Electronic Data Interchange Changing Petroleum Industry's Basic Business Transactions

Bob Tippee
Managing Editor - Economics and Exploration

Oil and gas companies using information technology to cut costs and save time are changing the character of basic business transactions.

A standardized process called electronic data interchange (EDI) is performing the work of traditional physical documents such as purchase orders, invoices, and delivery tickets.

The savings so far have been great and are potentially much greater. From data collected in an industry survey, American Petroleum Institute's Petroleum Industry Data Exchange Committee (PIDX) calculates that reporting companies saved $2.89 for every $1 they spent on EDI programs implemented through 1996.

A task force that API formed in 1987 to study the subject estimated potential petroleum industry savings from EDI at more than $500 million/year. Work of the task force led to creation of PIDX in 1988.

Kendra L. Martin, API manager of electronic commerce and information technology, puts savings in perspective like this: Sending a single paper document costs $10-30; an EDI transaction can cost as little as $1-2.

Purchase orders, for example, cost an average of $30 apiece, including the paper and people processes involved. Electronic invoicing costs $10-15/transaction.

"We want to get [invoicing costs] down into single digits," Martin says.

Implementing EDI

As a tool of information technology, EDI is easier to define than to implement across an industry as large and diverse as petroleum.

API says EDI is "the computer-to-computer exchange of machine-processable data in a standard format." Industry-wide implementation of EDI thus means putting transactions and materials on a digital basis common to all companies.

Petroleum companies and suppliers adopting EDI use computer applications developed to conform with the general EDI standard of the Accredited Standards Committee X12 (ASC X12) of the American National Standards Institute. Parties to EDI transactions often negotiate written trading partner agreements specifying contractual matters and protocols governing their electronic business.

EDI is easiest to apply in business areas requiring relatively small amounts of information that a company can capture internally, such as invoicing.

It's more difficult in unautomated areas where paper records pass from one company to another away from an accounting or recording function. An example: delivery tickets for aviation fuel, which can pass from a vendor to a pilot on an airport tarmack.

To API's Martin, the oil and gas industry will pass an important landmark when it uses EDI for 90% of its transactions in the broad areas of purchasing, invoicing, and product sales. Implementation in those areas now is less than half.

EDI trends

She says most if not all major oil and gas companies use EDI to some degree. Expansion of their implementation of EDI depends greatly on adoption of the tool by vendors.

A recent PIDX goal thus has been to encourage EDI use by petroleum company suppliers. As more and more of them adopt EDI, oil and gas companies can expand EDI use into more and more functional areas.

But adopting EDI has been difficult for some suppliers, especially small ones discouraged by the cost of computers and software supporting EDI. Martin thinks the cost of entry will subside as EDI capability moves onto the internet.

Petroleum is ahead of many industries in EDI implementation, Martin says. Bu it doesn't operate on the front edge of the trend. That distinction belongs to the automative and retail businesses.

The growth area for EDI technology is the internet, Martin says. And the next stage of EDI implementation will be in "new areas that we just never thought about," as technology highlights potential for automation and cost-saving.

In addition, petroleum will find itself adopting EDI and saving money in response to initiatives of other industries. A recently enacted federal law, for example, mandates EDI for health care.

The affected industry estimates it will save $4-10 billion/year by replacing 450 electronic forms with a single claims form under EDI. Some of those savings will ripple into the petroleum industry through the human resources offices of oil and gas companies.

Using EDI

Names of PIDX user groups and special projects show business functions in which EDI is in use and where the trend is headed in the petroleum industry. Here, from the PIDX internet site (www.pidx.com), is a list of user groups and descriptions of their applications:

Electronic Aviation Fuel Sales (Avnet), a joint effort by PIDX with the Air Transport Association of America on an application that will allow transmission and automated processing of aviation fuel sales documents between trading partners.
Check Stub and Royalty Payments Data Exchange (CDEX), which provides formatted data on oil and gas lease check stub details. CDEX provides for the direct transmission of royalty payment and remittance information from lease operators to owners.
Crude Oil Data Exchange (CODE), supporting exchange of crude oil and condensate run tickets, statements, and tank increments between producers and transporters.
Downstream EDI-including Petroleum Product Exchange (Petroex), which expedites collection of bill-of-lading and bulk custody transfer information on finished-product and intercompany transactions; Exchange Reconciliation System (Recon), providing an electronic means of obtaining information on unmatched exchange transactions on a contract and product basis; and Terminal Administration and Billing System (TABS), which provides credit and product authorization at exchange terminals while capturing bill-of-lading information.
Gas Revenue Accounting Data Exchange (Grade), designed to facilitate transmission of natural gas liquids and natural gas metered and allocated volumes, test data, and plant and lease settlement data.
Joint Interest Data Exchange (JIDX), including Authorization for Expenditures (AFEX), which supports AFE balloting and approval between operators and working interest owners; Joint Interest Billing Exchange, which exchanges joint interest bills and related detail between operators and working interest owners; and Well Operating Data Exchange (Wodex), which exchanges daily drilling and well operations reports between operators and working interest owners.
Joint Utility/Petroleum User Group (Jupug), a joint application with the Utility Industry Group (UIG) that defines data required for electronic invoicing and payment documents between petroleum, telecommunications, and electric utility companies. Although the Jupug group itself dissolved early last year, its work continues through UIG.
Material Safety Data Sheets (MSDS), an application that defines data required for electronic transmission of material safety data sheet information used by petroleum and chemical companies.
Pipeline Information (Pipenet), designed for transmission of product and crude oil pipeline data between pipeline companies, shippers, and refiners.
Purchasing and Materials Management (P&MM), providing information requirements for purchasing, inventory, logistics, and material control documents.
Regulatory Data Exchange (REGS), which serves as the focal point between the petroleum industry and federal and state agencies for royalty, production, and severance tax reporting.
Wellsite Information Transfer System (WITS), providing instructions and the format for transmitting real-time drilling parameters and information to joint interest partners.

