Digital transformation is fueling incredible growth at big tech companies. But most investors still do not grasp the magnitude of the opportunity.
This week, The Wall Street Journal reported that Google has opened a new division to court the oil and gas industry. The pitch is typical Silicon Valley: We can manage your stuff better than you. And if you do not take our advice, your business will die.
Don’t laugh. It is surprisingly effective.
The oil and gas sector was early to supercomputers, machine learning and data centers. Finding oil has been very high tech for a long time.
In 2017, a BP geophysicist used a custom-made algorithm and a supercomputer to find an oilfield hidden beneath a salt dome and 7,000 feet of water in the Gulf of Mexico. Eni Spa, an Italian oil company, has a Milan supercomputer rig the size of a soccer field.
Oil companies spend tens of millions of dollars building and maintaining supercomputers and data centers. Then they have to court the brightest minds to build software to make it all work. It is a delicate calculus.
Harnessing computers speeds up oil discovery and sidesteps miscues, saving millions. But the industry is sort of reinventing the wheel.
Cloud giants Amazon (AMZN), Microsoft (MSFT) and Google already have powerful cloud computing networks. They are continually investing in new gear, innovative processes and people. And their public cloud services are available for a fraction of the cost of building and maintaining stand-alone operations.
In October 2017, Chevron (CVX) signed a deal with Microsoft to use its Azure cloud network. The seven-year partnership is potentially worth hundreds of millions of dollars to the Redmond software giant. The two firms will integrate staff and collaborate to harness the value of Chevron’s data hoard with analytics.
Google’s plan for the oil industry begins with artificial intelligence. Two years ago, the company made the full transition from mobile-first to AI-first. The Mountain View juggernaut started by training its talented engineers in machine learning. At the time, only 2,000 Googlers were AI specialists. The number is now over 18,000.
Those engineers are being dispatched throughout the company to problem solve.
In June, Google signed a deal with Repsol Global, a Spanish integrated oil company. The companies will use artificial intelligence and big data to optimize Repsol’s Tarragona refinery. The project has the potential to add 30% to Repsol’s refined barrel margin, or $20 million annually.
It’s a win for both companies.
Still, not everyone in the industry is quick to embrace the public cloud. Some worry the likes of Amazon, Microsoft and Google will eventually be competitors in the search for renewable energy sources. Giving these companies access to industry data and processes might be existential.
Mr. Frog, meet Mr. Scorpion.
There is also the worry about getting stuck. Cloud computing is notoriously sticky. Once a company moves its workloads, and relies on virtual computers in the public cloud, it is hard to reboot.
“It’s like the Hotel California, you can check in anytime you want, but you can never leave,” says John Gibson, head of digital at Tudor Pickering Holt & Co., an energy investment bank.
The prospect of never leaving might not appeal to an investment banker, but it should hit the right notes with investors. It means recurring revenues and a much larger potential business.
Gartner, a global IT research and consulting firm, predicts the cloud shift will affect $1 trillion in IT spending by 2020.
Amazon and Microsoft are the two leading public clouds. They are orders of magnitude larger than Google, but there is room for many winners. These companies are using their scale and their AI expertise to build formidable barriers to entry.
Amazon, Microsoft and Google are up 75%, 43% and 30% over the past year. Although they have had nice runs, investors are still underestimating the potential. Every sector is undergoing a digital transformation. Every company needs more computers and better data analytics.
This trend is a monster. And if you want to get in on the next leg of it, click here.
Jon D. Markman
P.S. I’ll be speaking at the Dallas Money Show in October. It will be a great show, with all sorts of experts sharing their insights. You can find more about that incredible conference by clicking here. I hope to see you there!