What is the digital oilfield? Simply put, it’s how oil and gas companies apply digital technologies to drive their core business. For upstream companies, these business drivers include optimizing production, acquiring acreage, and acquisitions and divestitures (A&D). Midstream companies have more customer-oriented business drivers, such as maximizing transactions, securing and retaining contracts. In the digital oilfield, this translates to bringing information technology to bear on the highly complex business of tracking both the physical and accounting movement of crude, natural gas, and natural gas liquids (NGL) through a labyrinthine network of gathering systems, processing facilities, storage hubs, and transportation pipelines. Digital oilfield innovation is bringing new operational and cost efficiencies to the pipeline link in the value chain, but the change is not uniform across the sector.
Liquids Transportation, Epicenter for Innovation
Record hydrocarbon output from the Permian and other U.S. basins in the last decade has resulted in a good problem for midstream in the form of infrastructure bottlenecks across the country. For service companies that charge contract-based fees or regulated tariffs to move hydrocarbons, the increasing volume from U.S. basins is very good for business. But economics dictate where and when infrastructure is being expanded. Sustained low prices for natural gas make it less attractive for companies to spend big on capital projects, resulting in producers flaring instead of taking a loss, in some cases, to move it.
Digital oilfield innovation in the pipeline space is heaviest where production growth and competition intersect. This is why an increasing number of midstream companies are improving their physical and digital infrastructure for managing the accounting movement of crude and NGL. Liquids transportation is a competitive landscape where a large number of service providers compete on price and for each other’s customers. Digital oilfield technology and software are creating new efficiencies that give midstream companies a competitive edge, increase business agility, and lower operating costs.
In contrast, low natural gas commodity prices and a highly regulated interstate gas pipeline market has resulted in only a handful of gas transportation service providers, lack of competition, and little incentive to innovate.
The Complex Business of Moving Hydrocarbon Liquids
The task of moving crude, NGL, and refined products along hundreds or even thousands of miles of pipeline is a complex business involving complicated contracts between shippers and a midstream service provider. It’s akin to collecting tolls along a highway – the farther hydrocarbons are shipped, the more tolls and fees are accrued. Those contracts determine fee structure and formulas used to calculate a monthly settlement charge to each shipper. Each agreement also stipulates escalations, which are the periodic adjustments to fees based on inflation.
Midstream companies that operate a pipeline system, hauling service, and other forms of hydrocarbon liquids transportation face an ongoing accounting challenge to accurately track, allocate, and invoice shippers based on the unique contractual terms for each shipper. Adding complexity, in an attempt to level the playing field in highly competitive markets, the Federal Energy Regulatory Commission (FERC) sets tariff rates for interstate liquids transportation with some state agencies determining rates for intrastate transportation. This means that midstream service providers must be able to account for contract- and tariff-based shipments. Given the high volume of transactions and complex accounting involved, midstream companies have long relied on computing power to keep pace.
When it comes to the software midstream uses to manage liquids transportation, there are two schools of thought. On one hand, there are advantages to buying commercial software, including lower total cost of ownership (TCO) compared to building custom solutions. But for decades, midstream transportation providers have opted to build versus buy. Given the competitive nature of the business, there has been a prevailing trend to develop liquids transportation solutions in-house to provide a custom fit to business needs as well as a competitive advantage.
Trending Away From Home Grown Solutions
Today, midstream liquids transportation operators are moving away from custom software solutions. As discussed, the sector is experiencing massive growth due to record U.S. crude output. For software that was designed to manage a certain level of transactions, the situation is stressing systems to the breaking point. In essence, home grown solutions served their purpose under a “steady state” market environment, but are brittle and have become costly to maintain.
Circling back to the digital oilfield concept of optimizing midstream business drivers, specifically optimizing transactions and the accounting movement of crude, NGL, and refined products. Internally developed solutions are often owned and maintained by information technology (IT) departments, yet the objectives of IT aren’t always compatible with the digital oilfield, often prioritizing cost reduction, standardization, and security over core business drivers.
Companies that have built their own liquids transportation solutions are realizing that, in order to meet customer needs, they need flexibility and technology partnerships to succeed, effectively getting out of the software business and trusting software vendors to power their operations. Flexibility is especially critical as companies find new ways to move hydrocarbons along pipelines, in trucks, and on barges. And as business complexity increases – with more contracts and ongoing changes to fees and escalations – along with expanding infrastructure, more midstream companies are making the switch to commercial software.
Running Midstream Operations on the Cloud
There are a number of liquids transportation software packages on the market; however, they tend to be built on legacy technology. This means that complex settlement calculations and allocations can take hours and often require processes to be rerun several times. And legacy solutions provide limited visibility into how those calculations are performed, creating a black box that injects uncertainty into financial results.
Midstream companies are seeking innovative solutions that deliver high performance, confidence in data, and cost efficiency. But they are also looking for technology partners. Even with newer liquids transportation software, performance and black box problems persist while software vendors overpromise what they can deliver.
Midstream service companies are increasingly adopting W Energy Software, not just to manage the complex business of liquids transportation, but to manage the entire midstream value chain. W Energy Software is deployed at more than 100 midstream facilities and supports the movement of one billion barrels of oil per month with its liquids transportation solution.
Benefits of W Energy Software compared to home grown and legacy software providers include:
- Unified platform – Complete software suite for key midstream workflows – from gathering and processing to storage and transportation – eliminates data silos and accelerates business performance.
- Cloud hosted – Eliminates the need to manage on-premise server software, provides on-demand computing and elastic storage (scale up or down and pay for what you use), and gives users access from their device of choice.
- Fast processing – Software is architected from the ground up to take full advantage of the cloud, enabling settlement, allocations, and other complex calculations to be processed in seconds rather than hours without rerunning processes.
- Economy of scale – “Pay as you go” subscription pricing dramatically reduces costs by eliminating the need to buy hardware and reducing administrative costs for maintaining legacy solutions.
- Confidence in data – Complete data visibility and transparency into how calculations are performed with audit trails and tools to back trace revenue at every stage.
Cost efficiency, elimination of data silos, performance, and the ability to seamlessly integrate applications and workflows are driving midstream companies to the cloud. As an example, one of the largest midstream transportation and processing service providers in the country is expanding its Texas-based NGL hub with additional fractionation capacity, storage, and pipeline infrastructure, which speaks to the overall trend in the Permian Basin. Coming off of a long standing internally developed solution, the company is deploying W Energy Software’s Liquids Transportation, Terminal Management, and Scheduling software. Leveraging a unified application and data architecture, the midstream service provider gains the unprecedented ability to track the accounting movement of hundreds of daily NGL shipments through its facility and manage terminal operations while giving shippers powerful tools to manage inventory and nominations, all in one cloud-based solution.
As midstream continues to expand, digital oilfield innovation is essential to navigate growing information complexities, provide the agility service providers need, and create new cost efficiencies. Increasingly, the catalyst for that digital oilfield innovation is the cloud and innovators like W Energy Software.