Special projects

One of PIDX's special projects, the product of which went into use at the end of 1996, automates the tracking of third-party meter tickets by pipelines, oil companies, and suppliers.

Called the Third Party Ticket System (TPTS), it was developed by Harbinger Corp., an Atlanta EDI specialist, in partnership with API (Fig. 1 [114,980 bytes]).

The system automatically transfers documents on product requests and shipments between companies involved in the transactions. Harbinger estimates TPTS costs $3/ticket and says the cost to oil companies of chasing third-party tickets can exceed $70 apiece.

The system stores original meter-ticket information in a database, which among other things tracks product movements and trades among subscribers.

Another PIDX project with a self-descriptive title is the Common Industry Material Indentification Standards (Cimis) initiative.

PIDX worked with the Construction Industry Action Group and PVF Roundtable, a pipe industry group, to produce a list of common identifiers and standard descriptions for commodity materials used in maintenance, operations, construction, and original-equipment manufacturing activities.

Prior standardization attempts originated within specific industries. Cimis followed a consensus approach toward standards development and coordinated its work with national and global standards bodies.

In February 1997, after 4 years of work, it opened the Cimis Data Center in Houston.

Cimis kept product-description numbers consistent with bar code standards that use the Universal Product Code (UPC). Under Cimis, UPC numbers still identify a product by its manufacturer. The Cimis number identifies a product generically.

Priority products in the first years of Cimis operations have been carbon steel pipe, stainless steel pipe, oil country tubular goods, and carbon and stainless steel pipe and swage nipples, flanges, forged fittings, and buttweld fittings.

Cimis plans to expand its piping coverage then move into structural steel, fasteners, tubing, tube fittings, bearings, bulk electrical, belts, bushings, pumps, and electronic components.

Another PIDX special project is the Petroleum Industry Service Alliance (PISA), like TPTS a joint effort with Harbinger.

PISA will provide a "one-stop shop" for companies in the petroleum industry and service providers needing help implementing the PIDX Purchasing and Materials Management User Group 810 General Procurement Invoice.

"While speedy and cost-effective implementation of the 810 invoice is the primary goal of PISA," PIDX says, "the organization also seeks to make electronic commerce (EC) practices pervasive across the petroleum industry trading community by increasing EC transactions, adding trading partners, broadening the menu of implementation solutions (web EDI, EDI-to-fax, desktop EDI, etc.), developing an open technology base for future growth and change, and providing a help desk to ease the implementation process."

API's survey

API, through PIDX, tracks EDI implementation with an annual survey that began in 1996. It published results of the second and most recent servey last October, with results reflecting 1996 activity.

Respondents included 11 integrated oil companies, 43 suppliers, 10 producers, 3 refiners, 5 pipelines, and 12 other companies.

Of these, the 41 companies that responded to a question on the subject said they had used EDI for an average of 6.7 years. Integrated companies in this group had used EDI an average of 13.6 years, suppliers 5 years.

At least 85% of the survey respondents reported having implemented EDI, which led a list of 11 electronic commerce categories (Fig. 2 [118,022 bytes]). Respondents said that internal charges and unprepared trading partners were the biggest obstacles to implementatioin (Fig. 3 [128,801 bytes]). Implementation and plans varied by function among the various PIDX user groups (Fig. 4 [100,944 bytes], Fig. 5 [116,346 bytes], Fig. 6 [114,857 bytes], Fig. 7 [111,398 bytes], Fig. 8 [107,710 bytes]).

Asked about reasons for implementing EDI, integrated oil companies ranked "competitive advantage" and "reengineering processes" highest in importance, followed closely by "cost savings." Suppliers ranked "trading partner requirement" highest.

Based on 18 responses, the survey indicated that EDI users cut their overall error rates by an average of 85%-from a 10.6% error rate for paper documents to 1.6% for EDI for all functions. Error rates in purchasing were 11.7% for paper vs. 2.2% for EDI, in sales 14% for paper vs. 1.9% for EDI, and other functions 1.8% for paper vs. 0.1% for EDI.

The ultimate goal for EDI implementation in all functions, according to the survey, is an average of 76% of all documents. Companies indicated they use EDI for 35% of all documents now.

Sales was farthest along in implementation by this measure, with EDI in use for 45% of all documents against a goal of 75%. Other functions were next in EDI implementation at 40% of all documents against a goal of 67%. Purchasing implementation was 30%, with a goal of 78%.

Integrated oil companies are most aggressive among company types in use of trading partner agreements, with 36% of respondents always requiring them and 45% recommending them. Among suppliers, 25% always require trading partner agreements, and 35% recommend them.

Of 71 companies responding to the question, 65 said they had not yet sent any EDI transactions over the internet.

"As the electronic marketplace continues to display a rapidly increasing interest in conducting secure and reliable business over the internet," PIDX noted in its survey report, "we expect to see radical changes in responses to this question in the near future."