One of the areas in which oil and gas companies will undergo the most change during the coming decade will not be in meeting environmental requirements, or in developing more efficient fuels, or in opening new exploration frontiers. It will be in changing their organizations, strategies, and processes to live, survive, and thrive on the internet frontier.
The oil and gas industry is no stranger to change. During the past decade, companies responded to volatile oil and natural gas prices, deregulation, and industry-wide consolidation by using technology and restructuring to improve operations, lower costs, and increase returns.
Driven by new competitive pressures and marketplace expectations, the industry must change again, but things are different now. Companies are adopting new tools, methods, and structures and are taking advantage of the leverage, flexibility, and interactivity offered by the internet.
The energy industry in general was slower to take advantage of electronic-business (e-business) opportunities than the manufacturing, financial, and information technology industries. Hard-asset companies built around production platforms, pipelines, and refineries do not seem to be as well-suited to e-business as those built of financial, digital, or knowledge assets.
At least this seems to be the conventional wisdom on Wall Street. Market capitalization-to-revenue multiples of top e-businesses listed on the Internet.com Internet Stock Index (ISDEX) on Oct. 15, 1999, averaged 25.9, while major oil and gas companies listed on Standard & Poor's Major Oil Index averaged a multiple of 1.7 for the same time period (see chart).
The reality: E-business will have a major impact on the oil and gas industry. It will be the key to major cost savings, operational improvements, new marketing leverage, and more-astute management decision-making. It will connect all elements of the energy value chain, accelerate the flow of data, and make more information available to more people. Its biggest impact may be in providing competitive advantage, both within the industry and against outsiders aiming to capture high-margin opportunities.
Oil and gas companies used to be one of the few "e-businesses" in town, delivering the world's most important "e-product"-energy. Now they are exploring for prospects in the instant, electronic frontier of e-business and the internet, which has graduated from simple advertising banners and static electronic brochures into a global marketplace of products and services bought and sold at the click of a mouse.
The energy industry's response to this "e-volution" has been disjointed, at best. As an asset-based business, an energy company does not fit into the e-business model as easily as a financial or information technology company. However, many energy companies are well suited to e-business and may have as many as 30-100 e-initiatives under way at any one time. But there often is little or no strategic linking between the projects, resulting in repeated errors and conflicts, wasted resources, and missed opportunities. Companies even give away valuable data and marketing opportunities when they outsource credit card processing and other functions that gather detailed information such as demographics and product preferences from customers, suppliers, and others.
At a minimum, e-business offers the potential for improved communication, development of new markets, discovery of new growth opportunities, streamlining of business processes, and much more for the oil and gas companies that can incorporate it into their business strategies.
At a maximum, it is an online vision of the future that all companies-including oil and gas companies-must master to survive. Either way, success in the future goes through e-business and the internet, requiring an understanding and application of new strategies, processes, and technologies.
Successful application of e-business strategies will be required for an oil and gas company to build and maintain competitive advantage and growth into new market opportunities.
In this article, we will trace the technological transformation that revived and renewed the energy industry following the energy crisis of the 1980s and discuss the various ways technology is being applied in operating, finance, and administrative areas. And we will look at trends, technologies, and key factors for future success.
In the 1970s, personal computers were viewed as little more than expensive typewriters. Today, not having high-powered, networked PCs with e-mail and internet access is almost unimaginable. When the major oil and gas companies underwent massive reengineering of business processes and technology, they embraced technologies such as electronic data interchange (EDI) and invested hundreds of millions of dollars in enterprise resource planning (ERP) systems to integrate business operations with internal back-office systems to improve internal data transfer and access.
The explosive growth of the worldwide web has quickly brought the next revolution, however, with new technology enabling companies to transact business online through the internet. An energy e-business forecast by Forrester Research1 predicts that by 2004, e-marketplaces will push online energy sales to $266 billion by bringing higher efficiency levels to natural gas, oil, and electric power wholesale markets.
However, most oil and gas companies have not been quick to embrace the fast-growing internet-based technologies, apparently seeing little added benefit in spending many more millions of dollars to make ERP systems web-enabled.
