Table of Contents

Vol. 6, No. 1
1st Quarter 2000

e-Commerce: What Can It Do For The Independent Oil and Gas Producer?
by Karl Lang, Hart Energy Publications

The last six months have seen the launch of more than a dozen new Internet sites, many of which plan to become the “premier e-commerce marketplace” for oilfield goods and services. What can e-commerce do for the smaller exploration and production (E&P) enterprise? Not as much as some people may have hoped for by now, but within the next six to twelve months that will certainly change.

The initial benefits of e-commerce to smaller producers and service/supply companies will be to provide them with the ability to:

• Communicate more effectively, quicker, and using fewer resources, during the bidding and procurement process
• Take advantage of productivity-improving tools that previously were beyond the budgets of many small companies
• Gain access to customers and markets that previously were not accessible for geographic reasons
• Manage the flow of market and technical information in better ways
• Benefit from lower prices through the commoditization of some parts of the industry.

Smaller service and supply companies may be fearful of a commodity marketplace where price is the primary consideration, particularly if relationships are a big part of their value proposition. But e-commerce also offers the tools for them to quickly differentiate their products in ways that previously were too expensive. Online success stories, efficient customer support, technology updates and new product information can all be delivered to precisely the right person, at precisely the right time, for a fraction of the cost of print-phone-fax. Sales reps will be able to reach more clients quicker than ever before, giving them more productive time. Reducing cycle time through e-commerce can lower service and supply companies’ costs as well as operator costs. Ultimately, this will remove costs all along the oil and gas supply stream.

While many operators will continue to deal with their normal suppliers, the opportunity to look at new companies will expand. Companies’ comfort factors with non-traditional suppliers will grow. One thing is certain: for companies to maximize the benefits and minimize the dangers of e-commerce in their marketplace, they will need to be involved in the game.

What Is e-Commerce?

e-commerce, electronic commerce, is the purchasing of products and services over the Internet. It is being applied in the E&P sector in a number of ways.

Using “online catalogs,” vendors can use the Internet to quickly and relatively inexpensively place a virtually unlimited volume of related product information in front of thousands or even millions of potential clients. The economies of scale, instant communication and enormous potential audience that are possible with the Internet also make it much easier for companies to hold auctions for goods or services.

Even the buying and selling of properties, prospects and data can be carried out over the Internet, where large volumes of data can be reviewed, manipulated, analyzed and delivered electronically. “Online data rooms” have the potential to significantly reduce the time and money that investor/purchasers must spend on the winnowing process. They simultaneously help sellers by widening the audience of possible customers.

Recently the idea of a trading hub has surfaced as an alternative to a large number of independent, online “company stores.” The idea is to create a neutral site where buying and selling can take place under any number of different scenarios (searchable catalogs, auctions, classified ads, etc.), and where the participants benefit from the efficiency of a broad marketplace. A number of such sites have been launched in the last year, most within the last six months.

The current slate of more than 50 upstream e-commerce alternatives is listed in the accompanying tables. In some cases the sites are up and open for business, while in other cases they are poised to begin operating within weeks or months. While some hybrid sites are not easily categorized, the sites were placed into one of five categories according to primary purpose: (1) information portals, (2) auctions, (3) data sales, (4) application service providers and (5) trading hubs.

Information Portals With Online Classifieds

These sites are the natural Internet extensions of a number of print publications. In most cases they include news feeds. The more robust sites, like www.ogj.pennwellnet.com, include content developed for the underlying print publication: original stories, editorials, special reports, issue archives, event calendars, job/resume listings, and classified listings. The e-commerce side of these information portals, other than subscription sales or through advertising banners, is through classified listings.

The relative sophistication of the classified listing service varies from something like The Product Center on www.oilandgasonline.com by VerticalNet, to the Equipment Listings on www.oiltrash.com. The former offers searchable listings of RFQs and RFPs, used equipment, pre-qualified consultants, and supplier online catalogs; while the latter is just an alphabetical listing of equipment.

The common feature of these sites and others like them is that transactions are not carried out through the site. Buyers and sellers are connected, information is transferred, but no third-party-managed sale is made.

