Internet's impact on the oil and gas industry: reality vs. hype

Stuart Diamond
CSC Index
Dallas

• Oil and Gas Internet Opportunities [42608 bytes]

The oil and gas industry is taking a tentative, wary stance regarding the Internet. Many executives are skeptical about the Internet's relevance to oil and gas, and those who are pursuing Web strategies are, for the most part, simply auto- mating manual procedures or re-automating tasks over the Internet with little to show in the way of business benefits. -- Stuart Diamond

This divergence is apparent in a recent issue of Wired magazine.

Amidst the enthusiastic articles heralding a new digital age, an advertisement from Lotus Development, the software company, said: "From a capitalist point of view, the Internet has had about as much impact as the $2 bill."

My firm decided to see what specific impact, if any, the Internet is having on the oil and gas industry. Our research consisted of in-person and telephone interviews at 14 companies, including diversified oil and gas companies, petrochemical firms, and oil field service/supply companies.

We supplemented our interviews with data from our firm's research and advisory service, as well as extensive literature searches. In addition, we visited industry websites to analyze how oil and gas companies are creating an Internet presence.

Our main conclusion: The oil and gas industry is taking a tentative, wary stance regarding the Internet. Many executives are skeptical about the Internet's relevance to oil and gas, and those who are pursuing Web strategies are, for the most part, simply automating manual procedures or re-automating tasks over the Internet with little to show in the way of business benefits.

Most of the firms we interviewed have websites, but the content tends to be recycling of existing printed literature, such as annual reports and product specifications.

Industry's Internet wariness

Despite the reality and power of the Internet, few oil and gas companies are fundamentally re-thinking how they conduct business and what opportunities are available through this new medium.

On the other hand, there is wide general use of Intranet applications-that is, networks that operate solely within an organization-for dispensing benefits information and employee communications. While these applications are interesting, most companies are squandering their limited resources on non-strategic uses, such as posting cafeteria menus and intramural softball scores.

Overall, then, the industry has maintained a low level of investment and experimentation. Furthermore, none of the companies in our research had a unified, cohesive vision of how the Internet will change its business.

Yet the enormous potential of the Internet, in our view, is tangible and immediate. Dell Computer is selling more than $1 million/day of computers from its website. Amazon.com has reinvented the economics of book retailing with its online bookstore. Online brokerage services, such as eTrade and Lombard, are experiencing explosive growth. Oil and gas firms will have to do more to understand and grasp this potential.

Industry views

The executives with whom we spoke were typically chief information officers, heads of strategy, and other senior executives.

The interviews were conducted in late 1996 and early 1997. Three groups emerged from the executives we interviewed:

• Members of the first group, the sideline skeptics, have either taken no action or very limited steps.

• The second group, the cautious experimenters, have a "try a little, wait a little" attitude. While they accept the Internet's potential and have made some low-scale investments, they are holding off any significant strategic moves.

• The third group, the early adopters, have gone further in establishing an Internet presence but are stopping short of a full thrust. They are providing some information to customers and suppliers, as well as developing Intranet applications.

Sideline skeptics

Executives of the sideline skeptics group are candid about their lack of enthusiasm.

"When it comes to the Internet, oil and gas is behind the rest of the world," said the vice-president, information technology, of a refining/marketing company. "Senior management sees the Internet as a waste of money and does not see how it relates to the oil and gas business." This executive adds, "Senior management fears the Internet because employees will just play on it."

In another interview, the director of information technology at a motor oil products company doubted that the Internet has relevance for oil and gas firms.

Similarly, the chief financial officer of the chemicals division of a petroleum company said, "I have difficulty in seeing how the Internet could be used for marketing purposes for a large, commodity chemical business such as ours. Maybe it has some potential for specialty and consumer products."

One executive commented on another oil company's Web page: "I think 90% of the hits comes from employees, and the other 10% comes from their competitors."

One survey participant, a major petrochemical firm, said it had surveyed its top 50 customers as to their Internet presence. One-third had a presence on the Internet, but two-thirds did not.

