Online E&P asset management tools accelerate market transactions

Oil company portfolio management at the highest level generally follows the process in Fig. 1. The market price of oil and gas will continue to be the primary drivers for oil companies, defining which assets are strategic and which are not.

The merging of large players and the emergence of niche players means that portfolio balancing is becoming an almost daily activity. A&D decision points become ever more frequent, and as this trend grows, online marketplaces will really start to make a difference.

'E-evolution'

Accenture believes that a clear transition is emerging as to how online sites are evolving to meet the demands of oil companies. From an initially simple A&D focus, some sites are now helping oil companies in broader areas of portfolio management.

As oil companies increasingly turn their attention to releasing the "hidden" value of reserves and production they already have but are not accessing, online sites may become an even more important aid to oil company operations.

Initially, online sites were focused primarily on A&D activity. Popular perception was that internet-based marketing and transaction sites represented a "dumping ground" for distressed and valueless assets. Since then, A&D executives have come to realize that there may be significant benefits to be gained from marketing, acquiring, and divesting both strategic and nonstrategic assets online.

Traditional A&D markets involved oil companies hiring a variety of companies-usually brokers and investor bankers-to sell their assets. The nature of the deal was based on a personal relationship in a very localized or regional market.

Online A&D, while more impersonal, suddenly broke down the chain of relationships, offering a "one-stop shop" and, more importantly, access to a global market. Some online sites have now teamed up with investment banks to offer exactly this kind of service.

Options

E-commerce has helped to create a market for services and new markets for acreage, mature assets, data, and geology and geophysics resources at numerous points in the value chain.

Having online capability gives an oil company the opportunity to extract new value from these new markets. As this realization has grown, there has been a significant change in the growth of the online market and the nature of properties being offered for transaction:

• Market size. While consolidated figures for the industry as a whole are not available, the growth of the online market can be assessed by examining the activity of individual players.

Petroleum Place Inc., Denver, for example, saw the total value of online transactions grow from $1.46 million at its May 8-10, 2000, online auction to $3.07 million at the April 2001 auction.

IndigoPool saw its 3,100 users from 150 registered companies listing 450 properties in October 2000 grow to 5,700 users from 546 registered companies listing over 750 properties by January 2001. This represented increases of over 260% in the number of companies and 66% in the number of properties listed over a period of only 4 months.

• Geography. Participants can be split into those listing properties with a local, country, or basin focus and those having an international perspective. Over 94% of all assets listed with the former (e.g., Petroleum Place; OilProperties.com Inc., Austin; EnergyNet.com Inc., Amarillo) are focused on US local territories, while, with the latter (e.g., IndigoPool, theoilsite.com, London), only 28% of listed properties are US-based.
• Asset types. Similarly, a broad range of asset types are available, including:

- Government licensing rounds such as Australia Offshore 2000, Gabon ninth round, and Latvia first offshore round.
- Exploration prospects-both US and global.
- Producing properties. Most sites have a focus on the US, but the UK Continental Shelf and former Soviet Union are also well represented.
- Farm-ins. (One site has farm-in opportunities currently available in Equatorial Guinea, for example).
- Royalties. These are primarily listings from oil companies seeking to purchase or manage oil and gas royalties.
- Swaps. This is an emerging area of expertise yet to be fully exploited.

• Asset values. These typically range from several hundred thousand dollars for some of the small North American properties to $6.5 million for a large Texas oil field.

Recently, Goldman Sachs completed a $750 million transaction with the assistance of IndigoPool for the sale of a company as a going concern.

In addition to the speed at which this deal was carried out (estimated at 50% of the expected time to complete), the other principal benefit of doing the transaction online was that new data could be immediately disseminated to the buyers.as the deal was being evaluated, new discoveries being made by the company were coming online, with the new data being immediately disseminated to the interested buyers.

History

Until 1995, no significant alternative existed to the traditional A&D process, which was characterized by a network of personal relationships, physical data rooms, protracted evaluations and extended face-to-face negotiations. As such, a typical $1 million producing property might take 10-12 months to divest, once the divestment decision had been made.

In 1995, the landscape changed forever as the result of the launch of the first online marketing and transaction capabilities.

The first online property site was Petroleum Place, launched in 1995. This was followed by the Petroleum Exchange (petroWEB, Denver) in 1996-97.

