Industry Trends: Oil firms still adapting to the world of e-commerce

OGJ Online Oil & Gas Writer Karen Broyles interviewed Dennis McMullin, research director for Proxicom Inc. of Reston, Va., about the impact of electronic commerce (e-commerce) and electronic business (e-business) on the energy industry.

OGJ Online Oil & Gas Writer Karen Broyles interviewed Dennis McMullin, research director for Proxicom Inc. of Reston, Va., about the impact of electronic commerce (e-commerce) and electronic business (e-business) on the energy industry. With over 30 years in the industry, Dennis specializes in business-to-business (B2B) e-commerce development and e-business strategy development. Prior to joining Proxicom, McMullin was a consultant working with a wide range of clients to develop e-business strategies. He previously spent more than 11 years at Landmark Graphics, where he focused on marketing technical solutions. He also served as an internal consultant at Landmark and was involved in strategy development for the company's online and internet initiatives.


OGJ Online: What is the most common form of e-commerce that energy companies are pursuing? Can you name a particular e-commerce model that isn�t getting a lot of attention, but could become widely used?

McMullin: Business-to-business exchanges, or B2B websites such as EnronOnline, PetroCosm, TradeRanger and other public sites, have become the latest rage. One area that doesn't get as much publicity is private exchanges. These exchanges, particularly in the upstream sector, offer a huge opportunity for would-be customers.

OGJ Online: What is the difference between B2B websites such as EnronOnline and a private exchange?

McMullin: Big companies such as Chevron Corp., Texaco Inc., and others are collaborating on big public exchanges, which are typically set up to allow spot purchases or automate sale of products. These sites � such as EnronOnline's trading site for oil, gas, coal and other commodity products � give you a lot of efficiencies around commodity-type goods. Private exchanges tend to be extensions of extranets, the individual computer systems used within companies by employees. These exchanges usually are comprised of a group of partners collaborating on a project, such as exploration and production. Instead of commodity trading, you'll see the buying and selling of complex products and services.

OGJ Online: Can you name some other differences?

McMullin: To facilitate these partnerships, relationships need to be in place first before buying can begin, whereas commodity type goods focus more on getting the lowest price through anonymous trading. Unlike commodity exchanges, private exchanges tend to be formed on a smaller scale by partners participating on an invitation-only basis. A private exchange also might be taken down once a project has been completed. These exchanges are set up to only allow select vendors access to information on a private site.

OGJ Online: Why do you think private exchanges have the potential to become very popular?

McMullin: Historically, many oil companies have been sensitive about pursuing projects with partners in a public platform. The private exchanges provide an outlet for them to go on the web. The familiarity of large companies funding public exchanges could hurt businesses, as some energy players might shy away from doing business on well-publicized sites. These large exchanges are trying to be all things to all people. Their privacy policies say you can have private exchanges. But in starting out their businesses, they're using the big business model of public aggregation of suppliers and buyers. In a way, it's going against the original idea of the site.

OGJ Online: What trends do you foresee for e-commerce and oil and gas?

McMullin: I believe you will see the number of exchanges, within the energy sector and other industries, decline over the next few years. I believe the current number of energy-related exchanges is at the maximum the industry can support. We'll probably see four or five upstream sector exchanges still standing once the shakeout is complete.

One area I think we�ll see more energy companies taking their e-commerce efforts towards is exchange websites for information. I think there is huge potential being missed in the exchange of knowledge between the upstream and service companies. In the consolidation of major oil companies, the players are bringing together large volumes of information. Finding better ways to organize their knowledge structures, and finding opportunities to create new revenue flow, could become one of the great benefits of e-commerce and technology. One idea is to create site where companies would pay a fee to look in a library of nonstrategic knowledge gathered by a company.

OGJ Online: What are some lessons energy companies should learn before venturing into ecommerce?

McMullin: Coming up with a strategy that suits a particular company's business remains crucial. If you're not a major player or if you're an intermediate size company, you have to ask yourself, "What do I want to do? What is my driving reason? What is my reason for going out on the internet?" For some companies, it may be they just want to communicate with employees or let employees communicate with rest of industry, and not a major exchange.

Earlier in 2000, a frenzy of dot.coms emerging into the market occurred. Then the market really came down hard on the sites that didn't have a successful strategy. You have to have a clear strategy to succeed on the internet. For businesses involved in exploration and production, e-commerce might be something of peripheral interest.

OGJ Online: Do you see any new technology on the horizon that could change how companies are implementing e-commerce and e-business?