This is supported by the results of an Arthur Andersen survey, which asked the chief executive officers, chief financial officers and chief information officers of US oil and gas companies and leading industry analysts to assess the current use and expected growth of e-business or internet technologies in their businesses. The companies include major integrated companies and independents.
In rating their current use of e-business or internet technologies in operations, between 65% and 75% of respondents report their overall level of use as low to medium. In specific operations, the highest usage level (medium to high) reported is in internal communications and knowledge-sharing (50%), inventory management (33%), customer communications (31%), well-tracking (31%), pipeline operations and monitoring (29%), geophysical surveying (29%), e-procurement (29%), electronic bill presentment (29%), retail marketing (25%), and transportation management (25%).
This is in marked contrast to other industries, where the use of internet-based e-business is growing exponentially. While no one really knows how large the internet is, or how many networks are linked to it, it is estimated that there were more than 115 million people online around the world in 1998 and that the number of web sites was growing 15%/month.2
By 2003, business-to-business trade on the internet is expected to reach $1.3 trillion, 30 times the $43 billion transacted in 1998. E-business sales are projected to be $3.2 trillion.3 Companies are expected to realize nearly $1.25 trillion in savings by 2002.4
These potential savings could come just from the improvement of such business processes as order-handling and processing, distribution of promotional and sales collateral materials, procurement and supply chain management, customer service, marketing, and human resources activities. It is estimated that by 2002, US businesses will see between $360 billion and $480 billion in profits from internet-based cost savings alone.4
General Electric is already using e-business to purchase goods and expects to save $500 million over 2 years while buying $5 billion in goods via the internet.5 Two of the best-known success stories belong to Amazon.com, which used the internet to reinvent book-selling and mail-order retailing, and Dell Computer, which sells more than $30 million/day of computers from its web site.6
E-business, oil business
Although the oil and gas industry may be behind the other industries in using the internet, the big transition to ERP and EDI by oil and gas companies was a pioneering step in their use of information technology and e-business. They focused on streamlining transactions, using technology to tie the physical world to the digital world in order to improve information delivery and access across the organization.
As far back as 1985, for example, companies began electronically transmitting data from remote wellsites, especially those in the Gulf of Mexico, first only for internal use, then later to customers and vendors.
Even though the oil and gas industry has not embraced e-business as quickly as other industries, the technology still is reaching into virtually every corner of the business. Companies have used ERP and other technologies to streamline, integrate, and outsource general and administrative functions such as accounting, finance, human resources, and procurement and purchasing. They have also improved shareholder-stakeholder communication, the acquisition of knowledge capital, and knowledge management.
One of the biggest success stories has been in purchasing and procurement, where companies have realized major cost savings and dramatic benefits for their entire organization, such as:
- Improved information, reporting, and control.
- Better terms from smaller lists of preferred suppliers.
- Employee self-service while reducing maverick spending.
- Inventory reduction and shorter procurement cycles.
BP Amoco has begun an e-procurement project that will shift its purchasing of basic catalog items into an internet-based system by the end of 1999. While this covers only 15% of the company's total procurement spending of $20 billion, it accounts for more than 50% of the total number of transactions. The company expects to save at least $200 million/year.7
The Arthur Andersen survey indicates that e-procurement will be one of the areas that lead energy companies into greater use of the internet. While the survey respondents listed warehouse reduction as having the highest level of current e-business and internet usage with 33% reporting medium use, about 30% reported the same usage for e-procurement, followed by 23% using the internet for "smart" purchasing and electronic bill presentment and payment.
New applications that go well beyond the current e-procurement functionality will have a major impact on the entire supply chain. These include:
- The ability to share planning forecasts in real time with service and material providers.
- The use of advanced planning systems that optimize the scheduling and logistics across the entire supply chain.
- The procurement of goods and services through an open, on-line auction-bid process.
The results of these new applications will enable significant improvements in productivity and lower inventory and transportation costs.
Survey respondents also say they are using e-business-internet technology in geophysical surveying and interpretation, systems for well operations management, oil and gas production accounting and royalty payments, remote well monitoring and production management, joint venture accounting and management, oil and gas distribution, and project development. The respondents listed e-procurement-smart purchasing and vendor integration as having the greatest potential for major increases in the future.
