (from cell phone photos to professional scans) and 2D isometrics and diagrams all need to be consulted to figure out how the plant was meant to work, and then boost its productivity.
• Growing a service business means that EPCs have to get data-savvy. It starts at commissioning (when the asset first starts on its mission, and then ramps up to full production), but extends through all sorts of functions that rely on easy and frequent access to data. Industrial Internet of Things, predictive maintenance, training, contingency planning — EPCs are taking on more operational risk in order to capture some of the operating profit. They need help moving from engineering/design thinking to operating experience and systems, and they need it quickly.
• A technology refresh is coming. A lot of the EPCs I talk to are using old technology because it’s a sunk cost; users are trained, processes are institutionalized and licenses are on maintenance (or relatively inexpensive subscriptions). It’s also embedded into their IT infrastructure. But they know it can’t support the latest operating systems and hardware, new technologies like haptic and perhaps the tablet and visualization capabilities that can really speed workflows. Forward-thinking EPCs are using this slower time to migrate users and processes to newer technologies because they see the benefits they will bring.

Yes, it’s an uncertain time in the oil and gas world. But it’s also an exciting time that will see new leaders emerge, especially the agile who can quickly adapt to changing circumstances. That agility will be driven by information technology — our PLMish design/engineering tools, but also project control and costing, regulatory compliance, big data, commissioning and handover, and other tools that enable EPCs to be more profitable and extend their offerings to their clients.