i On the Market: Refining the Supply Chain

The oil and gas industry is more than valves and tankers. It's a world unto itself, with facets as dirty as well shafts and as high-tech as interconnected worldwide operations. With newly greased wheels, it's also a world that is picking up speed toward...


[From iSource Business, October 2001] When it comes to consumer products, 2001 is a fairly disconnected time. Whereas our ancestors knew where their chicken dinner came from (usually the front yard), we are so far removed from the origins of our goods that it's as if they magically appear in our grocery stores or shopping malls. Unless you're of a philosophical bent, with some spare pondering time, you have probably never even considered the long journey most goods take to get from the source to your house.


Some goods are more disconnected than others, though. There may be a Made in Japan doorframe sticker that reminds you of your Accord's origin, but there's no way to signify that the premium you pump was drilled in Kazakhstan or refined in Houston. But the oil and gas industry is more than the local Gulp-n-Go. Its supply chain extends quite literally worldwide, with various levels of sophistication and data-gathering capabilities. In other words, it's a prime candidate for e-commerce efforts.


Baby Steps


Regardless of its uses for e-commerce, oil and gas is not exactly rushing headlong into e-sourcing efforts. Leif Eriksen, research director with AMR Research, says that the industry isn't a trailblazer. Part of the reason for this is the nature of the business. As Eriksen explains, there are two distinct sides to oil and gas upstream (exploration and production) and downstream (refining) and they operate in distinctly separate ways.


Further complicating things are the different aspects of direct and indirect procurement. As would be expected of a commodity, direct procurement is more of a trading activity than a traditional procurement one. As long as the specs are met, a supertanker of crude is a supertanker of crude, regardless of the supplier. The indirect spend doesn't have that level of commoditization. Pumps, drilling equipment and tankers, for example, all have large numbers of specifications, and can't be dealt with in the same manner as commodities are.


Accordingly, Eriksen says that indirect spend, particularly the upstream indirect spend, has seen a lot of e-commerce activity. If you look at it from the perspective of B2B marketplaces, several marketplaces, most prominently Trade-Ranger, PetroCosm, and NetworkOil, targeted the indirect space fairly early on. Unfortunately for major backer Chevron, PetroCosm has gone the way of many marketplaces, ringing down the final curtain. Of the others, NetworkOil is mainly handling surplus and used material, while Trade-Ranger is more of a consortium than a marketplace, with investment from all of the major oil companies except Chevron and Exxon Mobil. Eriksen says that, of the big oil companies, Exxon Mobil has yet to make a commitment to a marketplace.


Drilling for Dollars


Eriksen says the upstream side is growing faster, and will probably continue to grow faster, because of a very basic motivation it's where the money is. For a lot of companies, that's where they make their money. They don't make a lot of money off the refining business, or taking the oil and turning it into fuel products. If the revenue potential is greater on the upstream, then it follows that the potential for increased efficiency is also greater.


While money might be the major factor for the upstream focus, there's another, very viable reason. The upstream side lends itself more readily to collaboration efforts. When an industry is at its essence the discovery and removal of gooey black substances hidden deep in rock strata, operations of all sizes rise up in all kinds of places, doing everything from seismic exploration to sinking pipes hundreds of feet into the ground, even if that ground is itself hundreds of feet below the ocean's surface. Eriksen says, If you have exploration or production operations in a remote part of the world, such as Kazakhstan or even Indonesia, it's very difficult to do business with those countries with traditional communication mechanisms. If an installation can erect a satellite dish and begin uploading and downloading data worldwide, however, collaborative efforts become a lot easier to enable.

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