The use of internet and e-business technology in exploration and production is a global phenomenon, as well. The Norwegian oil industry, for example, established an inexpensive, global extranet called Secure Oil Information Link (SOIL) to give access to common information, applications, and services to all oil companies, service companies, and vendors operating on the Norwegian continental shelf.8
In the downstream segments, the industry's wholesale and retail areas have been a fertile ground for e-business. Examples include:
- Company-controlled intranets connecting service stations with corporate headquarters, allowing the retail outlets to access information, purchase fuel and items for convenience stores, and track invoices.
- Outside vendor extranets providing electronic storefronts enabling the buying of gas and convenience items.
- Supply chain management: Vendor communication, demand planning, inventory replenishment, transportation management, order fulfillment, electronic bill payment and presentment.
- Data-information collection, management, and usage.
The Chevron Retail Alliance, which represents 8,000 retailers across the country, is a good example of this trend. This year, it completed a beta test of an extranet designed to automate the supply chain, linking the company, suppliers, and retailers. This network would take the place of a system in which company managers communicate with retailers through fax, telephone, and face-to-face meetings about brand promotions, pricing, and other key information.9
Refining and midstream have benefited, as well. Refineries developed systems for producing integrated information on volumes, capacity utilization, downtime, and operating costs. In midstream, e-business has been applied to everything from managing and monitoring crude oil, natural gas, and petroleum product transportation and distribution to global trade and logistics.
The use of e-business in oil and gas marketing and risk management has grown significantly with the global electronic oil and gas markets and the focus on trading and risk management to manage assets and maximize revenues.
However, the industry has just begun to scratch the surface of e-business opportunities. In our survey, for example, almost all of the responding companies rated as low or medium their use of electronic commerce and the internet in virtually every business process except information management, which had the highest rating.
Meanwhile, the internet is changing everything. Whether it's the relationship between suppliers and customers or the way a company manages back-office functions such as accounting, payroll, and human resources, industry is quickly identifying and taking advantage of the opportunities of online e-business.
For the e-business pioneers, the results have been spectacular. Revenues are minuscule or nonexistent for internet companies, especially when compared with the traditional companies, and profits don't exist. But, America Online's market capitalization is almost half of one of the largest companies in the world, Exxon Corp., and Amazon.com's is a little less than Enron Corp.'s.
For oil and gas companies already involved in e-business through EDI, moving to the internet becomes the logical next step, but only if it produces significant bottom-line results and improved customer satisfaction.
Internet connectivity has been made easier for oil and gas companies that participated in ERP implementations and reengineering. With new internet-based technologies, a company can connect suppliers, customers, and others directly to its ERP systems through a web browser, thus reducing the need for installing expensive customized software.
This capability to interface with the internet through ERP systems presents great opportunities for further benefits in virtually every business area, as well as in some new applications such as the electronic storefront.
BP Amoco recently announced plans to buy gasoline pumps that not only will fuel a vehicle but also connect the customer to the internet. The customer will get information such as weather and traffic updates, and the company will get customer gasoline and convenience store sales data by the hour of the day.10 Mobil uses the internet to deliver results of used-oil analysis quickly through an application called PFA Inter-Link, which enables shipping companies to make their fleet maintenance programs more efficient and cost-effective. This helps them monitor the mechanical status of engines and other onboard systems.11
Baltimore Gas & Electric Co. began using the internet in 1998 to manage the flow of gas through its pipes.12 The Pennsylvania Department of Conservation and Natural Resources uses the internet to provide data on oil and gas industry operations in the state. Companies and individuals save thousands of dollars in travel, searching, and copying records.13
Smaller companies are benefiting, as well. The business-to-business market has drawn a great deal of attention in recent years, resulting in the development of an e-business infrastructure that makes it possible for much smaller companies to increase efficiency and effectiveness of their sales and marketing operations and cut costs in their supply chain without sacrificing customer service.
In the automotive industry, for example, increased internet access and on-line research have enabled suppliers and customers to build direct relationships, dramatically decreasing the requirement for specialized distributors and dealers. Dell Computer's direct build-to-order business model propelled its global revenues to more than $17 billion in less than 14 years.14
Success in e-business
Energy companies will remain under intense pressure to lower costs in order to remain competitive. At the same time, they will be looking for higher reliability, global reach, and improved services from their information technology and e-business systems.
