Electronic commerce (e-commerce) presents challenges and opportunities unique to the energy industry-as well as potential to change the balance of power between oil companies and service-supply firms.
A new report by Arvind S. Sanger, Stuart T. Kagel, and Robert Maina of the New York investment firm Donaldson, Lufkin & Jenrette says e-commerce initiatives are most rewarding where they allow companies to change business processes and secure growing shares of value created by those pro- cesses.
"Here the challenge is coming up with new ways of doing business more efficiently that were not possible without the internet and getting the companies to accept this change," says the report, introduced at a late-February DLJ energy conference in New York.
Overhaul of business process via the internet is more difficult but potentially more rewarding than the e-commerce initiatives that have progressed furthest in other industries. Those initiatives create markets by lowering transaction costs through the elimination of paperwork or by facilitating matches between buyers and sellers in fragmented markets.
The DLJ report estimates worldwide market parameters for the oil and gas industry this year at greater than $1.5 trillion in revenues, $1 trillion in cost of sales, $75 billion in inventories, and $200 billion in capital spending.
Of the capital expenditures, $140 billion will pertain to upstream, $60 billion pertain to downstream, and $8 billion by oil field service companies.
The report sees potential for e-commerce to add "meaningful value" in these functions:
- Procurement of indirect materials that support organizations. Examples are office supplies and products, travel and entertainment, and professional services. In this area, involving a large number of repeat purchases, e-commerce offers savings from reductions in paperwork and time spent ordering and tracking purchases. DLJ expects e-commerce to produce 10% savings in this market, which it estimates in size at $50 billion in 2000.
- Direct goods procurement. DLJ sees great potential in some areas and little in others for e-commerce in the $200 billion market for direct procurement of capital goods and services. Where the number of suppliers is low, there is little potential saving from matching buyers and sellers. And where there is a high level of technical or performance specification, cost comparison is not a major factor. In these areas, the potential for e-commerce to add value is limited.
By contrast, procurement of products such as low-end tubulars, standard pumps and parts, standard valves, low-end bits, and packers can be made more efficient through e-commerce because of the large number of suppliers.
"In this whole area," the DLJ report says, "we expect suppliers to resist adopting e-commerce because they risk being commoditized and losing margins, with no real revenue gain to offset it."
The report estimates the portion of this market suitable for e-commerce at $50 billion. Although more than half the opportunity is downstream, most effort is upstream.
- Supply-chain management. The internet offers efficiencies in the management of equipment inventories, the worldwide value of which DLJ estimates at $75 billion. Efficiencies might come, for example, from supply store operators functioning as inventory depots for oil companies newly able to operate with inventories at minimum levels and from just-in-time delivery by makers of custom-ordered products.
E-commerce in this area will require 2-3 years to develop, the report says, estimating that oil companies might be able to trim worldwide inventories by 10% through supply-chain management.
If the average cost of capital for the industry is 10%, the total cost of carrying inventories will fall by $750 million/year. Storage and personnel costs, which represent at least 20% of total inventory, might fall by a further $1.5 billion/year.
- Designing wells better. Use of the internet to gather a broad array of information quickly and efficiently could reduce the $140 billion/year upstream capital expenditure by 10%/year.
"This is a high-value proposition that will not be easy to accomplish, given that it involves changing business processes that are at the heart of energy industries [reasons for existence]," the report says.
Operating and service companies are "likely to be reluctant to open up their value-add to independent and neutral third parties.
"Longer term, we believe this proposition contains enough value-add to be successful, but it is going to be one of the trickiest to accomplish or judge today."
- Used-equipment trading. DLJ estimates the market for used oil field equipment at $5 billion/year, with potential to grow to $15 billion/year. Growth of an e-commerce role in this fragmented market will depend on development of standards against which an independent party can certify condition of equipment on offer. Products likely to dominate the used-equipment market include pipe, rig equipment and rigs, valves and fittings, christmas trees, machinery, process equipment, compressors, and offshore platforms.
- Oil and gas property trading. The internet can help alert potential buyers to the availability of oil and gas properties for sale and transfer data needed for decision-making. It thus can add efficiency to a market DLJ estimates at $20 billion/year. Of that total, $5 billion involves small properties best suited to online deals.
"We expect this market to double in the next few years as a result of finding a larger pool of buyers online," the report says.