i On the Market: Refining the Supply Chain

[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.


Kendra Martin, chief information officer for the American Petroleum Institute, agrees with Eriksen's views on collaboration, but she goes on to point out that when dealing with the ultra-long supply chain of oil and gas, technological borders are just as intimidating as physical borders. While a corporate office in America might have as many T1 connections as it does M&M's in the break room, that's probably not the case with the field offices out breathing dust and slogging through swamps. She says, Where we like to take every opportunity to avail ourselves of knowledge management systems and collaborative design tools, we have to make sure that the lowest common denominator includes the ability to use a Blackberry in South America, or a handheld, or portable telecom ability.


A Drill Bit and a Mouse


Martin goes on to say that, despite the down and dirty image oil and gas might have, the people in the field have been more receptive to e-commerce activities than workers in other industries. The reason for this acceptance is that underneath the grimy image lies a very high-tech industry. Steel pumps, pipes and tankers might do the physical moving of oil, but it's computers and electrons that manage the oil, a fact that explains the seemingly contradictory high-tech underpinnings of the oil and gas industry. Martin  explains, The guys sitting on a platform in deep water are also using a lot of tools to communicate back to headquarters or with their geologists or their businesspeople. So there's a lot more acceptance in a field environment in our industry than maybe in others because they are used to, and can see the value of, some of the cost efficiencies and time resources they can save with this stuff.


Eriksen gives an example of one way companies can benefit from enabling their supply chain. He says that technology from such companies as Manugistics and Aspen Technology forecast demand and better execute deliveries to retail outlets. If a service station is well-stocked with premium but low on regular, that data can be relayed to a facility that then trucks only regular to that particular station. As you can imagine, managing these needs is an incredibly complicated task. Eriksen says, The product leaves the refinery, generally by pipeline to a terminal. From the terminal, individual trucks come and lift' that fuel, which then is delivered to various retail outlets.


According to Eriksen, it's in the lifting stage that optimization tools can be very effective. In most cases, you don't have very good information on real-time demand at the pump, because even though the demand for fuel is relatively inelastic and doesn't change much with economic conditions it changes with the seasons, but that's fairly predictable what does change is the individual demand at any specific pump, any specific station. That's where it gets complicated. How do you manage that efficiently? It can be a nightmare.


What Can You Do For Me?


According to Eriksen, the oil industry's adoption of marketplaces has been tempered somewhat by the same concerns as other industries will the marketplace interfere with the relationships companies have with each other, but without adding any value, and will adoption of marketplaces necessitate the duplication of effort? If two companies have a long-standing relationship with each other, and the marketplace is just another communication layer to be dealt with, what's the point? And if there are a number of marketplaces, how does a company know which ones to work with? Eriksen says that Web skittishness has lead one entity, OFS (Oil Field Services) Portal to stress that it is not an exchange. The OFS Portal has gone to great lengths to emphasize that it's not an exchange or a marketplace. They don't plan to host any transactions. It's simply a portal in which they will make available the content of all the members in a standardized form.


Language Barrier


Like other industries, the oil and gas industry has struggled to establish standards for electronic commerce. However, unlike other industries that might just have to get Company X in Ohio to make sure its legacy systems can talk to Company Y's in South Carolina, the oil and gas industry must do the same for Company X in Dallas and Company Y in Saudi Arabia.


Eriksen says oil and gas has lagged behind such sectors as electronics and chemicals in this area. Luckily, help is on the way. There is a standards-making body in the petroleum industry, called PIDX the Petroleum Industry Data Exchange and it is meeting with the intention of trying to put standards together. It is working with the marketplaces as well as the individual companies and suppliers, but it hasn't moved that quickly.


Martin agrees that settling on standards is an important issue that has to be resolved before e-commerce reaches its full potential in the oil and gas industry. She says, I think the big focus right now is on complex services and e-catalogs in general. You can't do catalogs without some agreement around how we provide some commonality, because if not, you'll just have to use everybody's portal, and that defeats the whole purpose of e-commerce.


Fueling the Future


What does the future hold for the enabled supply chain in oil and gas? According to Martin, if the technical issues establishing the infrastructure, setting standards, etc. are overcome, collaboration will increase and evolve, and possibly in ways no one is currently imagining. She says, If you can bring people onto projects and off projects seamlessly, then things like workflow and design will probably take off, and we'll think of all kinds of things that have never occurred to us.

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