Opinion

Time for digitalisation of oil and gas assets

TS Ramakrishnan/Aditya Malhotra | Updated on June 25, 2020 Published on June 25, 2020

The use of sensors and analytics will help cut operational costs and improve safety of plant and personnel

With the national lockdown since March 25 coming to an end with no major relaxation for the movement of people, the demand for fuel plummeted by about 50 per cent in April, reaching 2.6 million barrels per day (bpd) from a normal level of 5.2 million bpd. In May, it was 70 per cent of the year-ago level.

Although the national lockdown was extended up to May 17 and subsequently eased with more relaxations, the restrictions in the movement of people may be completely lifted only in the third quarter or, in the worst case, the fourth quarter of 2020-21.

Therefore, the fuel demand for FY21 will not even reach the levels of FY20. The resulting fall is expected to hurt India’s oil refinery capacity utilisation (RCU). It went down to 70 per cent in April as against 100 per cent utilisation over the course of the last five years. Though the RCU has increased post lockdown, it has not yet reached pre-Covid levels. With excess capacity and depressed demand, margins on fuels and petrochemicals are expected to be hit severely across the industry.

Crude oil price may remain depressed for the years to come, not only because of demand destruction (due to the Covid-19 pandemic) but also because of oversupply of crude, resulting from the changing power dynamics in the OPEC cartel and other major oil and gas producers. Despite the Brent crude oil price now hovering around $40 a barrel and the renewed optimism of OPEC+ (the alliance of 21 countries which produce crude oil, including 11 OPEC members that has been undertaking supply corrections in the oil markets since 2017 production cuts), the brewing US-China conflict may further impact crude oil prices negatively.

Even if pent-up demand is taken into consideration, with people wanting to get out of their houses, this is only going to be a short burst. With reduced air travel and social distancing norms becoming the new normal, the fuel demand is expected to take a severe hit in the coming years. The Centre and States — which rely heavily on taxes from crude oil and petroleum products for revenue — have been increasing and will continue to increase taxes on the same, as there are no other major sources of revenue even in a post-lockdown scenario in FY21.

Tax hikes

The Centre starts increasing the excise duty and State governments their sales tax/VAT when international crude oil prices fall, leaving no scope for a reduction in the price of crude oil components. The increased tax component would nullify the drop in crude oil prices and compensate for the reduced petroleum tax collection due to decreased sale, for both the Centre and the States. Given the Covid-19 pandemic, the resultant economic slowdown and the fall in tax revenues, every penny saved in the crude oil refinery process provides support to the government to subsume it in taxes.

Given this, the oil and gas companies may have to streamline their businesses more in terms of reduced operating costs than any other avenue to boost their bottomline. This is where digitalisation of oil and gas assets helps refiners and producers maximise value from existing assets. In a time of suppressed demand, market volatility and depressed product price spreads, refiners can optimise operational costs by leveraging a host of digital technology offerings.

According to Bloomberg New Energy Finance, digitalisation could cut the cost of refining a barrel of oil by over 10 per cent for a 1,80,000-bpd refinery with a Nielson Complexity Index of 12 and 1,034 workers. Refinery production cost per barrel can be reduced for parameters such as labour, power and utilities, maintenance, overheads, and insurance, increasing operating margins per barrel.

The oil majors in, among others, China (nationalised oil companies), Norway (Equinor), Spain (Repsol), Israel, South Korea and Singapore have been way ahead of the curve in implementation and integration of digital technologies for their assets than their counterparts in India.

Digitalisation can be used to support the Indian oil and gas industry in several ways. First, the use of sensors and analytics will boost energy efficiency, reduce fuel and loss, reduce unplanned shutdowns, and optimise productivity of existing assets. By lowering operating costs, the industry can raise operating profits.

Second, new assets will be equipped with sensors and networks that can be designed to connect employees and tools, thereby cutting overheads and increasing margins. Further, remote monitoring will lower the need for employees to conduct inspections, thereby saving man-hours and further reducing operating expenditure.

And, lastly, automated controls can help employees reduce dangerous and hazardous inspections, safeguarding thereby both personnel and the plant. This can also help producers and refiners reduce their insurance costs.

Predictive maintenance

Digitalisation can also be implemented for predictive maintenance to reduce asset downtime, real-time monitoring of assets to optimise processes, automated drilling to cut down on unplanned shutdowns, with AI to find resources such as oil and gas, drones to monitor the safety of assets and personnel, machine learning to develop operating models for processes, and use of cloud computing to operate assets remotely.

Augmented reality and virtual reality can help train and modernise the workforce. Furthermore, operational planning and integration of procurement, installation and commissioning processes will help resource optimisation and efficient scheduling.

Since most of the upstream production and downstream refining capacity is owned by oil PSUs, there needs to be a strong and tangible policy push by the Ministry of Petroleum and Natural Gas towards digitalisation projects. To begin with, the Ministry may mandate quantified targets with timelines to oil and gas PSUs to invest a percentage of the total investment in digitalisation projects. The PSUs should have full autonomy on how and where to invest, but the targeted benefits should be quantified by the firms and put in public domain.

This will also be positively viewed by investors and will help increase the valuation of the firms, which can be capitalised during disinvestment. The digitalisation projects of oil and gas PSUs would also have a ripple effect on other manufacturing firms to adopt such technologies to drive their competitiveness.

With relaxations given during the lockdown, the oil PSUs are resuming 511 projects on oil and gas exploration, refinery, gas-pipeline laying and the city gas distribution network — earmarking more than ₹42,000 crore. The allocation of resources may be modified so that digitalisation of refineries may be given equal preference with other projects.

Given the current uncertain times, the budgeted disinvestment of BPCL in FY21 may not happen. Also, in the current global economic conditions, any disinvestment may have to be postponed to subsequent financial years depending on how the world economy recovers from the Covid crisis.

But if oil PSUs are brought on a par with global oil majors by implementing digitalisation of assets, it would increase the market capitalisation of oil PSUs and the government could mop up more revenue from the disinvestment, when it happens.

The Oil Ministry may have to take cognisance of this and push for digitalisation of oil and gas PSUs’ assets.

Ramakrishnan is a public policy analyst and Malhotra is an oil and gas industry practitioner. Views are personal

Published on June 25, 2020
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