Online property sites realized that they could meet the demands of a large number of buyers and sellers of oil and gas properties, particularly in the mature North American market, cheaply and efficiently using new internet technologies.

They were a natural extension of the physical auction room, simply carried over to the internet.

Rahul Dhir, the interim CEO of NRG 360, said, "the [online] propositions that will be successful are those that are extensions of existing models." Typically, the online sites offered the following:

• Listings of oil and gas properties, divided into categories such as oil and gas, exploration, or production. They dealt in individual properties or packages of properties as well as swaps, farm-ins, and royalties.
• Floor only, simultaneous floor and internet bidding (hybrid), and internet-only oil and gas property auctions.
• Electronic catalogs of auction properties and basic electronic data rooms.

Although not a revolutionary influence on the industry, early pioneers proved that there was value in internet-based transactions.

During 1998-2000, the first identifiable impacts on the traditional A&D process became evident. The discovery phase of the A&D process began to shorten, the industry realized that evaluation might be achieved with web-based tools, and online participants began to offer the market elements of the execution phase (Fig. 2).

Mirroring developments in other in- dustries, the upstream oil and gas industry has seen a profusion of online marketplaces emerge over the last 18-24 months in reaction to the dot-com boom years.

In the upstream area, the marketplace has focused on two key areas-online A&D and electronic procurement.

Within 3 years after the first online A&D markets were established, a variety of other A&D marketplaces emerged.

As of January 2001, there were about 20 online property sites focusing on the upstream oil and gas markets that, by the end of 2000, had over $5 billion in assets listed.

The initial focus of the online property sites remained on the discovery and evaluation process. Companies began listing a large number of assets and the data associated with them, with the focus on the evaluation phase starting to increase.

Up until now, the process of divesting a typical $100,000 producing property offline still involved an immense amount of time and effort, focused mainly around the evaluation phase.

Depending on the specific asset, this extended effort was due to the complexity of the transaction process, including the creation of data rooms from disparate data sources, the selection of buyers, distribution of hard-copy communications, buyer visits to the data room, execution of the transaction (auction or negotiation), and due diligence. The whole process could easily take from 6 months to a maximum of 12-18 months.

Online sites, however, began offering the upstream petroleum industry resource planning software to support the discovery and evaluation processes. These included accounting, billing, and land and production management software systems; geotechnical data; and analysis tools such as seismic, logging, and production history, all delivered online.

Companies such as OilExchange and UpstreamInfo.com, Houston, which focused on the broader asset management view, were established, and new entrants associated with other industry participants launched sites such as NRG360 and Oil & Gas Journal Exchange Property.

The larger sites continue to grow. IndigoPool now has assets valued at $4 billion posted on its site. Petroleum Place sold over $35 million worth of properties online during 1999-2000 after holding its first totally online auction in May 2000 and sold its largest single property online, at $6.5 million, in December 2000.

Growth has been built on the initial visible advantages of the online property market over the traditional offline methods, using increased market reach to achieve reduced cycle times, which, in turn, leads to increased value.

However, some companies such as Petroleum Place are being cautious about too-rapid growth. Basil Sabbah, vice-president of business development for Petroleum Place, said, "We are more focused on delivering the value proposition than on expanding our business."

Similarly, Les Finalle of OGJProperty- Exchange confirms that his company "does not want to outrun the market." For most online companies, the value proposition is based on two elements:

• Increased market reach. Listing properties online takes advantage of the internet's ability to provide real-time, dynamic information and communication.

Property sellers now have access to a larger pool of buyers, with the hidden buyer being uncovered literally anywhere in the world with very little effort on the part of the seller.

The seller supplies data "at work" 24 hr/day, enabling the buyer to work up prospects online, an ability offline sales could never achieve.

• Reduced cycle times. Increasing the speed at which transactions can be executed once a divestment decision has been made also created new value.

The immediate availability of data over the lifetime of a property and the use of internet-enabled channels for marketing, evaluation-analysis, and transaction execution means that cycle times started decreasing rapidly. The overall collapsing of the start-to-finish cycle time for the deal also contributed to uncovering the true value of the asset, with companies now able to acquire and dispose of significant amounts of properties in a relatively short space of time.

The present

Now that the early pioneers have proved the potential value of internet-based A&D activities, the industry has begun to examine the best potential for real value to be gained in the application of e-commerce. The evaluation phase of the A&D process likely will compress as companies focus on providing more efficient and effective online evaluation suites.

