Part 3 of our series asks experts for their perspective on the research and development looming ahead that will help make the growing pipeline business a safer and more efficient industry. The article comes to a provocative conclusion you don’t want to miss.

Esri

Gas and hazardous liquids pipeline operators are pushing harder than ever for further advances in Geographic Information System (GIS) technology, of which California-based ESRI is the industry leader.

There are multiple reasons for this, said Esri’s Tom Coolidge, pipeline and gas utility industry manager.

“Pipeline operators need to find a better way to achieve business objectives in a time of increasing regulatory and market change.” Here are some of the changes he said pipeline operators frequently mention:

  • Government regulation is expanding and tightening.
  • There is a public expectation of zero incidents and zero tolerance by the public of failure to achieve that.
  • Environmentalists are increasingly watchful of impacts to the natural world around pipelines.
  • Stakeholders have rising financial expectations.
  • Authorities scrutinize new pipeline construction proposals much more closely and under intense public attention.

“All of this is driving gas and hazardous liquids pipelines harder to re-imagine how they conduct their business and to modernize the key enabling technology systems needed for them to do so,” he said. Among the key enablers of change is GIS – the ultimate enabler of Location Intelligence for all functional areas and roles. Location Intelligence is a term for the discovery of insights from the visualization and analysis of aggregated authoritative and public data.

While GIS supports all functional areas and roles, it often is thought of in the context of pipeline operations. That is because of the critical role operations plays. They are responsible for knowing at all times what is going on within and around a pipe network.

“This is essential to those responsible for ensuring that it always performs as expected, and others [who are] affected by its operational status. Pipeline operations is becoming increasingly data-driven. With location being a pipe network’s most common data denominator, the role of GIS in powering Location Intelligence is becoming more important.

“GIS is the ultimate enabler of Location Intelligence for the entire pipeline enterprise, and ArcGIS additionally provides the sharing and collaboration capabilities needed for the enterprise to effectively use it to achieve better business outcomes,” Coolidge explained.

Looking ahead, he predicted GIS software in a web GIS architecture will be one of the new product types destined to make the greatest impact on pipeline operations in the next five years. Built on the same technology as that underpinning the worldwide web, he says this new generation of GIS provides a range of new solutions for pipeline operators and an ability to fully participate in the convergence of information technology and operational technology systems. 

Among the new solutions of importance is advanced analytics, including analytics using artificial intelligence and machine learning.

“Pipeline operators can also now perform linear referencing and connectivity modeling on the same pipeline database. Real-time GIS is here, enabling pipeline operators to consume and analyze streaming real-time data to achieve their business objective,” Coolidge concluded.

Arion Blue LLC.

That oil and gas is a technology-driven industry, perhaps never so evident as in the advent of onshore horizontal drilling and fracking. Yet many other areas of the energy industry have lagged other industries when it comes to technological advances, said industry veteran Dan Dutherage, co-founder of Arion Blue LLC, a Houston-based engineering startup.

“That changed with the dramatic drop in oil prices in 2014-16 that put significant downward pressure on the entire industry, thus driving a need for leaner, more efficient operation of energy infrastructure. This in turn has highlighted the need for and implementation of new technologies, and now we’re seeing more and more new technologies coming to light within the industry,” he said. 

“The most recent advances outside of the drilling and fracking areas have been driven more by the need for the effective development and cost control of energy assets than regulations and the environment.” 

Improving the quality of, and access to, extensive data will be the hallmark of new research efforts, he said.

“This will be critically important as we strive to improve efficiencies, reduce cost and enhance our safety practices across the entire spectrum of the industry. Thus, automation, the increased use of remotely controlled devices, the application of smart technologies, and even artificial intelligence during project development and operation will become ever more important.”

Will energy companies be willing to share the fruits of their R&D with their energy brethren? Dutherage isn’t so sure.

“Some industry groups exist where knowledge is shared; however, knowledge is power. It seems to me that we as an industry are becoming ever more protective of the knowledge we gain to further secure our competitive advantages.”

