No one can dispute that continuing advances in technology and growth in use of the internet are having a profound impact on the oil and gas industry.
Not so apparent, however, is how the resulting "new economy" built around electronic commerce will forge itself in an industry largely perceived as rooted deeply in traditional-if not conservative-methods of conducting business and managing work flows.
Focusing on this future picture, nonetheless, is getting easier. Over the last 6-12 months, the oil and gas industry has continued taking strides toward embracing new internet technology through the formation of myriad combinations of business-to-business (B2B) partnerships, aimed particularly at streamlining the upstream sector.
What effectively began as an onslaught of launched e-procurement marketplaces matching buyer to seller is rapidly evolving into a network of highly technical, B2B e-commerce connections capable of handling the most complex of transactions while managing massive amounts of data and ultimately changing significantly the industry's workflow processes.
Embracing the new economy
For better or worse, the internet has permeated nearly all businesses, changing the way people work and the way data are managed. Within the oil and gas industry, the latest internet technologies have targeted the upstream sector and the improvement of its processes-making them faster, better, less expensive.
In some instances, private firms continue to woo E&P firms with their digital wares, which pledge both cost and time savings. Other ventures have been initiated through operators' own efforts while working closely with independent solution providers or data management specialists.
Whatever business model is chosen, industry would appear to be ripe for the change. According to a recent report by Banc of America Securities LLC (BAS), the oil and gas industry is well poised to embrace e-commerce. "On the surface," the report says, "the oil industry appears to be fertile ground for e-commerce: Roughly 90% of all transactions in the oil industry are conducted with businesses rather than consumers; its vertical integration means it is highly intermediated; its 'command and control' bureaucracy is almost legendary; it is overcapitalizedellipse; and its end-market buyers are highly fragmented.
"Despite such rich opportunity, however, the industry has lagged other old-economy sectorsellipsein its acceptance of internet-based technologies, having barely dipped its toe in the water," the report said.
BAS says it believes e-commerce and the broader e-business applications that offer value-added workflow-process services will be a great cost-saver for the oil and gas industry. "We think that full application of e-commerce [and] e-business will shave an incremental 5-15% of costs out of the system," BAS said.
Industry specialists do empathize with companies grappling with having to choose a suitable e-business model amid the dizzying array of start-ups. But many firms, large and small alike, have stuck their necks out to pronounce their e-business strategies. For the time being, finding a model to fit perfectly will be a matter of trial and error, especially as they continue to grow in complexity and expand in breadth (Fig. 1).
"Standing still is probably the worst answer," said Tyler Dann, BAS senior equity research analyst, integrated oils, and one of the primary authors of the report. "Basically, complacency in this environment-whereellipsethe internet is reducing the cost curve for the entire economy-not taking that incremental step of efficiency gains means that you're even further behind. Soellipsein some ways, you're running to stand still."
"The leaders of the industry recognize the slow, top-line growth inherent with the business and have pretty much constantly looked for ways to enhance value to their shareholders," explained Michael LaMotte, BAS managing director and senior oil services analyst and another author of the BAS report. "[So] they're looking for the next opportunity to enhance earnings beyond what is inherently capable through top-line growth."
"Many of our oil and gas clients have approached us with concerns, saying, 'Look, I see all these announcements, we better start looking at this, why aren't we in it?'" said Gary Adams, lead partner of e-business for energy consulting with PricewaterhouseCoopers LLP. "They basically see their competitor companies moving out and jumping into these ventures and fear being left behind. As a result, most oil and gas companies are reviewing in detail where e-business will have an impact on core business processes."
Halliburton-SAIC
One internet solution that addresses knowledge and data management comes from the teamed efforts of Science Applications International Corp. (SAIC), Houston, and Halliburton Co.'s Landmark Graphics Corp., Dallas. The firms have collaborated on the creation of a portal, or platform, that unites geophysicists, geoscientists, and petroleum engineers with companies working on E&P development projects worldwide.
Through this specially designed, secure network-adapted from SAIC's Advanced Network eXchange (ANX), which is used today in the automobile industry-these petroleum scientists-or knowledge workers, as they are referred to in this model-will be able to access both data and key applications to work within the parameters of a company's project. These workers can be operating company employees or outside contract workers providing valuable knowledge to a particular project.
