E-commerce applications for the upstream petroleum industry

The race for competitive advantage

Nov 1st, 1999

E-commerce (electronic commerce) is getting a lot of attention these days as a way to sell to consumers, but the bigger opportunity for Internet transactions is between businesses. The energy industry is on the cusp of the e-commerce revolution. The Internet is already facilitating transactions in deregulated utilities, energy futures, and environmental credits, but the potential for e-commerce extends beyond the purely financial realm.

From buying drill bits online to negotiating for engineering services such as logging or seismic data acquisition, e-commerce can help companies reduce risk, lower capital requirements, and move more quickly than their competitors. Cisco CEO John Chambers says that in the Internet age, the "fast will beat the slow, rather than the big will beat the small." In the energy industry, where size has always been a major determinant of success, accelerating business decisions and processes will become a new and challenging criterion.

Knowledge a constant

One driving force remains unchanged: the industry's dependence on knowledge, whether it is hard geologic data or the inferences that can be drawn from available information. For example, visionaries knew that there was oil to be found in East Texas, long before Spindletop. Technology has expanded the industry's knowledge and its ability to exploit available data, from 3D seismic exploration to enhanced satellite imagery.

Strategic use of the Internet can give the industry another leap forward in knowledge management. Just as seismic technology creates virtual views under the earth's crust, e-commerce tools can give an organization a virtual look into its assets, customers, suppliers, and partners.

What will electronic commerce look like in the oil industry? How can operators and suppliers communicate and conduct transactions via the Web?

Possible applications

Here are a handful of upstream and downstream applications that are under development or may soon become reality if today's industry leaders exercise the same vision that past leaders did and dramatically reduce cycle times and indirect costs:

  • Oilfield equipment forum: We may soon see an online forum linking operators and suppliers. No more chasing rigs. Operators will be able to request the supplies and services they're looking for, and suppliers can post their complete suite of products and services online, extending their offerings to operators immediately and consistently.
  • Online logistics: The Internet provides a more direct line of communication between buyers and sellers, and resources can be more appropriately allocated when suppliers are plugged into where the greatest needs are and can anticipate upcoming project specifications. By enabling operators to securely post profile information about an upcoming project, e-commerce can facilitate the direct delivery of materials from suppliers' sites.
  • Electronic payment processing: Many companies are already implementing electronic data interchange (EDI) transactions and electronic authorization forms to handle billing and payments more efficiently than their paper-based predecessors, and more and more of these transactions are being handled in secure Web-based environments instead of direct modem links. Likewise, invoices and job service records can be transmitted electronically, prompting the generation of purchase orders that are automatically incorporated into existing electronic resource planning (ERP) systems.
  • E-procurement: Beyond electronic processing, electronic procurement systems can put a catalog of pre-approved suppliers' items at the fingertips of the end users. The system, already being implemented in the industry, stores user profiles and automatically limits purchases to appropriate authorization levels.
  • Property auctioning: With the first online auction of oil and gas properties held in October, the Internet is enabling complete real estate transactions. Sellers post proper-ties for sale, qualify auction participants based on their proven knowledge of and participation in the industry, and specify the period during which bids will be accepted. Potential buyers are able to register, view and download well files, and submit bids online.
  • Electronic scheduling: Watch for the availability of online calendars dedicated to matching operators' requirements to suppliers' availability. An operator can see when a particular service company is available, set up the job, and receive electronic confirmation, all before going to the operating site.
  • Inventory management: The Internet brings the concept of just-in-time delivery to its fullest potential. Automatic ordering can direct shipment of products with short shelf lives directly from the supplier to the site to minimize internal transport issues and inventory levels.
  • Asset management: In an electronic environment where suppliers gain insight into operators' needs, suppliers can manage their assets more strategically. Given this bigger-picture view and the ability to foresee where the greatest opportunities are, suppliers can concentrate equipment and resources where they are needed and reduce costs associated with stagnant assets and unused inventories.

Bottom line results

Ultimately, the goal of any technological enhancement must be to improve business processes for a benefit to the bottom line. The extensive supply chain integral to the oil and gas industry makes efficiencies - both in communication and delivery - challenging.

Leveraging the Internet is an effective way to address these challenges and strengthen the relationships between operators and suppliers. In a hyper-competitive market where oil prices fluctuate frequently, decreasing the cost of procurement and reducing cycle times are ongoing objectives met in part by an effective e-commerce strategy.

The oil and gas industry has historically led the development and maturation of emerging technologies and approaches to business. Competitive advantage in the next three years will belong to those who not only recognize the possibilities presented by the Internet, but embrace the entrepreneurial spirit inherent in the exploration and production industry.

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