Cautious experimenters

The second group, the cautious experimenters, have made low-level investments in the Internet.

Typically, they have established a home page for public access and are using Intranet systems to distribute medical forms and internal communications. Yet, for the most part, they are restrained in their commitments until they are convinced that the Internet is truly a commercial medium.

Several of the major oil and gas companies provide information about their racing teams, along with downloadable photographs of cars and information about company-sponsored drivers and teams. Another company uses the site to introduce information about new products, such as a replacement for freon in auto air conditioners, along with usage guidelines and locations of the nearest dealer that can install the replacement system. Several companies have similar guides to service station locations on their websites, along with the ability to apply for a credit card.

Another cautious experimenter is a vertically-integrated oil company that is focused on Intranet applications. The company is getting its human resources department online for such activities as inquiring about insurance beneficiaries and checking on outstanding vacation days. This firm also plans to move all of its corporate travel bookings online with its travel agency. The company's Intranet has many other features, such as an internal phone directory, job postings, IT help desk, and employee-sponsored events.

Yet the focus at this company is almost entirely on Intranet applications. When asked if the company plans to link with customers for order placement and other transactions, a senior IT executive replied, "No, we're a long way from that."

One theme that recurred in our interviews was the need for support from senior management for Internet initiatives. This was usually expressed in terms such as, "We need buy-in from the top before we spend any kind of money on this."

Until that support is forthcoming, it is doubtful that the industry will go much further with the Internet.

Sometimes it takes imagination to get the attention of senior management.

At one company, the IT department demonstrated to the CEO how he could communicate via e-mail over the Internet with his son at college. Once the CEO experienced the power and saw the possibilities of this new medium, he became the driving force behind the introduction of the Internet at his company.

This senior-level enthusiasm and sponsorship is precisely what is needed for oil and gas companies to harness the power of the Internet for competitive advantage.

Early adopters

The third group in our research, the early adopters, are ahead of their industry peers, although behind the pace set by innovators in other industries.

An example of this group is an oil field supply company that has established an Intranet presence for sales and marketing. The company maintains a database of 300 drilling products, which contains a photo of the product (e.g., a drill bit), specifications, and bit performance data. The company also has plans to offer customers technical information, such as worldwide bit selection based on drilling and soil conditions.

Another company in our research did what we are advocating: It re-thought the way it provides customer service, given the realities of the Internet. This firm replaced many of its telephone-based customer service representatives, who dealt with customer inquiries via an 800 number, with e-mail and Internet contact. This company found that it is actually better able to serve its worldwide customer base over the Internet than it was through conventional means.

Not only has its customer satisfaction increased, but overall customer service costs have decreased.

New plans include online pricing information, order placement, order inquiry and tracking, payment information, and other transaction-oriented applications.

Another example of an innovator is a petrochemical firm that is building a plant in China. Rather than installing and managing a conventional long-distance telephone infrastructure, such as a LAN (local-area network) or WAN (wide-area network), the company is simply providing employees in China with modems so they can communicate with the home office via the Internet.

Interestingly, one of the main obstacles to providing customers with similar Internet access was that the companies themselves could not readily get information about their customers. Internal systems were in such a state, due to age and/or design, that navigating through them was difficult enough for someone from the inside, not to mention an external user.

One executive, the director of information technology, said that although his company isn't pursuing Internet connections with customers, it is using electronic data interchange (EDI) for business-to-business commerce.

"I'm unsure as to how the Internet is different from today's EDI," he said.

In the view of CSC Index, EDI will be embedded within the Internet. The Internet will be the communications backbone for all business transactions, and data will move through secure, high-speed Internet bandwidth at a tiny fraction of the cost that it is currently transmitted through slow, dedicated telephone lines.

While EDI interfaces at either end of the transaction will appear to users much as they do now, the way transaction data are routed to their destination is undergoing dramatic change.

Lessons from other industries

It is understandable that the majority of oil and gas firms are taking a skeptical attitude towards the Internet.

But there is a big difference between a "wait-and-see" attitude, that stays well-informed and ready to take action, and a "head-in-the-sand" attitude that ignores the emergence of electronic commerce.

