Sept. 11, 2000

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Information: The Most Valuable Asset

IT is critical for energy companies that want to expand their reach

By Jeff Sweat

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ohn D. Rockefeller personified the principle that drove the energy industry throughout the last century: Control the physical assets--the oil, the gas--and you control the industry. His 21st-century successors in the energy business, though, are rewriting that principle. It no longer matters so much who controls the assets--it's controlling information that counts.

"The value of the information about an asset is more important than the asset itself," says Richard Ross, CIO of Amerada Hess Inc., a $7 billion petroleum company in New York. To Amerada Hess--which has almost 50 E-business projects under way, compared with a handful six months ago--that means data about consumers, distribution, fuel deposits, even risk positions. The information becomes currency as valuable as crude oil, but easier to move.

The focus on information makes IT suddenly critical in an industry perceived as stodgy and low-tech. IT has long been valued in obvious ways, such as providing three-dimensional modeling that helps oil companies discover underground oil deposits, or enterprise applications that manage the refining and distribution of fuel.

But IT and the information it drives are making it possible for energy companies to expand their reach into remote pockets of the world, to understand the consumers that buy their products, and to align their supply chains and procurement efforts with partners. IT represents the chance for energy companies to transform themselves into something that barely resembles an energy company.

The physical assets that once helped energy companies dominate the economy are almost a liability in the new economy. A company tied solely to physical assets such as massive reserves of oil or natural gas can't move quickly enough in an economy where reaction times need to be immediate. So the old-line oil companies use their physical wealth as a foundation for other services and products. "It increases the asset liquidity and you can move faster when you can exchange information about energy," Ross says.

Amerada Hess, for example, has more than $1 billion in oil inventory. The company can take that into the market and use it to help buy other services. When it sells a large shipment of oil, it can also bundle in options against alternative energy projects to hedge against drastic changes in supply.

The most extreme example of an energy company stepping away from the physical is Enron Corp., which has as a commodity. With that model, customers need never physically receive the oil or gas; they can buy or sell according to market fluctuations, much as a commodities trader would deal with pork bellies. Amerada Hess is pursuing a similar model. Although it hasn't yet set up a commodity exchange, Amerada Hess has built all of its applications and networks on an Internet architecture so it's simpler to tie in partners and customers.

It isn't only information about oil and risk that interests Ross; he also tries to hone in on customer data. Energy companies' interactions with customers used to be filtered through a network of distributors and retailers. But with the rise of the Internet and more direct selling models, they now have an opportunity to connect directly with customers. "The Internet opens up whole new channels to individuals," Ross says, "but we have to know who those customers are."

Amerada Hess invests in customer-acquisition and customer-relationship management technology that will help it segment its customer base to target specific prospects with marketing offers. It's considering sales-force automation, data mart, and analytic packages to acquire, but probably won't adopt a big CRM package like Siebel Systems Inc.'s eBusiness 2000. That kind of package is too complex and all-encompassing, Ross says, for CRM needs that will evolve as the energy market evolves.

Not all energy companies are concerned about CRM, which is in an early-adoption phase in the market. CRM isn't much of a factor in the exploration and distribution of oil products, so not surprisingly the companies most interested in it are those with large retail gasoline sales. Other companies beginning to implement CRM include those that sell fuel and services to other businesses.

The energy industry isn't only trying to understand its customers, but also to get a better sense of energy consumption. "They're trying to see how demand is spread out from location to location, which will help them figure out how to meet needs," says Leif Eriksen, an analyst at AMR Research. By learning what customers want, companies can alter the refining processes to get a particular product to a particular customer. "There's a fixed number of products you can make in this business," Eriksen says. "You can change the timing and production of delivery of the product."

For some energy companies, the move to CRM packages isn't driven by market pressure or an increased need for customer satisfaction. Rather, CRM is an IT tool to consolidate customer-management systems flung across different departments and regions. Schlumberger Ltd., an $8.40 billion oil services company in New York, recently adopted Siebel's eBusiness suite to replace a wide spectrum of customer-management tools--sales-force-automation packages, Web sites, and directory-assistance applications--that dotted the company.

These grew organically in response to local needs, but they don't serve a company that's trying to share information globally. "Fragmented solutions don't let you benefit from your customer data," says Guillermo Arango, Schlumberger's IT sourcing manager. "With integrated solutions, regions can exchange more customer information."

Global information exchange may be the single most pressing demand for IT in energy companies. Oil exploration and production stretch a company's geographic limits; large oil companies can have exploration or drilling projects running simultaneously in West Africa, Brazil, and Thailand. The people running those projects need to collaborate with employees in the corporate office, as well as at other locations throughout Europe and Asia.

The first obstacle that must be overcome before those dispersed groups can collaborate is to establish a communications infrastructure--not just a virtual private network, but an actual telecommunications and Internet infrastructure. "One challenge is to be sure that we have the bandwidth in place that will let us do more collaboration," says Gene Batchelder, CIO at Phillips Petroleum Co., a $13.8 billion oil company in Bartlesville, Okla. Many of the poorer, more remote countries have almost nothing in the way of IT, so an energy company wanting to do business there has to build its own infrastructure--everything short of actually laying phone cables.