David Jewell

Consultant David Jewell has often been called to share his expertise in the burgeoning field of information technology as it pertains to pipelines. 

“The push in midstream for IT resources is most likely focused on cost-reduction via the minimization of platforms or systems. Efficiency is always of interest, but the ROI is always suspect. Most companies have faced over budget/time projects at one time or another, so there is a natural reluctance to invest too quickly or strongly,” he said. 

Significant consolidation in the pipeline businesses in recent years has led to a need to standardize on the fewest numbers of platforms (i.e., gas management systems) as possible, thereby reducing the number of staff and data center resources necessary to support the daily business. 

“The challenge with some of these consolidations is that they are not always on the latest technology,” Jewell said. “They move to stable platforms familiar to internal users and their respective IT staffs. But these technologies do not necessarily incorporate mobile and social technologies as well as other newer technologies.”

Here is his view into the future of R&D.

“I suspect the biggest changes in the next five years will be in the way technology is developed. There is a technique/methodology being used in other industries called ‘agile’ development, which breaks down large projects into smaller chunks that can be coded more quickly.

“This approach also takes advantage of the advances in web-based technologies that allow for more connectivity between coded processes. It allows for faster, cheaper development that often leads to a working prototype of a process. This new way of approaching projects will be adapted in midstream companies.”

Jewell said a problem many companies struggle with are their aging legacy systems. “These systems are huge and are the focus of most IT shops, just keeping the systems all running. The application of innovation is difficult with so much to keep the enterprise operating.

“They know there is promise and cost savings in the new technologies, but it remains difficult to justify the changes. The challenge is to adapt new technologies in a cost-conscious industry environment. Areas like data analytics, robotics for routine processes, etc. will begin to sneak in.

“For the most part, technology is still not seen as a strategic resource. Instead, it remains a tactical tool for conducting business. This may change as turnover in the midstream C-suite goes to younger, more tech-savvy people. It is beginning to be true in some of the upstream companies,” he concluded.

Cleve Hogarth

Cleve Hogarth, like David Jewell, is familiar with nearly every aspect of pipelining, from hardware to software, from IT solutions to marketing, both have extensive experience on the operations and service sides of the business.

With commodity prices expected to be "lower for longer" into the future (especially for natural gas), Hogarth suggested there is extreme pressure on oil and gas to do more with less in order to eke out acceptable margins. 

“The shale E&P segment has seen significant success with its adoption of ‘manufacturing’ initiatives, however, all segments of the value chain are under pressure, including midstream where operators are under pressure to maximize efficiency in order to reduce costs to make economics work for shippers, and to generate acceptable returns for shareholders.

“Specific to midstream, recent successes have been achieved with replumbing [reversals, conversion of commodity, etc.], as well as improved operating efficiency and long-term reliability,” Hogarth said. 

Pushing ahead, he expects to see big gains in IOT as well as the following:

  • Optimization tools (operational and commercial);
  • Sophisticated inspection technologies to reduce cost and effort of regular inspection and to anticipate potential issues;
  • Smart-pipe solutions to support monitoring and predictive analytics;
  • Safety-related technologies to avoid incidents;
  • Improved systemization solutions to improve efficiency of planning, development and construction.

And if the customer has his or her say, new products that will improve efficiency and reliability; quick responsiveness to weather and operational constraints and evolving market conditions. Last, but not least “they want to see the creativity to continue to offer new and flexible services,” Hogarth concluded.

Bits, Bytes, and Barrels….

Geoffrey Cann, Canadian researcher and author (Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas), suggested that digital companies are not targeting the oil and gas industry directly, but instead focusing on key sectors vitally important to the industry - notably transportation.

“Connected, shared, and autonomous cars could alter the demand for gasoline and diesel permanently, but more important, they create new disruptive business models. Many of these same innovations [artificial intelligence, wearables, financial services] will be put to work in oil and gas to lower costs, raise productivity, and enhance sustainability, possibly unlocking disruptive value.”

