What Is e-Commerce?

The Evolution From Websites To Trading Hubs

Who's Who In Upstream e-Commerce?

Information Portals With Online Classifieds

Auction Sites

Data Sites

Application Service Providers

Trading Hubs

Next Six Months Will Be Busy

e-Commerce Option Reaps Benefits

The last six months have seen the launch of more than a dozen new Internet sites, several of which plan to become the "premier e-commerce marketplace" for oilfield goods and services. Chances are good that not all of these sites will thrive, since part of the value in having a single clearinghouse for buying and selling is …well … having a single clearinghouse for buying and selling. But the real question for independent producers is not which upstream oil and gas e-commerce Internet sites will be open for business, but how e-commerce will effect the way independents and smaller service and supply companies operate. What can e-commerce do for the smaller E&P enterprise? Today, perhaps not as much as some people may have hoped for, but during the next year 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, more quickly, 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 by promoting price competition in some situations.

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 must be involved in the game. Eventually, those who choose to ignore the opportunity to save time and money via e-commerce will lose competitive position to those who have learned how to operate in a new environment.

What Is e-Commerce?
e-commerce, electronic commerce, is the purchasing of products and services over the Internet. In its simplest expression, products are displayed or described where potential customers can view the information online, make a decision, and purchase the product electronically. While e-commerce quickly proved to be a particularly efficient way to sell certain types of products (e.g., books and beanie-babies), practically anything can and is now being bought and sold online. Consumers spent $8 billion online in 1998, and that figure is expected to grow to $130 billion over the next four years. But business-to-business e-commerce was about $43 billion last year and by 2003, is predicted to be $1.3 trillion, 10 times consumer e-commerce, 9% of all US business trade. It is being applied in the E&P sector in a number of ways.

Using simple or elaborate online catalogs, vendors can use the Internet to quickly and inexpensively place a virtually unlimited volume of product information in front of thousands or tens of thousands of potential clients. This obviously can streamline a sales operation and reduce the cost of sales, assuming that a large percentage of those potential clients are ready and able to buy online. Services can be sold over the Internet as well as supplies, particularly when the service can be characterized in a detailed, uniform descriptive template that permits straightforward cost estimation (and comparisons).

The economies of scale, instant communication and enormous audience possible through the Internet also make it much easier for companies to hold seller-driven auctions for goods ("What will you pay me for this pipe?"), or buyer driven "reverse auctions" ("I will pay X dollars for pipe … who has some?). These types of interactions in the Internet environment dramatically improve the chance for true market pricing to prevail.

Even the buying and selling of properties, prospects, interests and data, rather unique transactions of the E&P industry, can be carried out over the Internet, where large volumes of data can be reviewed, manipulated, analyzed and delivered electronically. While "online data rooms" may not replace face-to-face due diligence and a handshake in the near future, they do have the potential to significantly reduce the time and money that investor/purchasers must spend on the winnowing process, while simultaneously widening the audience of potential clients for sellers.

The Evolution From Websites To Trading Hubs
While the number of E&P-related product and service vendor websites has risen dramatically over the last three years from a mere handful to the hundreds, only a small number of these sites have the sort of electronic purchase capability that would classify them as true e-commerce sites. Many are simply places to view company information and find out how to contact a salesperson the Internet version of a sales brochure.

Similarly, while the number of oil and gas producer websites has also grown dramatically, these sites have for the most part been used only as sources of information for investors and channels for public relations efforts. However, a few large integrated companies have begun to use the Internet internally as a means for streamlining their upstream procurement activities. Some of these companies, having seen the bottom line impact this approach can have in their operations, are now looking to open these internal marketplaces to the industry. The idea here is to not only benefit from the efficiencies of the open marketplace as a buyer, but to profit as the manager of the marketplace as well.

The idea of a trading hub is simple: 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 and deep marketplace. A number of such sites have been launched in the last year, most within the last six months. The fundamental idea is that while a host of individual vendor and/or buyer websites can make the gathering of product information and the bidding process somewhat easier than the old paper-fax-phone routine, an electronic marketplace where all requests for bids can be responded to by nearly all potential bidders and all product offerings can be seen by nearly all potential buyers adds a quantum leap in efficiency. Estimates of savings in cost of sales for sellers and in procurement costs for buyers range anywhere from 30 percent to 80 percent, depending on the efficiency of the companies' existing operations. With the total value of E&P goods and services running at about $178 billion per year, it is easy to see why companies have decided to jump into the e-commerce pond.

