In recent months, Chevron Corp. has unveiled plans to participate in several electronic commerce (e-commerce) ventures.
Last month, Chevron and partners officially launched PetroCosm Corp., a business-to-business (B2B) venture focused on the oil and natural gas sector. Chevron and Texaco Inc. are two of the companies taking a financial stake in the venture, along with Ariba Inc., Crosspoint Venture Partners, Requisite Technology Inc., and KPMG Consulting LLC.
In May, Chevron announced the formation of UpstreamInfo.com, a B2B portal allowing oil and gas companies to access technical and business information through the internet. Chevron's partners in UpstreamInfo.com include EDS, Raytheon, and The Information Store. And in March, Chevron, Oracle Corp., and Wal-Mart subsidiary the McLane Co. said they planned to create RetailersMarketXchange.com, which they say would be the first internet trade exchange designed as a full-service marketplace for all convenience store and small business retailers and their suppliers.
Chevron also created in June a new subsidiary Chevron Technology Ventures LLC. Chevron said the subsidiary would, over the next 5 years, invest in a substantial portfolio of technology start-up companies whose innovations "could significantly benefit Chevron's existing businesses and lead to new growth opportunities." Chevron says it is the first petroleum company to establish a venture capital group to make equity investments early in new technologies.
Oil & Gas Journal Online Staff Writer Karen Broyles on July 21 interviewed Donald L. Paul, vice-president of technology and environmental affairs, about Chevron's recent focus on e-commerce ventures.
OGJ Online: What prompted Chevron to begin entering internet-related ventures?
Paul: We began to realize 3 or 4 years ago on an internal basis that the internet and the kind of process redesign that could take place by designing work processes around e-businesses, or an internet or customer-based model, could impact our business. It became clear to us that it made sense to be more aggressive. That's really been our strategy�participate early, see what's going on, and adjust and adapt internal business, and have direct financial participation on the venture capital side.
We decided that the best way to make changes and to enter the market early to capture values was to participate directly. It wasn't viable to sit back and see what happened.
About a year and a half ago...it was becoming clear that big technological changes were going on in the outside world�such as changes in information technology, advances in materials, biotechnology. We realized that these could potentially and materially impact our business, although the developments weren't being driven by our business but by larger investment and 'starter' activity, almost all of which are outside the oil and gas business. So a year ago, we put together a new e-business development group to lead the company into what was just then becoming the rapidly growing e-commerce sector.
We think of its this way: We're moving into a world in which we're managing molecules and information together as digital information becomes more and more embedded in our world...[This will enable us] to take advantage of emerging technologies and participate directly in the venture capital start-up process.
OGJ Online: Has your decision been influenced any by that fact that your company, based in San Francisco, is close to the heart of developing technology and internet start-ups in Silicon Valley?
Paul: We've definitely been influenced by the fact that our headquarters and major installations are situated so close to those companies. We've got a homecourt advantage in terms of Silicon Valley. It was with that and the venture capital start-ups in mind that we began looking at corporate venture-capital programs, something that pharmaceutical companies pioneered. The pharmaceutical companies really made the biotechnology industry using the idea of big companies investing in smaller companies.
OGJ Online: What kind of ventures has Chevron Technology Ventures invested in?
Paul: Basically, we look for technologies that could create products for energy markets but may not be aimed at them.
We redesigned our production and manufacturing facilities to provide us with better information in real time. It's given us the opportunity to optimize operations and minimize incidents. It also allows us to begin to understand the technologies and get into position to capitalize on them when they're commercially viable.
We structure our deals with same kind of performance metrics you would with a closed-end fund, looking for investments with a good return on a financial basis. In addition, we look for strategic opportunities to improve internal operations by building operations around new technology business models. It's a research and development mission, but with financial returns.
OGJ Online: How is your approach to developing technology different from what you did before?
Paul: The way we're investing in R&D is a first for an energy company. I think that interest is growing so much in corporate venture capital that other companies will follow suit.
When you're managing a closed-end fund, you decide ahead of time how much money you'll invest. After you invest and, hopefully, the start-up becomes successful and goes public, you liquidate and pay shareholders. You don't keep feeding the project like you would with a traditional R&D project.
It forces a level of financial discipline and discrimination, so that you end up only investing in a small percentage of the deals you see. This year, our first fund had $60 million. We wanted to invest in a broad sweep of investments at early stages, some with higher risks but for smaller amount of money and higher ownership. We invested in industries such as broad connectivity materials, information, and biotechnology.
At a meeting last year of the Industrial Research Institute, whose membership includes [firms that conduct] R&D such as GE and DuPont, I raised the point that we're thinking that venture-capital experience is changing the way industrial R&D is occurring. It was a year ago that I speculated that venture capital start-ups would change the way companies did industrial R&D. This year, there was a talk focusing on venture capital and how that's impacting R&D.
