Strategic Alliances Fit Pattern of Industry Innovation

James G. Crump
World Energy Group, Price Waterhouse
Houston

The industry is experiencing a renaissance in almost every aspect, from technological breakthroughs to innovative business practices to new products and markets.

An inevitable outgrowth of such rapid and fundamental change is an evolution in business relationships. The strategic alliance is at the forefront of this trend.

Development of new relationships capitalizes on, and partly results from, enormous advances in technology and finance. The industry can now look for oil economically in the depths of the ocean, see clearly what lies under the ground, and build pipelines over the tallest mountains and undersea. Derivatives markets allow consumers and producers to swap price risks to stabilize costs and project finance.

Such modern advances build on a rich past. For many years, the petroleum industry has found innovative ways to provide the energy that fuels our lives-first, kerosine for lighting, then fuel for the combustion engine. And the talented men and women in the oil and gas business today remain among the most innovative in any industry.

Because of its experience with evolving business practices, in fact, the oil and gas industry is uniquely well-suited to the new relationships of the present and those still to emerge.

New relationships

Today, like business in general, the oil and gas industry is much more competitive than it has ever been.

In response, petroleum companies are cutting costs and increasing market share by forging strategic alliances or merging with one another in whole or in part.

British Petroleum (BP) and Mobil are merging their European downstream operations for significant pre-tax savings. Chevron, Elf Aquitaine, and Murphy are pooling their refining and marketing in the U.K. Shell and Amoco have announced plans to combine their West Texas and New Mexico properties. Shell and Tejas Gas, and Chevron and NGC Corp. have formed joint ventures (JVs).

There are talks by Texaco and Shell about merging their U.S. refining and marketing assets.

Combined with Texaco's Star Enterprise partnership with Saudi Aramco and Shell's ties to Mexico's Pemex, this merger would create what one magazine called a "hydra of entanglements."

The trend will continue to advance on many fronts. State oil companies in producing countries will continue to integrate downstream with established companies in consuming nations. Privatization and liberalization will present other opportunities for mergers, acquisitions, and alliances. So petroleum companies are jockeying for position to exploit the end to state monopolies in energy sectors around the world.

The trend to mergers and alliances is not unique to the oil and gas industry. What is unique is the knack of petroleum companies to range easily among shifting alliances.

A competitor today is an ally tomorrow. A strategic partner in one market is an adversary in another.

This is a radically new way of doing business, and the oil and gas industry seems quite at home-and adept. This is further proof that in the new energy age, petroleum companies remain among the most innovative competitors.

The outsourcing rage

The competition spawning so many strategic alliances and other combinations is changing business practices on other fronts. Among these changes, and related to alliances in several ways, outsourcing is increasingly important.

From 1990 to 1994, the worldwide market for outsourcing in and outside the petroleum industry grew from $9 billion to $28 billion, according to Dataquest.

And the results of outsourcing are in. In a recent survey by the Outsourcing Institute in New York City, companies reported an average 9% savings in functions they have outsourced.

Outsourcing decisions, says management guru Tom Peters, are "perhaps today's primary strategic tasks."

But outsourcing is nothing new in the oil and gas business. Petroleum companies have outsourced for decades. There's a whole industry segment to show for it: oil field services. Companies like Halliburton and Schlumberger have become multinational giants by drilling and completing wells for the majors.

The majors have been outsourcing back office functions, too. BP Exploration, for instance, has outsourced to the Price Waterhouse World Energy Group the finance and accounting functions in its Colombian and Venezuelan units.

Clearly, oil and gas companies have been pioneers in outsourcing, and they are leveraging this trend in the new energy age.

Integrating work flows

Petroleum companies are also trying to integrate workflows and business units that were once focused on separate phases of the life cycle of oil fields, refineries, and other assets.

And outsourcing makes enterprise-wide integration difficult. It's hard to do both.

But innovators in the oil and gas business are cracking the code with technology. They know that a good way to integrate business units is to integrate the software that employees use.

Integrated software provides a single source of accurate, real-time, fully digitized information about the asset value chain within business units and throughout the enterprise of a company.

Price Waterhouse, for example, offers a suite of integrated, enterprise-wide systems for upstream, downstream, and administrative operations and accounting. The industry-specific software in this suite, called Price Waterhouse PinPoint Petroleum Performance Systems, is in use throughout the industry.

With computers now making it possible to exploit frontier resources that would not have been explored or developed just a few years ago, integration will be central to emerging business practices and relationships between companies.

Technological advance

The industry now provides example after example of how computer-assisted technology combined with new business practices creates opportunities-sometimes in areas once written off as no longer promising.

A prime example is the exploitation of oil reserves in deep water of the U.S. Gulf of Mexico. Drilling in 5,000 ft water depths has gone more than 15,000 ft beneath the sea floor. Conoco announced recently its joint venture with Reading & Bates to build a state-of-the-art drillship that will drill in 10,000 ft of water.

It's now believed that deepwater reserves in the Gulf of Mexico will exceed the reserves of the giant Alaskan Prudhoe Bay field. That could mean production of more than 1 million b/d as the century turns.

In the 10 or so years that oil companies have focused on this new frontier, 294 exploratory wells have been drilled and 36 confirmed discoveries have been announced in an area where no exploration was envisioned after the 1979 oil crisis. With at least 21 development projects now under way, some say this deepwater play alone could reverse the steady decline in U.S. production over the next 5-10 years.

