DRILLING & PRODUCTION

"Good old boy" oilfield in an e-commerce world

One overwhelming fact of modern business is that the proverbial ".com" is here to stay. The recent American phenomenon - football's Super Bowl - was a testament to that fact. Advertising commercials bombarded the television audience with enough ".com's" to saturate the most ardent internet user. The craze has even led to the latest fad in everyday life, where anyone can register any people, place, or thing as they see fit. Its enough ".com's" to make you want to digitize yourself and disappear into the digital world. Unfortunately, your new address would have a ".com" at the end of it.

Even the "good old boy" oil and gas industry can't to escape the mania. All of us are now aware of the plethora of web sites where information can be found on just about any product or service offered. This starts the first wave of ".coms". The next wave arrives under the guise of what is currently the hottest business topic in the oil and gas industry - e-commerce.

E-commerce, like knowledge management before it, seems to be all things to all people. Start-up companies, large service providers, and even oil and gas producers are lining up to define the playing field, ground rules, and support structure for the form that upstream oil and gas industry e-commerce functions will take.

Confirmation of the industry's craze for this new business capability was evident at the early February North American Prospect Expo in Houston. At least 14 oil industry focused internet-startup companies were represented, all boasting some form of e-commerce capability. This is 14 more than last year, signaling a change in the way the upstream petroleum industry wants to do business.

Niche areas such as equipment procurement, oil and gas lease transactions, on-line auctions, corporate accounting, and other functions are already established, each residing in the World Wide Web as a separate entity. There are two important challenges ahead for e-commerce.

• E-confusion: There is a degree of misconception surrounding e-commerce in the industry. Most people think e-commerce is just a simple switch from exchanging paper in business transactions to exchanging digital bits of information for the same transactions. Fundamentally, this may be true, but there is a great deal going on "behind the scenes" in cyberspace that makes e-commerce happen.

The popular approach for facilitating e-commerce is to create "communities" in the World Wide Web. As they exist today, communities can be based on a single company, distinct business functions such as purchasing, accounts-payable, and other functions, or represent separate, distinct product/service lines. It appears that every company involved in the oil and gas upstream industry is creating its own "intra-community," preparing for the final jump to a more industry wide e-commerce environment.

• E-reality: E-commerce will reach critical mass with the participation of more intra-communities. At some point in time, a centrally positioned, neutral community has to rise to the forefront and serve as an "inter-connection" for the various "intra-communities" residing in the World Wide Web. This central entity provides secure conduit for the transfer of information and knowledge. That distinguished position is the biggest plum on the e-commerce tree. No company, as of yet, has attempted to reach this lofty position.

This brings up a key areas of concern for oil and gas companies - information security. It is the common denominator for making e-commerce function to full potential. In the oil and gas industry, this is a risk not easily accepted by industry participants. For e-commerce to work, a comfort zone surrounding the security issue will have to evolve. Building it will not be easy. Everyone waits for the other guy to try it first. The playing field is still being defined, and the next few months should yield some indication how the industry will transform to accommodate an e-commerce environment.

Invest in barite, now

It is a logical assumption: as drilling activity decreases, the demand for drilling fluid chemicals and additives will drop. The recent downturn in the industry has been no exception.

Factors further reducing industry demand for barite (or barytes), a principle drilling fluid ingrediant, like more efficient exploration, reservoir development, and production methods, have decreased the number of wells required to drain reservoirs effectively. The increased use of oil-based and synthetic-based fluids has also decreased the total barite demand per well.

The worldwide drilling industry accounts for 85% of the world's barite consumption. The recent "Economics of Barytes" study authored by Roskill Information Services Ltd in London, England has estimated three companies account for 84% of world drilling fluid sales. They are M-I LLC, with 42% of the market, Baroid Drilling Fluids, with 28%, and Baker Hughes Inteq, with 14%.

China is the largest exporter of bulk barite. In the time period from 1985 to the end of 1998, China realized a 39% increase in barite output. The 1998 output of 3.3 million tons accounted for 55% of the world market. Other countries such as the CIS, India, Mexico, Morocco, Turkey, and the US accounted for 26%, with the remainder being supplied by 30 other countries.

China's production increase was in direct contrast to the downward trend in worldwide demand over the same time period, implying that other exporters absorbed the lion's share of the reductions in demand. This 35% reduction in worldwide barite demand since the early 1980s, and the shift of market share to China, created a loss of North American barite production capability.

North American barite mining companies could not keep pace with the cheaper China-produced barite and failed financially, which does not bode well for North America. The reduction in production capability will potentially pressure prices upward, once an upturn in drilling activity begins.

Most long-term future projections are indicating a significant increase in the number of active drilling rigs. Mud weighting materials like barite, are expected to see a comparable 20% increase in oil and gas industry barite consumption. Prices will in no doubt follow, with an estimated jump from $40-45/ton up to $50-55/ton cif range in the Gulf of Mexico region.