Auction Sites

There are a number of active and proposed sites (listed in the table above) that offer new and used equipment, parts, commodities, and producing properties in an auction format. The property auction sites have a variety of levels of descriptive detail available. Most sites are careful to make bidders aware of the risks involved.

It is difficult to find evidence of any significant number of transactions taking place as yet. For example, the two currently active sites for selling drilling and production equipment, www.erig.net by Taylor Drilling Services and www.oilandgasonline.com, either have no items listed or have no active bidding occurring for the items listed at the time this was being written.

The only active property auction site is www.energynet.com, although at least seven new property sites are scheduled to begin operating in the first half of 2000. Bill Britain, President of energynet.com which currently has about 25 properties up for bid, says that Internet auctions will provide some real benefits for smaller operators.

“Oral auction houses won’t let a seller put a reserve on a property that is below a certain value. On energynet.com a seller can place a minimum acceptable price on their auction property, regardless of its size,” says Britain. “That opens up the auction option to smaller producers who want to participate but don’t want to risk leaving a lot of money on the table.”

Data Sites

The data sites vary from those serving specific niche markets to those with much broader focus. For example, www.rigmatch.com is a niche market site that sells U.S. Gulf Coast drilling permit data updates. Users can access and search the database of filed permits, but only subscribers can retrieve the most current information. In contrast, www.ihsenergy.com sells a wide range of well, production, pipeline and drilling activity data to subscribers and on a per-item basis. Another site, www.petroweb.com from Hunter’s Petroleum Exchange, provides an Internet-delivered map interface that can be used to manage data obtained from a large number of data services.

Application Service Providers

Application Service Providers (ASPs) lease software applications or computer services from remote data centers to multiple users via the Internet. This can be more cost-effective than ownership, considering the cost of purchasing, implementing and maintaining the application. Demand for such alternatives is coming not just from traditional multinational companies, but also from small to mid-size producers.

One example of an ASP for the upstream oil and gas business is www.novistar.com/ a provider of administrative and information technology services. Businesses in all industries are turning to such outsourcing, allowing management to focus on its core competency. Online options provide greater access to information, scalability in the event of an acquisition or divestiture, and continuous, low cost upgrades of systems and services.

Trading Hubs

A dozen sites aspire to become the “premier” marketplace for oil and gas E&P transactions. While some of these sites, www.indigopool.com by Schlumberger for example, are being launched by major service or producing companies, each proposes to provide a neutral marketplace where all buyers and sellers are equal.

For example, Chevron and Ariba’s site www.petrocosm.com will be an equipment marketplace where buyers and sellers own the market. It is expected to include catalogs with millions of items, e-procurement for goods and services, auctions, reverse auctions, bid/ask exchanges, strategic sourcing, spot buying, customer-specific pricing, electronic payments, enterprise resource planning (ERP) systems and online community forums.

Another site, www.enersection.com, plans to provide the same neutral marketplace. Formed by a group of senior energy executives, this site expects to incorporate a high level of operator and service company expertise with a unique understanding of the workflow process.

One company, www.wellbid.com has already found a way to improve the procurement process by providing an online application service where engineers and service companies can communicate requests and negotiate bids for goods and services (see related article on next page). This site is a good example of a hybrid: it provides software (like an ASP) but also provides a place for buyers and sellers to communicate more efficiently (like a trading hub).

Next Six Months Will Be Busy

The number of sites poised at the starting gate means that the first half of 2000 could be the scene of a lot of online activity in the upstream sector. A prudent independent producer can keep aware of what is developing in this new marketplace by:

• Visiting some of the sites that are up and getting familiar with them (the links on the PTTC site can be a good jumping off spot for that process)

• Testing an appropriate e-commerce option when it becomes available

• Doing some self-evaluation to look for business practices that could benefit from streamlining (e.g., procurement)

• Evaluating the option of ASP software for business and technical needs.

The E&P business is unique in some ways compared to many other business sectors. However, e-commerce has improved productivity in such a wide range of businesses that it is difficult to imagine that oil and gas will not follow suit. Exactly how this will happen is difficult to know right now, but we won't have to wait long to find out!

A complete version of this article, including a list of all of the e-commerce sites identified as related to oil and gas E&P activity, can be found on the PTTC web site at www.pttc.org. It includes detailed information about the most distinctive features of each of the e-business websites.