But e-business is not just hardware and bandwidth. It is about leveraging the power of communication to inform, educate, serve, even entertain customers, suppliers, stakeholders, and other key groups. An effective e-business strategy requires cultural change, reinvention of business processes, refocusing, and retraining employees to maximize the benefits.
For any company, the move to e-business is a journey of e-volutionary discovery:
- First is awareness. A company realizes that it must improve the internal and external electronic sharing and communication of data, information, and knowledge in order to compete, and some form of e-business is needed to accomplish this.
- Second is buy-in. The company may not understand how technology is going to help, but it asks the right questions. At this point, e-business is considered information technology (IT), so the chief information officer or chief financial officer is given the responsibility for finding the solution.
- Third is ownership. There is complete buy-in by company management and an understanding that the entire company must be involved in the e-business. The CEO and board of directors sponsor the initiative.
By leveraging the internet and other web-based computing and leading-edge tools, companies can integrate suppliers with their operations to improve performance and efficiencies and manage the entire business value chain.
It enables them to improve and speed strategic decision-making and provides opportunities for significant savings in the overall cost of goods and services, in process and overhead costs, and in personnel costs. The internet also provides opportunities to gather and use customer information to personalize marketing and service.
Arthur Andersen has worked with many companies to help them develop and implement effective e-strategies. Once a company enters the world of e-business, it goes through a four-stage evolution:
- Reactive. The company has a static web site and uses EDI or other programs initiated by trading partners that have limited integration to core business systems.
- Proactive. E-business technologies supplement traditional business processes but are more integrated with core systems. They are promoted to trading partners.
- Interactive. E-business is used for process improvement, and web sites are used for one-on-one interactive commerce. Programs reflect the reality of trading-partner groups.
- Committed. E-business is a critical foundation for all enterprise-wide systems and is pervasive in all aspects of the business. It is used to create new business models.
How well a company makes the transition from the traditional business model to the e-business model depends on a number of factors. To complete the e-business evolution successfully, a company must have or develop several key attributes:
- A focus on delivering knowledge, information content value, and service value rather than managing transactions and assets. This requires further refinement of the company focus on core competencies that really add value and leveraging the power of communication. Everything else may be considered for selling, outsourcing, handling in a joint venture with another company, or some other disposition.
- Integrated systems and online interactive experience and perspective or access to a company with these capabilities. The company's customers must be wired, as well.
- A focus on markets and customers versus production, with a global perspective and a focus on responsiveness and flexibility.
- A committed management team focused on e-business and the change leadership required to make the transition.
However, this is just the beginning. In building an effective e-business strategy, a company must understand that:
- If you build it, it doesn't mean they will come. Is your strategy compelling to all stakeholders (customers, suppliers, employees), and does it add value to the company?
- If they come and you do not execute, it can damage the customer relationship. Integration into the customer's everyday business processes and transactional systems will enable the process to work. The electronic interface must be supported by the same level of quality and service as any other customer interface.
- There are opportunities to compete on this playing field. An effective e-strategy can be a competitive differentiator. It may be critical to develop an e-strategy just to keep up.
Arthur Andersen has developed a proven approach for developing an e-strategy that results in an action plan for starting new ventures, capturing revenue growth, and eliminating costs from e-business initiatives.
Following is a roadmap of this process:
- Understand the business landscape. To define the business context against which opportunities are assessed, a company must first analyze the business environment, taking a fresh look at the changing industry landscape, assessing the market and competitive forces, and analyzing its internal strengths and weaknesses.
- Perform a competitive analysis. A company must develop an outside-in understanding of the market, customers, suppliers, and competitors in an e-business world in order to create a comprehensive e-business vision. This requires the use of qualitative and quantitative techniques to gather information required to develop new insights into evolving e-business. These insights form a foundation for developing an e-business vision for marketing, sales, service, and procurement activities.
- Understand the customer experience. E-business redefines the exchanges and relationships between customers, suppliers, partners, and competitors. A company must identify and analyze the exchanges of goods, services, information, knowledge, and intangible benefits among industry and market participants. These exchanges define the current and future nature of the relationships and provide the context for assessing new opportunities and threats.