Who's Who In Upstream e-Commerce?
About 50 upstream e-commerce examples are listed in the accompanying table. This list is not exhaustive, but it is fairly comprehensive and representative of the similarities and differences among the sites. These examples also are briefly characterized as to primary purpose and distinctive features, based on interviews, website visits and press releases, in the accompanying list. 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. It is clear that the year 2000 will see a lot of maneuvering for position as sites compete for both buyers and sellers by offering different service options.

Many of these sites are hybrids and not easily categorized. In some cases sites are reacting to the emergence of competitors by adding or modifying features, making classification difficult. For the purpose of discussion though, each of the sites has been placed into one of five categories according to its primary purpose: (1) information portals (including classified listings), (2) auctions, (3) data sales, (4) application service providers and (5) trading hubs. Each of these broad categories is discussed below.

Information Portals With Online Classifieds
There are a good number of these sites because they are easier to create and maintain and are the natural Internet extension of a number of E&P industry business-to-business print products. In most cases they include news feeds or, as in the case of the more robust sites like www.ogj.pennwellnet.com, content developed for the underlying print publication (original stories, editorial content, special reports, issue archives, event calendars, job/resume listings, and classified listings). A certain amount of the content is typically free, with more in-depth information or complete stories available for a price. The e-commerce side of these information portals, other than subscription sales and in some cases advertising banners, is through the 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 oilandgasonline.com site offers, for example, searchable listings of RFQs and RFPs, used equipment, pre-qualified consultants, and supplier online catalogs. While the content of the site's lists is sparse at this point, the structure is comprehensive. The site adds value by making the products and purchase/sell opportunities easy to find, and makes money by charging the listing company for the space, as with a conventional print classified listing. The www.oiltrash.com is much less elaborate, basically just a non-searchable alphabetical classified listing of equipment.

The least elaborate variation of such a site is the buyer's guide, a directory of vendors grouped by product or service type. These sites are simply online directories that charge for listings (or more commonly for listing enhancements), as well as for use by buyers. Specific product information is rarely included.

Several of these sites also offer listings of properties or drilling prospects for sale. In these cases the sites take steps to make certain that individual investors are somehow qualified as responsible, informed investors who understand that oil and gas investments can be risky.

The common feature of these sites and the 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. Buyers or sellers are directed to the each other's Internet site or physical location to consummate the deal. The site makes its revenue from a percentage of the final sale price, paid by the seller.

Auction Sites
There are a number of active and proposed sites that offer new and used equipment, parts, commodities, working interests, undeveloped acreage and producing properties in an auction format. Registered bidders place bids in more or less the same sort of forum as is found on www.ebay.com. The property auction sites have a variety of levels of descriptive detail related to the properties available. In some cases access to the online "data rooms" is restricted by membership or is fee-based. Most sites are careful to make bidders aware of the risks involved.

Despite the number of sites, it is difficult to find evidence of a significant number of actual transactions taking place at those that are open for business. For example, two currently active sites for selling drilling and production equipment, www.oilandgasonline.com and www.erig.net by Taylor Drilling Services, either have no items listed or have very little active bidding occurring for the items that are listed.

Some of the early trials of online auctions have seen mixed results. For example, Superior Auctioneers' site (www.saami.com) has a link to an ebay.com auction site where 118 pieces of construction equipment were offered for auction by Superior over a ten day period early last December. Similar to items one might find for sale by producers, these items generated more than 700 bids. However, none were actually sold, because all had reserve prices that were never met. A similar construction equipment auction site, www.dirtpile.com, lists hundreds of pieces of equipment with very little sign of active bidding at this writing. In most cases these items have reserve prices.

There are a number of sites that offer the opportunity to auction producing properties. A variety of options will exist if these sites all become operative. For example, www.indigopool.com, Schlumberger's site, will offer IHS Energy Group historical data and GeoQuest interpretation software to bidders, allowing them to perform technical evaluations online at a virtual interpretation center before making bids.

Although at least seven new sites are scheduled to begin operating in the first half of 200, the only currently active property auction site is www.energynet.com. The energynet.com site, which held the Internet's first server-based oil and gas property auction in February, currently has about 25 properties up for bid. Anyone can view the property list, but only registered users can bid. Registration involves the user signing on as a knowledgeable investor who meets minimum income standards. Energynet.com uses information from a profile completed by each user to select properties that might be of significant interest for a particular user and then e-mails that user a pre-auction notification.

"Several auction companies have developed ways for bidders to participate in oral auctions or carry out what are essentially sealed-bid auctions via the Internet," said Energynet.com President Bill Britain, "But our site was the first to actually carry out an oil and gas property auction as a true online auction." Britain says that Internet auctions will provide real benefits for smaller operators. "If a smaller producer is interested in bidding on some properties at an oral auction, they have to travel to the site, spend money on a hotel room and a couple of days out of the office, and run the risk that they still might not get the property. This expense is not trivial for a small producer. With an online auction, they risk only the time spent looking at the property information online."

