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Why the digitalisation of the oil & gas industry will be a major trend in 2018

Numerous factors seem to be at play when it comes to making a prediction on oil prices in 2018. On the one hand, OPEC and other major oil producers such as Russia, stated their commitment to extend their cut in oil production until the end of the year. However, although the initial cuts in 2017 drove prices higher as intended, it also allowed US Shale producers to come out of a phase of declining production by raising their profitability. Consequently, US shale oil supply has increased significantly, with production increasing from 600,000 barrels per year to over 6 million barrels per year. Conversely, this increase in shale oil results in the opposite effect where the price in fact does not increase given the increase in supply.

Uncertainty

From this narrow view, one can question which effect will trump the other. Additionally, along with the difficulty in predicting both the extent of the increase in shale production and how much longer OPEC will cut production, there are also numerous other factors at play that simply cannot be predicted. Will there be geopolitical instability in Saudi Arabia given last year’s arrests of senior businessman and Royal family members? The effects of such instability may be detrimental to the production of oil and price stability. Will there be rising demand from developing economies such as China? Or are we about to experience dwindling demand from a potential economic downturn in China? To what extent will a tightening US monetary policy further suppress oil markets? These are just a few examples from a plethora of situations that emerged in 2017. This view also ignores new potential issues that are surely bound to arise in 2018.

Digitalisation

Therefore, given these uncertainties, speculating on the future oil price and what trends arise from it is complex. However, regardless of the oil price, any profit maximising firm ought to minimise its operational costs in order to maximise efficiency. A feasible way to do so would be to leverage smart and efficient software as much as possible, which has happened in almost all other industries. This is further justified because there is no downside. If the oil price were to pick up, these firms simply become more profitable. If it doesn’t then they radically increase their chances of survival. Firms in the industry will surely be realising this, and consequently, I expect the digitalisation of the Oil & Gas industry to be one of the most profound trends this coming year.

Written by Alex Heerema

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