- Develop an e-business vision. Using the information gathered in identifying opportunities and threats, a company analyzes each opportunity within the context of its objectives, benefits, resources, and risks. The opportunities are prioritized in terms of business value and implementation difficulty, and a vision is created for the e-business.
- Build a business case. The e-business scenarios identified during the vision-development stage are developed into supporting business cases, which analyze the operational and financial benefits and costs associated with each scenario.
- Produce a business design. The results of the business case development are used to prioritize projects and establish critical operational and financial objectives. Technology, process, and organizational gaps are identified, leading to areas requiring strategic development. Strategies are developed, business risks are assessed and prioritized, and risk management approaches are developed.
- Gather and use customer feedback. Customer-supplier interviews, focus groups, and other techniques are used to evaluate the effectiveness of these strategies and their impact on customers.
- Understand the implementation scope, plan, and cost. Implementation planning looks at the overall system design and organizes it into small, manageable pieces that can be implemented quickly based on company priorities.
E-business is changing the economics of business as an increasing number of companies move from the asset ownership and management model to one that puts knowledge creation, management, and communication at the center of their business strategies.
There is no doubt that e-business will change the energy industry in many ways. Oil and gas companies that start now to use effective e-business strategies such as those outlined in this article will be the first to gain the benefit of these changes. Companies that are proactive in understanding and leveraging the power of e-business will gain reduced costs, improved operational effectiveness, enhanced marketing, better communications and knowledge-sharing, and better positioning to take advantage of the technological marvels yet to come.
- Forrester Research, news release, Oct. 7, 1999.
- The Internet Society, Nua Internet Surveys (cited in Arthur Andersen presentation).
- Forrester Research cited in Industry Week, "Net Gains-e-commerce is poised to follow," May 17, 1999.
- Internetnews.com, "E-Commerce To Generate $1.25 Trillion In Savings By 2002," Aug. 5, 1999.
- Forrester Research cited in Industry Week, "Net Gains-e-commerce is poised to follow," May 17, 1999.
- Dell Computer web site.
- Browne, John, BP-Amoco Group chief executive, BP-Amoco strategy presentation, July 15, 1999.
- Grav, Morten, corporate IT adviser, energy trading and marketing, Statoil, speech to Electronic Commerce for Oil and Gas Conference, London, Jan. 27-29, 1999.
- Robinson, Teri, "Reinventing The Business Wheel-Ready Or Not, Companies Must Be Prepared For A Major Overhaul," Information Week, Issue 739, Section: Solutions Series, June 21, 1999.
- "New BP-Amoco pumps to dispense gas and data," Houston Chronicle, Aug. 18, 1999, p. 5C.
- Mobil PFA Inter-Link; www.mobil.com/business/marine/lubes/mpi.html; Aug. 30, 1999.
- Alexander's Gas & Oil Connections, Vol. 3, Issue 15, May 29, 1998.
- Pennsylvania Department of Conservation and Natural Resources, Aug. 24, 1999.
- Dell Computer Co., Sept. 30, 1999.
Victor A. Burk is managing director of Arthur Andersen's Global Energy Industry Services Group, responsible for the development of new services and products, business development and marketing activities, industry research, industry competence and training, and knowledge-sharing. He directs Arthur Andersen's annual Houston Energy Symposium and major energy industry publications, Global E&P Trends, World Oil Trends (with Cambridge Energy Research Associates), and Oil & Gas Industry Outlook.
Burk joined Arthur Andersen in 1972 after graduation from Stephen F. Austin State University and was admitted to the partnership in 1981.
Thomas Elsenbrook is a partner with Arthur Andersen, heading the Energy Business Consulting practice in the region that includes Houston, Austin, San Antonio, and New Orleans. In addition, he is responsible for the firm's Global 1000 initiative across all service categories. He has extensive experience in organizational strategy and design, business process reengineering, and performance reporting systems.
Gary Webb is a senior manager in Arthur Andersen's Business Consulting Practice. He is the Houston e-business/internet practice leader, with responsibility for information systems planning and internet/e-business initiatives. Webb has extensive experience in many industries with e-business and information systems planning projects including the development of e-business strategies, design, and implementation in the financial services, consumer products, manufacturing, and energy industries.