Digital Transformation Matters

Describing exploration success in the oil and gas business is, on its face, pretty simple: ‍

Find oil and gas cheaply and produce it with high cash margins.

Unfortunately, many management teams misrepresent what success looks like, often summarizing success like this:

Grow reserves and increase production.

While these two formulations of exploration success are pretty similar and indeed were synonymous over most of our industrial history, investor sentiment, consumer sentiment, and market fundamentals have driven a wedge between them. That wedge is capital efficiency. And capital efficiency is determined by finding cost. And finding cost is, fundamentally, geologically driven.

I am sure most management teams and engineers are shouting "WHAT!" at their screen. Let me explain: 

Most of the factors that make up an oil and gas company's cash flow are actually out of its control to one extent or another:

• Commodity (Strip) Price
• Blended Realization
• Royalty/Taxes
• Operating Costs

If you don't believe me, go ahead and analyze your competitors. You will find that the majority of inter-company variance in netback is accounted for by commodity price. You will also find that cash margin is rarely decoupled from commodity price and by association commodity mixture when you compare like projects.

So this leaves companies with just a couple levers to pull:

• G&A
• Finding Costs

G&A is undoubtedly within the control of the management team. Now, more than ever, a company can alter G&A by leveraging remote work, IOT, and distributed infrastructure. A company doesn't even have to be particularly agile to do so, but it must be high trust. The company culture must value its people, and it must be more precise than ever before on its goals and desired outcomes.

Interestingly, management's ability to control finding costs is lagging behind its ability to control G&A. Control lags because minimal digital transformation has taken place within the exploration domain. For the most part, workflows have remained static, while data flow has changed. This dichotomy of technological advancement has altered a companies ability to use data while not necessarily improving their ability to interpret data.

Over a series of articles I (David) will share with you our (GeoLumina's) view of what digital transformation is in exploration. I hope you will follow along, reach out with questions, comments and criticisms. And add to the growing momentum in this space.

I will leave you with our (Geolumina's) first principle of exploration digital transformation:‍

Data doesn’t tell you where to drill. Interpretation does.