Remote countries also lack staff with the IT skills to support a full-blown exploration project. To minimize the resources needed, Texaco Inc. standardized on technology from global IT vendors: Microsoft applications and operating systems, Dell hardware, Concert telecommunications, and IBM services.

With the infrastructure in place, many techno-savvy energy companies have begun to collaborate globally. The Internet makes possible interactions that were unthinkable or unaffordable just a few years ago. Energy companies were limited by the cost of deploying clients and networks that could handle any form of collaboration, but the Internet provides real-time connections and a desktop client that is, in most cases, free.

Phillips Petroleum has set up a Web site where regional offices, as well as business partners, can share information about projects. If a crew in Australia has uncovered seismic data that will help a team in the United States plan a run on a major gas deposit that Phillips is exploring, they can share that data on the Web site.

Meanwhile, a business partner supplying the drilling equipment can access the same data to ensure it has equipment appropriate for the ground that has to be drilled. Because the site is open to partners, however, Phillips has to make sure that it has security and authentication built into the collaboration process. Collaboration lets people work together who would have previously worked in isolation, unable to share their skills and knowledge. "We have people working together for the first time," Batchelder says. "The sooner you can find ways of doing business with each other, the better."

While the Internet provides the foundation for knowledge management, energy companies are looking for more. "If you want to leverage skills across all of your global projects, you have to have collaboration tools," says Rick Diaz, CIO of Texaco, in White Plains, N.Y. Although the $35.7 billion company uses Web sites to collaborate, it builds on Microsoft Outlook and Explorer for even stronger capabilities. Texaco is testing a collaboration product from TeamSpace which will facilitate joint collaboration with features such as project collaboration, document management, shared calendars, event planning, and issue management.

Collaboration between partners and suppliers feeds naturally into another IT trend sweeping the energy industry: business-to-business marketplaces. A number of exchanges have sprung up, including Petrocosm, a joint venture of Chevron, Texaco, and Ariba Inc.; and an unnamed 14-company exchange with participants such as Shell-BP and Phillips Petroleum.

IT energy executives imagine a number of uses for the exchanges, but the initial targets are the obvious ones: procurement, buying, and selling. The energy industry could benefit, as any industry can, with improved efficiency and less inventory. But exchanges make sense, in particular, for the oil business, which is capital intensive and has standardized on back-office applications from either Oracle or SAP. "We're basically working with similar environments and subsets of suppliers,'' says Phillips' Batchelder. "It makes more sense to cooperate, instead of acting separately."

But not all of the energy companies are sold on the idea of exchanges. Despite Phillips' involvement with the Shell exchange, Batchelder is withholding an unqualified endorsement of the exchange concept. "It's a great theory, but it'll have to prove itself," he says.

Some execs say that energy exchanges may be difficult to pull off because they require a tremendous amount of knowledge about the business and about physical assets. And microexchanges where only a few companies are involved won't generate that kind of knowledge. "Those exchanges are going to be a lot more difficult to pull off, unless you get a huge participation by most of the industry," says Randy Lair, CIO of Koch Industries Inc., a $33 billion, privately held Wichita, Kan., refining and distribution company that's evaluating a number of exchanges. "You can't have an exchange with just two companies."

Others are even less enthusiastic, especially in those parts of the industry that tend to sell services rather than commodities. "In the service domain, there's no clear evidence that the exchange model will work," says Schlumberger's Arango. "Those services tend to be customized." For example, if a client with an oil well in a remote country shops around for somebody to help it make the well productive, it wouldn't likely search an exchange for the provider with the lowest cost. Instead, it would look for someone who could actually get the job done, who knows the country and the issues involved.

The energy marketplaces may evolve to a model that offers more customization and services; in fact, suppliers may soon be required to offer those in addition to goods. For example, Texaco is participating as a provider in an exchange for the lubricants market. In that exchange, a supplier not only sells products, but offers the logistics and shipping services necessary to get the products to a buyer and in place. Texaco's Diaz expects logistics and shipping services to emerge in Petrocosm as well when that exchange is fully formed. "When you commoditize products, you lose the value that you used to get from the supplier," he says. "What you want is a partnership with your provider."

Today, these marketplaces focus only on exchanging goods. But they could prepare the industry for something deeper--sharing ideas, production strategies, and business plans. That's where exchanges will truly become useful. "The exchanges aren't there yet, but they'll provide the infrastructure to make the strategic stuff possible," Batchelder says.

The energy industry is on the cusp of a transformation--and when it's over, the companies that survive won't resemble the companies they were five years ago. They won't be energy companies because of what they sell. They'll be energy companies because of how they move.

Illustration by Jeffrey Fisher
Photograph by Edward Santalone

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