The turnaround in the Gulf of Mexico is a triumph of technological innovation in the new energy age.

In a Price Waterhouse study a few years ago, the gulf placed dead last on a list of provinces of interest to upstream oil companies. Today, the gulf is back on the radar screen, atop the list of most companies.

Other developments in technology

The deepwater gulf, of course, is not the only arena where new technologies and business practices are creating opportunities.

In the North Sea, a mature province with traditionally high production costs, companies are using floating production platforms to cut lead times by 3-5 years, according to Petroleum Intelligence Weekly.

Technological innovation has improved exploration success rates throughout the industry. Fast visual computing of seismic data has reduced an 8-month process to a 2-day affair. And project facility design has shed a year as a result of computer assistance.

Thanks to new 3D seismic applications, the industry can find a given amount of oil with a lot less drilling than before. Higher recovery rates are coming with multilateral drilling techniques and 4D seismic field monitoring that permits more-accurate readings of ongoing geophysical activity.

As we improve the way we use geological data, we can imagine the day when company geophysicists will locate source rocks easily instead of chasing pockets of migrated oil. Scientists are exploring the possibilities. It now seems possible that in the new energy age, we will find oil before we drill for it.

Beyond land and sea, innovative minds in the petroleum industry are close to cracking the ice barrier.

Northern Canada, the Barents Sea, Greenland, and even the earth's poles may become regions where resource development is no longer uneconomical and unfeasible.

Pipeline technology and materials are also being upgraded to permit movements of oil and gas over long or difficult terrain and under water. Even extended pipelines under the ocean are closer than ever to reality.

The industry is also experimenting with technologies that could speed energy supplies to the consumer and bypass crude oil feedstock. Exxon is planning an innovative natural gas-to-hydrocarbon liquids plant in Qatar. That plant could convert 500 MMcfd of gas into 50,000 b/d of middle distillates and other oil-based products.

This project and its technology hold great promise. Someday, countries with ample natural gas may be able to convert their supplies into easily usable transportation fuels.

This would revolutionize the link between natural gas and oil markets. The technology could be used to develop distant gas supplies that might otherwise not find a market.

From oil to energy

Technology. Outsourcing. Strategic alliances. These are all areas of remarkable innovation by oil and gas companies in the new energy age.

However, the best measure of a company is not what it does but what it is. And petroleum companies are redefining themselves-as energy companies.

They are positioning themselves for prosperity in one, integrated industry-from hydrocarbons to electrons.

Some companies are positioning to specialize in one or two aspects of the energy supply complex, others to exploit opportunities across the energy value chain. In the new energy age, the largest energy companies will range from the wellhead to the electric light switch.

Already, several major petroleum companies have created nonregulated power units that seek projects in Asia, the Caribbean, and Latin America.

Other big natural gas players such as U.S. Coastal and Australia's Broken Hill Pty. have embraced the power industry too, while U.S. trailblazer Enron has broken down the barrier between the natural gas and electricity segments.

Some oil companies, such as BP, are pursuing energy forms that are not commercial today-like the manufacture of photovoltaic cells to generate electricity. It's believed that the cost of such processes may one day be competitive.

In the new energy age, energy companies that can supply clients with secure and cost-effective fuels will be the winners. Diversified companies with diverse energy supplies will replace today's fragmented industry of companies distinguished by BTU form. Companies will hedge from one market to another as interfuel competition intensifies. And they may use BTU futures trading to provide the proper mix of sources at the most economical price for regional or even global markets.

BTU convergence in the new energy age is pushing the evolution of strategic alliances to exciting new levels.

How far?

Already, we see a dizzying number of U.S. electric and natural gas companies merging to exploit market synergies and core competencies under deregulation. Five megamergers were proposed last year alone, including PanEnergy and Duke Power, Enron and Portland General, Pacific Enterprises and Enova, Houston Industries and NorAm Energy, and Texas Utilities and Enserch.

Even as utilities have "unbundled" their operations, they've begun to bundle wholesale and retail services, bringing new, unimagined alliances to the fore.

Northern States Power Co.'s unregulated subsidiary Seren Innovations has struck an alliance with CellNet Data Systems of San Carlos, Calif., to market bundled services that include network meter reading, billing, and credit collections. Boston Edison has allied with telecommunications company RCN to develop a broadband network that will provide one-stop shopping for energy and telecommunications services. And KN Energy has announced "Simple Choice," a program that gives customers telecommunications and energy services, bundled and billed through one customer service number.

As energy companies dream of ways to bundle energy and telecommunications services with grocery shopping, entertainment, and virtually anything that can be ordered from and delivered to the home, the opportunities for strategic alliances appear intriguing-and virtually unlimited. It's clear the energy services company of today is fast becoming the household services company of tomorrow.

It's also clear that in the new energy age, the winners will be companies that know not only how to bundle wholesale and retail services, but how to brand those services. Oil companies are old hands at branding. They've been branding and selling products successfully for decades. By contrast, utilities are relative newcomers to marketing in a deregulated, competitive environment.

So petroleum companies, for long an indispensable upstream partner to utilities as a source of fuels, figure to be a valued partner downstream as well-in the marketing of bundled energy and other products and services to homes and businesses across the globe.

The Author