The system is intended to change stagnant workflow patterns, say its designers, as well as the way information about a particular development site is bundled, tracked, and stored, thus saving time and cost to the company.
The portal, explains SAIC Chief Technology Officer, Energy Sector Raymond E. Cline Jr., serves as a "community of potential joint-venture partners." Community members can be vertically integrated companies, joint ventures between vertically integrated companies, or individual knowledge workers-all connected "virtually" to one another.
"A lot of companies have gone to a model where they no longer keep their technical experts together inside the corporation," said Cline. "When you think about knowledge workersellipseit's not just about a consultant working with a company, butellipseinside a company you have an expert, and you want [him to] work with multiple teams that may be, perhaps, geographically distributed."
The open-environment setting would allow a company or joint venture to view a list of specialists that would, say, possess knowledge of a particular area, or vice versa. Once found, an E&P company can initiate communications, and collaboration can begin. In addition, the portal will have various membership levels, Cline says, which will entitle members to different levels of services.
"What [this system] helps enableellipse[is] a world where you could seamlessly bring people together around a decision," said Halliburton E-business Sponsor Robert Peebler. "You started doing it with the internet, going across boundaries, and this just takes it up a whole other level because now you can truly bring not only people [together], but you can bring data and applications and information and bring it all to one point."
"From a customer perspective," noted Lane E. Sloan, SAIC executive vice-president, energy sector, "ellipseyou sit there and say, 'What would be good for me?' I don't want to have to go into 15 different portals to get my work done, and I don't want to have to call up and say 'someone's on a different exchange [system], how do I get to work with them?'
"If you're a geophysicist, the one thing that you don't want is a bunch of hassle. You want to do your work. And this [system] is going to allow you to do your work more easily. The other thing is that you'reellipselooking for solutions. And if you've got the ability to go collaborate with someoneellipseand then all of a sudden that starts to happenellipseeverybody gets excited when, all of a sudden, these solutions start to happen," he said.
Commenting on the SAIC-Halliburton announcement, BAS's LaMotte saw a significant underlying message: "For Halliburton to open its doors and say 'We will have a knowledge-service provider that is open to best-in-class products and services' is a hugeellipsechange in attitude within an oil services companyellipseI think it's a major...step in the direction of win-win and does a lot to try to break up what's often perceived to be a conflicting relationship between contractor and operator."
BP Amoco-GeoQuest
A long-standing partnership between BP Amoco PLC and GeoQuest, an operating unit of Schlumberger Oilfield Services, took a major step forward with regard to BP Amoco's ever-branching e-business strategies.
The companies announced last month that GeoQuest will provide BP Amoco with a new network-based information service, initially in Aberdeen, Stavanger, and Sunbury with other sites to follow, while expanding the traditional service to include Anchorage and Calgary.
"What BP Amoco and GeoQuest have realized is that there are things that we're doing in individual operating business units of BP Amoco that have application around the world, explained Ron Mobed, vice-president and general manager, data management for GeoQuest. "What this letter of intent is setting [up] is what we call a global framework. We're going to create some global components-tools and processes-which we believe are universally applicable within BP Amoco and can be implemented within any business unit around the globe. On top of that, there are going to be some specific implementations. Inside each local business unit will be a mixture of the global components and some tailoring of the product and service offerings for the business units," he said.
BAS called the announced alliance a "major step in the effort to improve efficiency through networked knowledge and data management. The significance of the arrangement is not so much in the dollar value of the contract-or even the expected cost savings from such a move," BAS noted, "Rather, we think the significance of the announcement is that one of the world's largest oil companies has ceded control over what has long been considered by the industry as the sacred cow-its upstream data." BAS said that the deal "moves BP Amocoellipsedown the path of becoming a true e-business."
What will essentially be implemented, explains Mobed, is a system that will allow BP Amoco to ensure that the right data are available to the right people at the right time. The BP Amoco technical community will be armed with the information to make well-informed decisions more efficiently and, hence, dramatically improve productivity.
"Typically, they [interpreters] have been spending a lot of their time going around searching for information," says Mobed.