As the online property market continues to evolve, the fact that these sites list large amounts of assets that companies can buy and sell is becoming less important than the data associated with these assets and how they are managed.

As the whole cycle of buying or selling assets online continues to contract significantly, the collapsing of evaluation time is becoming key to achieving real benefit. There are already visible signs of contraction in the market, with online companies beginning to refocus their core activities away from the discovery process and into evaluation and asset management.

OilExchange's Gendelman said, "We are the next generation of oil and gas services. We focus on online asset management and supporting divestiture. The key benefit to an oil and gas company is value optimization, and we propose to work with customers to reappraise properties in their portfolio using new [application service provider] ASP-driven tools."

Oil companies are spending less time today searching for opportunities and more time searching for oil and gas. Although the key impact of online capabilities remains on market reach and reduced cycle times, as oil companies begin to increase their focus on portfolio management after the spate of megamergers, other capabilities are beginning to become more important:

• New markets for unwanted, distressed, or nonstrategic assets (not meriting the detailed marketing effort of core properties). A key driver for these new markets will be the unprecedented backlog of assets following the significant merger and acquisition activity over the past 24 months. The megamergers of British Petroleum Co. Ltd. with Amoco Corp., ARCO, and Vastar Resources Inc.; Exxon Corp. with Mobil Corp.; Total SA with Petrofina SA and Elf Aquitaine SA; and Chevron Corp. with Texaco Inc. has have resulted in considerable portfolio rationalization.

Also, particularly in the more mature areas of the UK Continental Shelf and onshore US, a new kind of petroleum company is emerging, one that looks to manage the mature gas plays that companies such as BP and Royal Dutch/Shell now consider nonstrategic. Companies such as Anadarko Petroleum Corp., Apache Corp., Talisman Energy Inc., and Venture Production Co. Ltd. are constantly in the market for new assets and welcome the kind of opportunities online sites offer, as they frequently have neither the time nor the resources the majors have to devote to portfolio management.

Some majors, however, are looking at new ways to create value from nonstrategic assets. BP, for example, has created an online service called VirtualProspect that leverages the internet, external resources, and web-based tools to realize absolute value from an oil company's E&P assets (see related story, p. 22).

As BP said, "We believe VirtualProspect can change how exploration is conducted. Companies will benefit from the new ideas that always come when additional interpreters examine a property and from the ability to quickly and cost-effectively develop unrealized opportunities without the delays inherent in expanding internal exploration staff.

"VirtualProspect represents a dramatic improvement over the traditional oil and gas interpretation process. It provides an electronic marketplace where the entire exploration process is streamlined and enabled online-from marketing initial property information to contract agreement, data delivery, interpretation, and delivery of prospect recommendations."

• Data management. Data management has now become a key area for the online companies, both in terms of differentiation from their competitors and the service they offer to oil companies.

Some companies such as UpstreamInfo expect time and cost savings. Upstream- Info said, "We estimate a 30-50% reduction in costs through saving time and expenses through better data management."

Other oil companies remain skeptical about the value of online property services beyond the initial "bulletin board" data-offering stage, believing that only a physical data room can enable in-depth analysis. Accenture believes the success of the online service will depend on a number of factors:

• Access to data. Most oil companies estimate it can take 3-6 months to put together a large data room, depending on the original condition of the data, with 70% of the total time spent on data gathering and organization relating to preparing a divestment package. Once online, data managed properly will relieve oil companies of the labor-intensive preparation for data rooms offline.
• Bandwidth. While some companies have high-bandwidth internet access, many smaller overseas and national oil companies are still restricted to access through poor-quality telephone lines.
• Data security. While most sites would boast security measures equivalent to those used by the military, some oil companies still display reluctance to post sensitive deals and data on these sites.
• Asset management. Companies are now managing portfolios using online tools that were originally designed for buying and selling assets. Oil companies are realizing that existing data management tools, which have been added to those originally developed in the 1970s, are complex and expensive to implement.

The new tools developed by online sites are cheaper and easier to use and provide a more effective way of managing data on a global basis than those otherwise available.

Companies like OilExchange, Hallibur- ton Co.'s Grandbasin, and Exploration Data are developing tools for portfolio management that will allow oil companies to gain efficiencies in day-to-day operations, reevaluate internal technical and financial assets faster, and improve relations and reduce liabilities with partners.