The lessons from industries other than oil and gas demonstrate that, when leveraged intelligently, the Internet can provide real, tangible advantages in cutting cycle time, reducing transaction costs, and other strategic measures.

For example, General Electric Co. has launched a website for purchasing industrial products. Since its inception in January, the site has logged $350 million worth of industrial products. GE divisions can electronically send out bids and requests for quotes to thousands of suppliers that can respond over the Internet.

In addition to saving time and paperwork, the system also is an economical way to expand GE's universe of suppliers. In one instance, GE contracted with a Hungarian supplier to provide machinery for a GE Lighting factory in Cleveland, with savings of 20%.

The GE system has been so successful for internal use that the company is now reselling the technology to other companies that want to establish Internet purchasing systems. Textron Automotive is using a similar system to purchase raw materials.

The Internet changes the rules of the game. It lowers barriers to entry and increases the chances that you will be taken by surprise by someone from outside your industry.

A start-up called Security First Network Bank has defined a revolutionary model for the banking industry. A $41 million institution, Security First is an online banking service that requires no bricks-and-mortar branches. Its costs per transaction have been slashed from $1 for a typical teller transaction to 2¢ or less for an Internet transaction. More than 1,100 accounts in 42 states have been opened within the first 2 months of operation.

A framework for the future

The time is now for oil and gas firms to be preparing Internet strategies.

In fact, Internet opportunities are emerging across the entire oil and gas value chain (see chart, p. 25).

The point must be emphasized: There is a systematic, coherent process for preparing an Internet strategy. This process requires asking tough, searching questions about a company's strategy, operations, technology, and its "organizational agility"-that is, the willingness and ability of its culture to implement fast-paced change.

Of course, every individual company must chart and navigate its own distinctive course through the Internet seas. However, my firm has developed these guideposts for the development of Internet strategies:

• It's here. The "emerging" technologies of the Internet have already emerged. Naturally there is turbulence as new browsers and protocols vie for acceptance as standards. Technical people will debate these competing standards endlessly, and each camp will be insistent on its superiority. But the core technologies are in place-and technology alone is no excuse for further delay in implementing an Internet strategy. The job of management is to make decisions about which technological standards to introduce and then get on with business.

• Think big. Internet capabilities mean that technology can be leveraged with much less capital than in the past. As a result, you shouldn't be satisfied with incremental gains-in fact, those are likely to squander the potential of electronic commerce. Instead, companies should aim for quantum improvements of 50% or more in such critical measurements as faster cycle time, quality improvement, sales volume, and customer satisfaction.

• Watch your back. The new infrastructure lowers the barriers to entry. It isn't clear yet how this will play out in the oil and gas industry. But the only guarantee is that someone, somewhere, is trying to figure out at this moment how to carve chunks out of your hide by using Internet technologies to create a new business model. The imperative for you is to figure it out and introduce it before he or she does.

• Seek ways to leapfrog middlemen. A crucial concept of the Internet is conveyed by the term "disintermediation." There are big gains for those who can use new technologies to establish direct contact with your ultimate customers-and shake the middlemen out of the system.

• Get smart fast. You need to have a team within your organization whose primary responsibility is charting the Internet and seeking ways to leverage it for your company. This is too big a job to be tacked on to someone's conventional MIS or IT responsibilities. Use alliances to augment your capabilities and accelerate your pace. If necessary, bring in outsiders to provide key technological and strategic savvy.

• Place your bets. Focus, then move in the face of ambiguity.

• Mobilize for change. To remain competitive, oil and gas firms must foster an agile culture that encourages the adoption and implementation of new technologies.

Conclusion

There was skepticism about the first personal computers in the early 1980s.

Now it would be unthinkable to find a business that doesn't run its day-to-day business on PCs.

So it will be with the Internet, especially as telecommunications bandwidth increases.

Certainly, much of the hype surrounding the Internet is unsound. But electronic commerce is here to stay, and astute management of oil and gas companies will be poised to seize its potential to reinvent how they do business.

The Author