How is the pipeline industry responding to digital transformation? To gain insight, Cann reviewed investor presentations and websites for 50 different Canadian and U.S. pipeline companies, including a more thorough study of some of the largest North American players. He conducted an extensive media search concerning digital innovation in the midstream and interviewed investment analysts who provide market guidance, profit analysis and price recommendations.

Some provocative findings emerged.

“My conclusion is that, with few exceptions, there is little published evidence of efforts to digitalize operations in the same manner and to the same degree as other heavy asset industries. Smart pigs [sensor-equipped devices that flow through a pipeline in operations looking for cracks, dents and erosion] feature prominently, but not much else.

“There is little overt discussion of drones, augmented reality, artificial intelligence, machine learning, blockchain, cloud computing and agile business methods. I was unable to find a single public midstream company that deliberately chooses to differentiate itself from its peers via digital innovation.

“Indeed, as an asset class, pipelines generate similar returns, tend to copy each other's strategies, have similar financial structures. In other words, they are undifferentiated.” 

How so?

“Many pipelines are set up as natural monopolies,” he explained. “As monopolies, there’s little incentive to innovate, even when it would result in significant business improvements. The gains from innovation may not accrue to the shareholders, and the costs of innovation may be handed to the customer as a toll increase, which customers may naturally resist.”

Add to that customer pressures.

“Pipeline customers will often configure their businesses around the vagaries of pipeline design [to take advantage of bottlenecks, for example], and they object to changes that are detrimental. I helped a pipeline model out the impact of making a change to its asset mix using game theory. We discovered that the intended asset would make money for shareholders but would principally benefit all of the marginal customers of the pipeline and penalize the largest and most reliable customer. Needless to say, the investment didn’t proceed,” Cann said.

Unlike a locomotive asset, which can be taken out of service for repairs and upgrades without incurring a huge network impact, pipelines must generally remain in service 24/7.

“Pipeline assets simply take longer to upgrade. When they do take place, emphasis will likely be to improve reliability or operating performance, rather than digitalization. Of late, pipelines have focused on finding and addressing micro fractures and other wear-and-tear issues as a priority,” he said.

To secure the capital to build these long-life assets, pipelines need the commercial structures in place that lock in volumes and prices for years. These become difficult to alter once in place.

“Rateable schedules are painful to design. Network changes that require coordination across multiple shippers, refineries and utilities will run headlong into commercial formulas that will resist change. This is not to assert that the pipeline industry does not self-improve, but that those improvements are of the usual marginal sort that do not require disclosure or are not yet driving big enough change to require disclosure,” Cann said.

Pipelines face their own business improvement drivers that will provide the business case for change. He said these include:

  • Herd mentality. The oil and gas industry tends to behave as a herd, with each innovation slowly copied across the sector. In a sector study, McKinsey estimated that it takes about 30 years for an innovation in oil and gas to proceed from idea to 50% market penetration, compared to six years in the telecom sector. Competitive activity does matter but the privilege of monopoly business models tends to dull the incentives to act quickly.
  • Regulatory. The pipeline industry is now heavily regulated, and the large transmission pipeline sector operates to the highest safety standards, on par with aircraft performance and nuclear power facilities. Spills do happen, but they are so infrequent as to be front page news when they do. Regulation tends to slow down the adoption of innovation because of the additional regulatory hurdles that must be met.
  • Environmental. The sector has devoted much of its attention to meeting environmental demands for safe operations, and hence the attention and investment in smart pigs to monitor pipeline integrity.
  • Capital constraints. As commodity prices fell in 2014-15, Deloitte Center for Energy Solutions estimated that about $1 trillion in capital investment was removed from the industry. Some portion of that capital would be to build new pipeline assets in support of new hydrocarbon resource development. McKinsey estimates that the construction sector (on which the pipeline industry is highly reliant) are the least digitally advanced of all industries. [Shell, at the LNG 18 conference in Perth, highlighted that according to their research, construction productivity in building oil and gas assets had actually declined by 25% over the previous decade, compared to 25% gains in productivity in virtually all other sectors.]
  • Talent. Perhaps the biggest driver of change is in the war for talent. Pipelines, like many industries, will find it increasingly difficult to attract and retain talented people if their internal processes do not evolve to match the talent experiences elsewhere.