Rather than developing technology through our own R&D, we're letting new companies that have an idea or project in an emerging technology develop their product while we take a stake in the project. It's a way of engaging in or commercializing research.
OGJ Online: From the ventures you've become involved in, like PetroCosm, UpstreamInfo.com, and the RetailMarketXchange.com, it appears that you're targeting both upstream and downstream.
Paul: We're looking at the whole value chain for hydrocarbons in terms of e-business, all the way through producing, transporting, and manufacturing products. There's a whole range of opportunities to rethink a business process or rethink a supplier-customer interface in reference to the internet and the business model. Already, we've seen the emergence of several hundred e-businesses targeted on oil and gas.
Creating business entities allows us to see things when we participate that we couldn't see otherwise and to transform our internal business. When you're in the process of investing or having your people on board like we're doing with Petrocosm, you can participate directly in business decisions and the market as they may appear today or tomorrow. You can see the gaps that need to be filled. Because you're owner, you have direct means of transferring leveraging of capital into your own company, which you wouldn't get [otherwise].
OGJ Online: What are some benefits you've seen related to your participation in e-commerce?
Paul: There are a couple of intangibles that we've seen, which show up in our bottom line in the form of better performance. One is the energy and enthusiasm that is spreading throughout our employees by our participation, even if they're not directly involved. The second benefit is that it forces the rate at which big companies try to get faster in terms of agility and response to change in outside world.
By hooking into businesses that change fast, you force your organization to act more rapidly, take higher levels of prudent risks, and increase the clock rate at which they operate. E-businesses operate on a faster cycle. You pick up speed in terms of making decisions in order to be successful. Being faster means being more agile in terms of business competency. Those intangible benefits can be hard to quantify within the culture of a company.
OGJ Online: How much money do you expect to save doing business online? How long do you think it will take for more procurement business within the oil and gas sector to occur on the internet?
Paul: One of the biggest processes that we spend money on is procuring business and service materials. We spend $10 billion/year on procurement. Research and our internal experiments show that we could probably save 10% by doing business on the internet. One of our upstream business units is moving towards doing most of its business through e-commerce, but we don't know how long it will take before the industry is doing 50% of its spending and operating this way. The whole industry is at the very doorstep.
Now that Petrocosm has officially opened for business, we'll be moving towards e-business as much as we can. My prediction is that, in the next year, there will be material amounts of business activity done on the internet�in the neighborhood of several percent. How long it will take us to get to 50% is hard to judge, since we have no experience to base it on. It is conceivable that, in 3 years, a majority of activity will be done this way.
The one thing about the oil and gas industry is that, while we're slow to respond, we're good at organizing and staying at something a long time. Once we get turned around, I think we'll be right at the very front edge. It'll be interesting to look at what's happening a year from now. Once the industry is getting in the range of doing 10% of their business online in a year, we'll definitely be on the way.
OGJ Online: Does Chevron have any plans to enter the bandwidth market?
Paul: We are not looking at entering the bandwidth market. We have major holding in Dynegy Corp., which already holds interests in natural gas and electricity and is getting into bandwidth as a commodity trading market.
We do, of course, have to and do manage our access to bandwidth for our work, which is an important part of our activity in international business. We are aggressively managing access to bandwidth opportunity to build bandwidth into projects such as the TransCaspian Pipeline, which will transport gas from the Caspian Sea in Kazakhstan to the Black Sea through Russia.
It's very clear to us that, when you start building pipelines, you certainly want to put fiberoptics with pipeline. We consider fiberoptics to be the fuel of the 21st Century, just as electric power was for the 20th Century. We think about bandwidth in terms of every major project�not only what you need for the project but also what we could use or somebody else could use in terms of technology.
In many countries, oil and gas is a primary source of national wealth. As you develop resources, it makes sense to develop information technology resources for telecommunications and internet access. It makes sense as part of the infrastructure, since we're in the business of producing molecules and information.
Biography
Donald L. �Don� Paul is vice-president, technology and environmental affairs, for Chevron Corp. Paul is responsible for coordinating the work of Chevron�s research and technology companies and accelerating the development and application of competitive technology throughout the company�s worldwide activities. He is the corporate officer responsible for Chevron�s five technology companies: Chevron Petroleum Technology Co., Chevron Research & Technology Co., Chevron Information Technology Co., Chevron Technology Ventures, and Chevron eBusiness Development Co. Paul is also the corporate officer for Chevron�s worldwide health, safety, and environmental compliance function, which includes Chevron Environmental Management Co., the unit responsible for managing Chevron�s environmental remediation efforts at its US sites.