In addition, these tools will enable companies to optimize timing in A&D and financing, access and manage cross-project data, and outsource areas such as data management.

• State-of-the-art applications. Even the advanced online data room sites such as that of OilExchange, which was the first to offer geotechnical data manipulated and analyzed through an application service provider (ASP), are faced with reluctant oil companies who prefer using a physical data room.

The continued development of these ASP methods may be the key to online success of A&D methods over those offline. Oil companies will be able to use such software securely without having to spend the time or the money developing and upgrading them.

The future

Accenture sees a unique online "life" for new and mature properties. A future where a government launches a licensing round online but not offline, where data for the block is analyzed and sold via the internet, where real-time analysis occurs all the way from shooting seismic to working up the prospect and to drilling a well with data constantly available online from the rig to the online evaluator.

Properties could change ownership up to five times more frequently than currently expected. The total transaction time for property in the future is likely to be, at worst, 3 months in total and, at best, possibly a matter of days.

The success of specific online companies in delivering benefits will depend on their ability to build on the key capabilities that support the evaluation and, more importantly, the execution objective of oil companies in today's environment.

They must determine what will be the source of new value as the A&D process quickens and thorough data, available over the full life cycle of a property, is used along with anywhere, anytime evaluation tools to drive portfolio management and manage transaction execution.

NRG360's Dhir said, "It is difficult to get an objective view of the value of assets in an expanded portfolio. Other than the 'crown jewels,' the less obvious sources of value just get lost."

Success for oil companies who want to exploit this online marketplace will depend on their ability to see and quickly seize opportunities to realize otherwise "trapped" asset value. Oil companies should watch for particular opportunities:

• For capturing, transmitting, and managing internal and external mission-critical data throughout the asset life cycle. Oil companies will continue to suffer from the combination of poor or incomplete data, bad access to current data, data collected and stored in a variety of ways and formats, and poor cross-referencing capabilities.

Sites such as OilExchange offer access to virtual data rooms using ASP technology. The advantage to oil companies is the ability to access large volumes of data in real time as if it were loaded on their local servers. The data never leaves the online site server; it is thus secure and is organized efficiently to enable users to start evaluating it immediately. Online sites also provide software upgrades and modifications so oil companies always have access to the latest technology available.

• For accessing "anytime, anywhere" evaluation and analysis tools. Real time access to evaluation tools will allow oil companies to start further reducing their operating costs, as personnel stay put and start communicating via the internet.

Oil companies also will likely benefit from reduced technology costs as they rely on the online sites to provide them with the latest software, thereby eliminating upgrading costs.

A large online site might pay for a license from Landmark Graphics Corp. or Schlumberger Ltd.'s Geoquest plus a certain amount for usage of the software. Sites such as Halliburton's Grandbasin are specifically designed to provide oil companies with real time, on-demand access to the most sophisticated E&P technical applications such as Landmark and others. Such ASP solutions will mean increased cost and time benefits for the oil companies using them.

• For using fast, efficient, and inexpensive processes through the electronic marketplace. Paperless transactions, reduced time to market, retirement of physical data rooms, increased selection efficiency, and reduced A&D time scales are expected to cut the time from weeks to days for getting an asset to market and the time for completing the A&D transaction from years to months and, ultimately, to days.

The sites themselves will start migrating together to develop better services to the oil companies and will begin to form alliances and partnership to create competitive value for themselves and their products.

In short, the online property market is evolving from a fast, inexpensive tool for buying and selling assets to a resource for changing the way oil companies carry out their day-to-day business and manage their portfolios.

Acknowledgment

Research for this article was carried out by Accenture's global strategic research department.

The authors

Paul Fockens is managing partner for the global energy industry sector of Accenture (formerly Andersen Consulting). He has more than 28 years of business and information technology experience and has spent over 10 years in the worldwide energy business. Fockens began his career in management consulting in 1987 at Cap Gemini, where he progressed to president of the oil and gas sector in 1993 and became senior vice-president of Cap Gemini, America, with specific responsibility for its SAP global practice. He joined Andersen Consulting in 1995 and has overall responsibility for its global energy practice. Fockens holds degrees in mathematics and computer science from the University of Amsterdam.