McMullin: Wireless technology is expected to be the next wave of technology in e-commerce. For example, fiber optic cable or landlines are allowing companies to wire their drilling platforms for closer monitoring. The Gulf of Mexico is probably one of the best areas in the number of fiber optic wires. These lines could be used for communications or recording well data. Field engineers and other workers could use wireless palms to retrieve information from repair manuals or other information from their company's database. Having mobile personnel with wireless technology, enabling them to always have a connection to the internet, means that companies can base workers at locations that fit the needs of their jobs.

OGJ Online: Are there any drawbacks to wireless technology?

McMullin: Entering a tremendous amount of data into smaller wireless devices such as Palm Pilots can be difficult. But voice recognition and natural language technologies, which could hit the market within the next five years, could enable mobile workers to use wireless to do business or gain access to company databases. It may come to the point one day where nobody uses a keyboard anymore.

OGJ Online: Are energy companies using e-business to improve their internal business practices? If so, how?

McMullin: I fold that into the idea that e-business could change how companies manage intellectual property. It could be allowing employees to learn to use Microsoft Word, do other training by computer, or even take college courses. It could give energy companies a whole new capability of spreading intellectual assets, such as information on business practices such as drilling. The expertise I gain is not just in finding oil but the learning cycle involved in using particular tools. These intellectual assets can be put back into the corporate store. The next time an employee has to do the same task, they can check the company knowledge base to find out what�s been learned before about that particular task or topic. It also can be more efficient to learn new things via the internet rather than read printed materials, which can become dated quickly.

OGJ Online: How much does it cost to construct and maintain an online trading site?

McMullin: The cost depends on the complexity of site. Like anything else, the more bells and whistles it�s got, the more it costs. Some of the newer models, such as emarketplaces or online exchanges, are so new, there's almost no cost-related information available.

There are three levels of websites. For a web site with just brochures and product information, it could range between $100,000 and $500,000. A website a step up from that would have content integration, advance search information, capability, and personalization, such as a My Yahoo or My America Online site, where information the user prefers is pushed to them ahead of other information. This type of website is better because it can keep users coming back to site repeatedly. Setting up this type of website can cost anywhere from $200,000 up to $800,000.

Third tier websites, which allows users to collaborate with one another, such as a customer support team interacting with customers, could cost $1 million to $3 million. The prices go up once you move into the marketplace of buying and selling goods or services. For example, if you want to buy a book, you could find it on Amazon.com and get more information about the product. This type of site offers advanced personalization, meaning that it will remember who you are when you log in and suggest things you might be interested in. This kind of site could cost several million, due to the costs of the back office services needed for buying and for credit checks.

Larger corporations� websites could cost as much as $100 to $200 million. The sky�s the limit on the cost of these web sites, and so are the costs of maintaining sites. A static sight wouldn�t require many people, but departments of staff could be needed to maintain larger, more complex sites.

OGJ Online: What kind of changes are you seeing internally at companies because of the e-commerce and e-business?

McMullin: I think it will allow the industry to assign more value to intellectual property. Finding oil and gas requires the use of a lot of knowledge, and the internet has become a new medium for companies to use that knowledge for their own purposes. That knowledge base has become a potential revenue stream, which will be the most interesting thing to watch. The pace at which energy companies are pursuing e-commerce is the fastest I�ve ever seen. Compared to other industries, it would be slow, but by energy standards it's huge, blinding almost.

OGJ Online: What are other obstacles you�re seeing for energy companies pursuing e-commerce?

McMullin: One of the biggest obstacles is the willingness of the organization change their business to pursue e-commerce opportunities. Getting employees to adapt to a new way of doing business and to understand how their organization will use new technology, can be tougher than actually building a web site.

General Electric CEO Jack Welch is a good example of the top management completely buying into a new way of doing business, which is crucial for e-commerce to succeed. He decided to tear his company apart and redefine it before somebody else did.

There's also this idea in energy and many industries that you can't do everything online, that there's got to be some face-to-face stuff. I think we're getting closer to doing more online, thanks to software products, that would allow companies to collaborate and negotiate for the buying and selling of complex products and services. One software product, e-Negotiations, is used in manufacturing to allow contracts to be created online. This will allow online exchanges to become more sophisticated, as energy companies start going beyond the basic exchange of goods for dollars idea.

OGJ Online: Are e-commerce ventures and e-business practices making any impact on share prices?

McMullin: The energy industry is still viewed as an old-line business. Other issues, such as its tendency to cycle up and down financially, also have kept the influence of e-commerce and e-business from being reflected yet.

Part of the problem is that companies are still trying to figure out what value their company could gain by being online. The biggest impact that technology has had on the energy industry the past decade has been in 3D seismic and other technology that can lower the risk and costs of drilling projects.

More companies are seeing the benefit of the business side efficiencies of e-commerce and e-business, but haven�t been able to impart the potential value to their shareholders. Analysts and shareholders still tend to look only at exploration and production as the major influences on the financial bottom line.

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