What is the role of the public sector?

“The suppliers of technologies to the pipeline industry [compression technologies, pumps and valves, flow meters and measurement systems, power generation, sensors and monitors], face much higher pressures to innovate so as to remain competitively relevant. Virtually every technology and service company with whom I engage has a strong focus on competitive differentiation based on innovation and are actively wrestling with the role of digital innovations in their business models.

“That is not to suggest there is no role for universities or government-funded programming to drive innovation into the industry, but this R&D appears to be aimed at solutions for all of industry to benefit [metal fatigue, micro fracture detection] and so forth.”

Noting that the pipeline industry adopts changes very slowly, Cann offered a handful of technologies that will increasingly impact the sector.

The Internet of Things: “Sensors generate enormous quantities of data, with greater diversity in form and content, at ever declining costs. They are appearing on virtually everything - pumps, valves, vehicles, vessels, and people. Oil and gas, as an asset-intense industry, drives demand for internet-connected things.

“The trajectory is pretty clear - smaller, cheaper, more capacity, lower power, encrypted, connected. More smarts embedded in the sensors means these devices will be able to do more and take on more local work. Instead of 10 unique sensors on something, there will only be one super-capable sensor.”

Artificial Intelligence: “Only the modern tools of machine learning and artificial intelligence are able to process the immense volumes of data that the sensors generate. The amount of money and investment pouring into AI, coupled with the phenomenon of fleet learning - individual AI engines that share what each other learn the instant they learn it - point to constantly falling cost and improving capability. Eventually, job design starts with AI and incorporates the human attributes, rather than the other way around.

“In the future, many pipeline assets like pumps and compressors will have onboard AI capabilities through which they will make increasingly smart decisions. These decisions include, given a set of changing conditions, when to run, at what pace and using what resources at what cost.”

Still, the oil and gas industry is only at the early stages of considering digital’s potential impacts on their businesses. Here are the kinds of questions they face, according to Cann.

What is digital? Digital technologies are new—less than a decade old for most—and have been aimed principally at consumer markets rather than industry. Most of the executives leading oil and gas companies, including pipelines, are in the latter half of their careers and have little personal direct experience with new digital technologies. There is a lack of basic understanding of these technologies and their potential impacts. Raising the digital acumen is the first challenge. 

Where to start? There appears to be much opportunity on inspection, but while oil and gas is very good at derisking investments in hard assets, they are much less effective at identifying the highest and best opportunities in digital. Setting out a digital strategy so that investments are all generally heading toward a distinctive digital future is needed.

Sourcing resources? Many other industries (financial services, public sector, healthcare, agriculture, manufacturing, power) are all confronting digital opportunity at the same time. There is a new war for key talent with digital chops, and that talent is scarce, expensive and in high demand. Pipelines are asking for guidance on talent strategies and models for sourcing the talent they will need for the future.

Cann says the potential for blockchain technology, in particular, to change the dynamics in the pipeline sector is strong.

“Crude oil cargos on a pipeline, for instance, could be recorded as an asset on a blockchain database, similar to tracked discreet items such as shared bikes, freshly mined diamonds, organic food products, and used vehicles.”

“Digital technologies can create new open business models. For example, the spare asset inventories (of critical spare and replacement parts) that all large industrial companies hold could be made visible and shared across multiple players in the industry. (The UK offshore industry does this).  A local technology company in Calgary, IronHub, has created an inventory of surplus assets that is made available to the industry looking for bargain assets for new projects,” Cann concluded