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Globalization and the Economics of Energy Spur Growth in Engineering Services

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by Sampath Kumar

Daniel Yergin, energy and economic scholar, wrote in his book, The Quest, “Globalization of demand may be shaping tomorrow’s needs. But it is accompanied by the globalization of innovation.”

How will Yergin’s prediction play out? Which aspects of innovation will be globalized?  And who will leverage the innovation of engineering talent in tomorrow’s growth markets?

As energy demand shifts from West to East and new sources and regulations influence the market, the energy industry will be forced to reimagine its future. We’ve seen the beginning of this reimagining in response to sliding oil prices, namely through layoffs and efforts to maximize operating process efficiencies.

Over the longer term, oil and gas companies also will need to be more efficient in planning and executing their capital-intensive projects. Our prediction is that engineering services outsourcing will be an essential tactic for those enterprises who want to thrive in this dynamic market.

The globalization of demand and its accompanying innovation is indisputable. According to McKinsey Research, global gross domestic product (GDP) will grow over the next decade from $70 trillion to $150 trillion, requiring the ability to meet increasing energy demand in emerging economies. The chart below shows regional GDP as a percentage of global GDP.  It forecasts China and India becoming more dominant players, while shares of the U.S. and Europe decline.

Regional-GDP-percentage

As the supply and variety of energy sources increases to meet demand (BP estimates depicted below), intense competition and market forces are driving oil and gas companies from across the energy spectrum – from integrated majors and super majors, to oilfield service companies, exploration and production companies and process manufacturing and chemical companies downstream – to seek greater efficiencies and explore opportunities for operational excellence.

Energy-demand-growthOil and gas companies have always contended with a variety of forces: new energy sources and renewables that increase market supply, fluctuating demand, environmental regulations and efficiency standards. To address the escalating costs of production and the surge in demand, energy companies must be able to grow and shrink their talent pool as needed and, therefore, rely on a complex ecosystem of both local and global software and service outsourcing providers with industry-specific competencies.

In the early 2000s, India-based engineering service providers saw opportunities in the oil and gas industry and invested in human capital by hiring in markets that had available talent, as well as in growth through acquisition. For enterprises, initial forays into outsourcing their engineering services proved effective in cutting operational costs with a focus on outsourcing services around data digitization, conversion from 2D to 3D modelling, plant operations and product lifecycle management.

Over time, engineering service providers have been able to offer increasingly complex services, including design automation, mobile-enabled parts catalogues, 3D printing, geospatial services, supervisory control and data acquisition (SCADA), and advanced data analytics.  Over the last decade, engineering service providers have gained substantial expertise and are looking for ways to contribute at a systems level.

Now, because of the current drop in oil prices and the difficulty in finding giant oil reserves (reserves that have at least a total of 500 million barrels of recoverable oil and gas), oil majors have begun exploring difficult terrains, mainly in the deep sea. Drilling on the ocean floor poses enormous engineering challenges. To ensure reliability and return on investment, these companies must depend on simulation and a host of other engineering activities that are well suited for outsourcing.

In its Energy Outlook 2035, BP forecasts that volatile oil prices will continue in the near term. It is in this context that a number of enterprises are leveraging talent for complex engineering tasks and innovation closer to where the growth is. We predict that labor arbitrage and the availability of talent will underpin powerful business cases for funding the move of certain engineering functions from West to East, spurring the globalization of a set of mature and diverse engineering services to meet demand.

ISG helps enterprises structure mature sourcing processes, implement successful transformational initiatives and build competitiveness in your future markets. Please contact me for more information.

About the author

Sampath and his team help enterprises leverage engineering services to address the needs of IT in engineering and accelerate time to market for product development teams. Sampath has more than 30 years of experience in engineering services and software product development and management. Prior to ISG, Sampath led the engineering services of Tata Consultancy Services in North America where he provided innovative solutions in Product Lifecycle Management, Embedded Software Development, Product Engineering and Plant Solutions for multiple Fortune 500 companies. He also led the Aerospace and Process Manufacturing business units and drove key business initiatives for engineering and manufacturing customers that included marquee Fortune 100 clients. Before joining TCS, Sampath led the Infosys Automotive business units in North America and Europe.