Models in the Oil & Gas Industry

Dr. Hans Th. Le Fever

eNovITe, hanslefever@enovite.com

Models are the favourite mechanism to provide a deeper understanding of the world around us, be it the physical world with laws of nature or the business world of interactions between companies and the individuals therein.

IT has a particular role in this as on one side it allows the modelling of complex phenomena through the calculation of mathematical formula or algorithms. On the other hand the ever increasing advance of IT capabilities has led to changes in the business landscape that are hard to accommodate without the use of models.

Here we will focus on the use of models in the Oil & Gas industry, with particular emphasis on those applications that provide a deeper understanding of a company's business activities and market behaviour.

Introduction

The oil & gas industry has been using models for a long time. In the exploration side geological models are used to further understanding of the subsurface and so to increase the chance for success of prospects. When a field is started to be developed 3D volumetric models are used to simulate the behaviour of underground reservoirs in order to optimise the long term extraction of oil & gas and the (undesired) water. On the surface facilities like platforms and pipelines are built, using 3D constructional models. For the evacuation phase linear programming techniques are used to determine capacity of pumps, pipeline systems and transportation capacity. Most of the models in these stages of the oil & gas development are based on mathematical formula and lent themselves for building into computer programmes and algorithms. From historic perspective most of the IT developments have over the past decades concentrated on developing this area.

As of more recently the business landscape started to change dramatically by forces of globalisation, deregulation and the advent of the Internet. The need to take a different approach from 'business as usual' forced companies into new methods to describe and analyse their business activities. Over the years we have seen a steady pace of new methodologies, e.g. TQM, Business Process Reengineering, Six Sigma, Activity Based Costing. These methods start from a systematic, diagrammatic description of the business and then set out to take to provide a different perspective and distinct way to improve the business. Some of these new concepts rapidly reached a temporary hype status, with guru's, best sellers and plenty implementation advisors. But in general all have reached a level of maturity where they can be applied with sense and show results. All these improvement / change programme share some basic simplification of the underlying model, such as value chain, input-out models, value webs, etc.

Over the years we see a shift from a focus on the departmental or organisational unit as area of improvement towards an overall company programme until ultimately the 'extraprise' stage is reached. Changes in processes and systems can no longer controlled by the company itself; it has to be done in conjunction with partners. As an illustration, the departmental era focussed on specific applications, very much the algorithm driven models mentioned above. Most companies have entered the 'enterprise' stage and embarked on the introduction of integrated financial systems for ERP (Enterprise Resource Planning). These typically encompass finance, procurement and production planning / maintenance. With the advent of the Internet opportunities arose to create more sophisticated exchange of data between companies. This 'extraprise' stage allows the integrating of internal systems with the back-office systems of other companies. A different aspect is the optimisation of inventory levels enabled by the integrated view of the supply chain.

It is important to recognise the dual role of IT, as a driver and as an enabler. On one side companies face business partners (suppliers, customers, contractors) who embrace IT and force the company to do the same; models are needed as a template for improvement of the processes, internally as well as with external partners.

As an enabler, IT allows new value creation from information assets, digital content or info-mediary roles. Here models are needed to describe what position is taken in the market and to what it could evolve.

The various kinds of models can be categorised by considering whether they are internally or externally focussed and whether time is an explicit element. We will take a closer look at the following models:

 

Business Activity Models

Business Activity Models give a comprehensive overview of all the activities in a company. In an upstream environment the highest level would typically contain processes such as 'explore', 'develop', ' produce' and 'sell' hydrocarbons. For an Oil & Gas company these can be considered core activities that need support processes such as HR, Finance, Procurement and IT. The model breaks these main activities down in more detail until a task level is reached.

The Business Activity Model can be used in a variety of ways:

IT activity Models

Support activities like IT will typically appear at all kind of places in the above model. Therefore, to allow focus on IT as a process, a separate IT activity model is appropriate. It is in a way a filtered view on the business activity model, arranging separate activities in a way logical to the IT process. The IT activity model would specify at its highest level processes such as IT (operational) services, system integration, planning and management, etc (see diagram 2).

The model is generic i.e. irrespective of the specifics of a company but clearly terminology will differ between companies. For a company with an internal IT department it can be very useful to help delineate responsibilities. To illustrate this let us look at the problem of poor data quality the blame for which is often passed backwards and forwards between various part of the organisation.

In the diagram we can see the main functions of an IT department, such as Provide IT Services, which the full responsibility of the IT department. However, Exploit Application Portfolio, Data & Services is an user responsibility, with specifics such as determining which applications are needed in their specific area of business, defining what the data represents, quality control on entry and keeping it up to date. The physical integrity (stored as entered, uncorrupted, backed-up) remains however with the IT service provider.

A diagram like this can be a great help to facilitate discussion on organisational boundaries.

 

Business Models

Business models give a description how a company operates in the market. They are useful to classify the wide variety of Internet-based offerings and can serve as a frame of reference. The basic models are as follows:

Most of these are extension of existing businesses, opening new channels for the 'bricks and mortar'. As long as the web-based offerings take actual inefficiency out of the system, profitability is not a major issue; although in a number of cases extended ROI periods are foreseen. The major profitability challenge is with the new offerings that are based on digital content only. Here new revenue models like advertising and referrals are needed to create a revenue stream.

Capability Maturity Models

This category of models found their origin in Carnegy Mellon University. It was developed by the Software Engineering Institute to advance the state of practice of software engineering to improve the quality of systems that depend on software.

The CMM takes very much a process view on the working of an organisation and defines mature processes as:

In short it is a common-sense application of process management and quality improvement concepts to software development and maintenance. Assessment takes place to decide the stage at which an activity is conducted.

The model consists of five maturity levels that lay successive foundations for continuously improving the software development process and the quality of its products. Each maturity level is a well-defined evolutionary plateau that institutionalises a level of capability for product development. The results of the assessment can be used to plan for progression towards the next level of skills and competency.

Stage

Characteristics

Initial, Ad hoc

Success depends on heroes

Repeatable

Management oversight and tracking of project; stable planning and product baselines

Defined

Software processes defined and institutionalised to provide product quality control

Managed

Product quality planning, tracking of measured software process

Optimising

Continuous process capability improvement

To illustrate how this model could be used for the area of data management, consider what these stages would mean (Quality of data is measured by properties which include accuracy, accessibility, and clarity of definition):

As an additional benefits the model can be used for organisational improvement as well as forming an underlying structure for reliable and consistent appraisal methods e.g. benchmarking own activities).

Internet Presence Maturity Curve

There are various ways how companies take presence on the World Wide Web but with the exception of the dot.comms that take full presence on day 1, most organisations go through an incremental approach. This may reflect their attitude of risk or their way of priority setting and managing of internal resources. Anyhow, for whatever reason mostly the following phases are identified:

Conclusion

The broad range of models we have discussed indicate there is a wide variety of tools to figure out ones position, be it with respect to others or in evolutionary terms. Models that have sometimes come from the IT industry it self, developed for internal purposes, now prove valuable as diagnostic tools for the wider business landscape. They can be applied successfully to illustrate strategy and direction.

For the evolutionary models it is important to recognise that they are based on individual and organisational learning. As most industries have become very short term, profit focussed one need to recognise the human behaviour and culture component might set limits to the pace at which changes can be implemented.