"It's still the case today that people are trying to get more productivity out of their most valuable people assets-[those] people that can find oil and gas and who can improve the recovery factor from 35% to 50%."
In order for a solution to be successful, says Mobed, it must address three aspects of a business: technology, process, and culture change (or people). "GeoQuest has taken the view right from the beginning that this is a solution that we're trying to offer, not a particular product. We must encompass all three elements to ensure that the customer achieves the desired step change," he explained.
Marathon-eNersection.com
And, e-business partnerships continue to increase in number, as more and more operators throw their hats into the B2B arena. The latest of these has been heard from Marathon Oil Co., which entered into an agreement with eNersection.com Inc., Houston. The agreement makes Marathon the first major integrated oil company to sign with an independent B2B system for services in the upstream industry, the companies said.
"We feel that the unique knowledge management technology of eNersection'sellipseWorkFlowNavigator is ideally suited for the selection of high value services for our upstream organization," said Marathon Pres. Clarence Cazalot.
"This technology is a key factor in improving the selection of high-value services," said Mike Strathman, leader of Marathon's e-business strategy team. Essentially, the eNersection system will tackle the workflow process of well design and construction by allowing engineers to collaborate more efficiently and quickly, says Strathman. Marathon chose eNersection because it was more attuned to the industry, he says. Once up and running, Marathon will use the system to focus on North American operations.
Zeke Zeringue, president and CEO of eNersection, said, "Our WFNDynaMaps are able to be customized to the unique needs of Marathon as their relationship with their major service providers evolves with internet technology. We expect not only to show the opportunity of savings to both Marathon and their service providers, but more importantly, how the technology enables a process of online value engineering."
Companies such as Marathon, says Ike Epley, vice-pres. corporate development for eNersection, will use the product to support drilling, completion, and well servicing operations while obtaining value-added information from internal and external sources to identify best practices and procedures.
Structural changes, shakeout
What will the B2B e-commerce landscape look like a year from now? With regard to partnerships such as those mentioned above, e-business analyst Gartner Group projects a drastic decline in the 'traditional supplier' relationship, while it sees an increase in 'collaborative alliances' over the next 5 years (Fig. 2).
BAS concludes in its report that companies should act now and learn as they go. "In order for these productivity-enhancing developments to take hold," BAS said, "major change is neededellipsewe believe collaboration within and between companies-the fuel for entrepreneurship-needs to be fostered, [and] adaptiveness to change needs to be ingrained in managers and employees alike. We think senior management teams need to allow their employees more accountability for decision-making, and that customer focus needs to be paramount.
"Traditional concepts (vertical integration, for example) will need to be rethought, in our view, with companies instead focusing on existing and new areas of expertise and specializing in those areas, while collaborating with other companies in areas where they have little expertise."
According to a longer-term outlook, Gartner Group predicts B2B e-commerce reach a "trough of disillusionment" around 2002, with "true e-business" emerging around 2005 (Fig. 3).
And, in a report similar in content to the one released by BAS, Salomon Smith Barney said, "Cautiously, we predict the full impact of oil and gas internet cost savings may not be realized until 2002-03, principally due to the challenges of standardizing a highly specific, project-oriented workflow process. We are not particularly concerned about the industry's traditional aversion to change, asellipsethe potential cost savings are irresistible. However, it is one thing to set the goal of unifying complex oil field business practices and another to actually doing it."
Salomon Smith Barney goes on to say that it believes that the number of new applications will quickly evolve. "In our opinion, these models will evolve rapidly (as most internet applications tend to do), with the winners being those that are first and best at achieving liquidity, content, neutrality, and fulfillment in the e-commerce segment and incremental value in portal and application services. However, we do not expect more than a handful of oil field internet companies to build the required critical mass."
Looking at developments likely to occur over the coming year, GeoQuest's Mobed sees those companies without any practical ideas becoming more visible. "Today, it's a land-grabellipseand everyone's trying to stake out something, but sometimes they're staking out something with nothing behind it, and it will take a little bit of time for it to become apparent in the market-[that is,] who are the guys who have staked out something and got something, and who are the guys who staked out something hoping that people will inflate their share price, or buy them, or just believe them. From the oil companies' side, they will be in a better position to choose in a year's time.