Fueling A Desired Change

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Fueling A Desired Change
Oil companies see little hope of rising prices, so they're finding new ways to profit

By Dan Richman
Issue date: Sept. 18, 1995

ith oil prices flat over the past year and unlikely to increase anytime soon, most energy companies have had to tighten their belts a little just to keep pace with inflation--and then a little more to stay profitable. Chief information officers have been tapped to help cut costs, beginning with their
own departments.

"We are very sensitive to price in both oil and natural gas, and that's reflected in our determination to cut costs wherever we can," says Donald Bennett, general manager of the information technology department at Texaco Inc. in Houston.

From the looks of things, the belt-tightening won't end anytime soon. "Nothing has happened to indicate prices will increase over the next two to three years, and organizations are having to examine how to maximize value in a world without escalating prices," says Ed Fikse, a managing partner for energy at Andersen Consulting in Chicago.

Companies are choosing various routes to cut costs, but energy companies on the leading edge of technology have some approaches in common. For one thing, Amoco, Chevron, Shell, Texaco, and others are continuing the trend toward reducing the use of expensive mainframes in favor of more cost-effective client-server computing.

Chevron decided at the end of 1994 to phase out mainframes in favor of a distributed environment featuring Microsoft Windows desktops and Unix and Windows NT servers, says Rose Taylor, general manager of planning and architecture for the company's IT division, Chevron Information Technology Co. in San Ramon, Calif. IBM VM applications will be moved to client-server within five years, and MVS applications within 10 years. "After that, we'll use the mainframes as servers," Taylor says.

As the mainframes go, so too must some of the applications running on them. Of the 25,000 Chevron employees who used the VM-based OfficeVision electronic-mail system, 16,000 have been moved to Microsoft Mail. The two systems can communicate with each other, but for greater uniformity, OfficeVision will be phased out along with VM.

Client-server groupware is slowly making its way throughout Chevron. About 4,500 of Chevron's 45,000 employees in 15 operating co mpanies now use Lotus Notes, linking U.S. facilities with those in Nigeria, Angola, and other countries. Some employees still use Share, a mainframe groupware product from Collabra Software Inc., but they're being moved over to Notes.

Like other companies, including Shell, Chevron has moved away from SAP America's mainframe-based R/2 accounting application to SAP's R/3, the client-server implementation of that product. "It makes much better use of resources without any apparent sacrifice in functionality," Taylor says.

During the last year, Chevron created a centralized Notes repository, accessible to all users, containing all the applications available to the Chevron companies. It also contains an "IT architecture" with the specifications, such as platforms and network and communications protocols, that are to be used on a standardized basis throughout the parent company.

Chevron Information Technology has reduced its internal costs by 20% over the past three years, thanks to those changes as wel l as attrition and outsourcing non-strategic IT functions, Taylor says.

Outsourcing is the single biggest cost-saver at Texaco, says Bennett. Among the functions that have been or soon will be outsourced: installing new LAN hardware and software, overseeing electronic data interchange (EDI) invoicing and bill payment, running the internal help desk, and even some telecom functions.

No More Custom Software
Also reducing costs is Texaco's use of off-the-shelf software instead of applications created on a custom basis by in-house developers, Bennett says. Growing numbers of such applications are coming onto the market, thanks to groups that help develop industrywide standards, such as the Petrotechnical Open Software Corp. (POSC). Cooperation comes about as oil companies realize that nothing is lost, and costs are saved, by sharing some applications.

"I doubt we'll ever see competing companies sharing software that gives them a competitive edge, like for seismic interpretation or refiner y control," says John Yurkanin, a principal in the oil and gas practice at EDS Management Consulting Services in Houston. "But for things every company has to do, like royalty accounting, everyone's anxious to reduce costs as much as possible, and standardized software is one way to do it."

About $5 billion annually could be saved by widespread sharing of applications throughout the oil industry, estimates Bill Miller, a partner in Andersen Consulting's energy practice in Houston. That's more than 40% of the $12 billion spent on information systems annually by the 25 biggest oil companies, according to Miller.

Bennett says to save additional money, Texaco has shut down mainframe-centric computing centers in four locations, leaving only its Tulsa, Okla., center still running.

Amoco, like Texaco, has been de-emphasizing in-house development in favor of off-the-shelf products, says Carl Williams, VP of IT. Amoco also has eliminated two of its three data processing centers, saving money by buying bigg er machines in the remaining center and offering access to its applications to Windows users over wide area networks.

Perhaps the most radical IT-related change this year took place at Shell Oil, where on Jan. 1 the former IT division of Shell Oil Co. became Shell Services Co. "Shell used to have three lines of business: oil products, chemicals, and exploration/production. Now, it has a fourth principal business: computer services," says Michael Sternesky, manager of business development for the new company.

Shell Services will compete with outside companies to sell software to other Shell divisions and maintain their current applications, Sternesky says. Most new development will be for client-server systems, though mainframe applications will be maintained and even enhanced. Shell Services will also sell software and services to companies other than Shell, including competitors. But only software that doesn't offer a competitive advantage will be sold to non-Shell companies.

"We can't estimate h ow much money this will save," Sternesky says. "But we believe that by being forced to operate at market prices, we will deliver cash flow and profits to Shell. Outsourcing is fine, but it only cuts costs, it doesn't generate profit. This way, instead of being a cost center, we'll be a profit center."

Though some analysts predict such transformations of IT departments into separate, competitive companies will grow, some oil companies are opting not to go that route.

"We thought about it, but chose not to go that way," says Chevron's Taylor. "For the moment, that's a more dramatic measure than we want to take."

All the hot trends in energy are likely to continue over the next few years, especially if oil prices stay flat. Energy companies will probably seek to increase their revenue by bumping up sales of "dry goods" (non-liquid products) at gas stations, and IT will play a big part in that, predicts Mark Pyatt, a marketing director for the EDS Energy Industry Group in Plano, Texas.

"When a cus tomer buys an oil company's gas, an oil filter, and oil, that scanned data could be fed into a database, and later might generate discount coupons to be mailed to that customer for future purchases of filters," Pyatt explains. Fewer than 10% of oil companies' retail outlets have the scanner devices necessary to compile that data, Pyatt says, but more will soon.

(To view the Energy chart in PDF format click here)

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