As a seller, small producers benefit from the large audience of potential buyers and from the fact that there is no restriction on small property reserve bids. Auction houses won't let a seller put a reserve on a property that is below a certain value, typically around $100,000. "Because energynet.com's costs are the same regardless of a property's value, 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 a lot of smaller producers who want to participate but don't want to risk losing money if their existing investment in a property is not realized."

Some wonder if online auctions can replace the excitement and competitive feel of a physical auction room. Attempts to combine the two have not met with success, at least partially because the sites could not match the pace of rapid real-time bidding and bidders were confused. Other questions remain as well. Will potential bidders be allowed to view and analyze proprietary seismic data licensed to the seller, over the Internet? Will enough high-quality properties reach the auction sites to attract a critical mass of serious bidders? The answers to these questions remain to be seen. While the market will probably support more than one oilfield auction site, the contenders that survive will be the ones that are able to provide the best service to both bidders and sellers, as well as a large volume of properties.

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 site that sells U.S. Gulf Coast drilling permit data updates. Any user 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 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.

To the extent that Internet data access makes it quicker and easier for any producer to make decisions, data sites provide benefits for all sizes of producing companies. Generally in the "news" information business, the longer data is available the less its value. This is also true for certain types of oilfield data (for example, permit information in exploration plays). With historical well data, the age of the information is not as important as the way it is packaged. In fact, old data that has been collected and sorted into an easy-to-use format may be of particular value to companies. Online data answers both needs. It's available fast and in a format that can be quickly incorporated into a company's decision-making process, saving technician and engineer time.

Obtaining well and production information via e-commerce sites can make particular sense for smaller companies with specific data needs. "We use a lot of production data to evaluate properties for purchase, but the locations we look at are so scattered it doesn't make sense for us to buy the data on disk by area. We would end up paying for a lot of data that we wouldn't use," says Karen Achten, production/engineering technician with Wilbanks Exploration Inc. in Denver. Achten uses the Internet (specifically www.ihsenergy.com) because, "If I need the data now, I can just log on to the net, look up what I need and have it in about five minutes." That's a little different from the online system offered in the past. Under the old online system, a download would cost $2.40 to $4.25 per property downloaded plus $23 to $25 an hour for online access. "On the net (using the IHS Energy Group system), it's $2.15 per property. Period. It takes me maybe a quarter of the time to select the properties and maybe one tenth of the time for the download, as compared to the old way. So the bottom line is, we save on the data and on tech time, by quite a bit," Achten says. "E-commerce allows us to be more informed buyers (of properties)."

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, when the cost of purchasing, implementing and maintaining the application is considered. In some cases, ASPs can provide an alternative to building internal information technology operations. With IT and data processing performed by a third party, organizations can focus on their primary area of business.As oil producers become increasingly dependent on complex and rapidly changing information systems, both large and small companies can consider the ASP approach. Smaller companies may decide to use an ASP to quickly make use of critical applications at a reasonable cost. Some studies have shown that by leasing applications from an ASP, customers can save between 33% and 53% over purchasing and managing the hardware and software for the application themselves.

An ASP combines the role of an Internet Service Provider (ISP), companies that own and operate network servers that host Web pages and route e-mail for companies or individuals, with that of a software application seller and a outsourcing service provider. One view sees a future where producers outsource all of their software application needs to ASPs, renting use over the Internet.

There are several examples of ASP sites that focus on the upstream oil and gas business. One of these is www.novistar.com. Novistar is a provider of administrative and information technology services to the upstream energy industry and through a partnership with Oracle Corporation, offers both outsourcing and online, hosted software based on the Oracle Energy Upstream suite of production planning, operations, and accounting applications. Novistar president and CEO Trip Ray commented, "Businesses in all industries are turning to outsourcing of business processing and information technology, allowing management to focus on its core competency. The petroleum industry has historically been an innovator in the use of outsourced services for tactical functions such as drilling, well servicing, and seismic acquisition and processing. Novistar's hosting and outsourcing solutions provide greater access to information, scalability in the event of an acquisition or divestiture, and continuous, low cost upgrades of systems and services."

Demand for such alternatives is coming not just from the traditional multinational companies, but also from small to mid-size producers. Offering software as a service via the Internet enables software providers to broaden their market reach to businesses of all sizes, particularly smaller businesses that in the past have not been able to afford costly "enterprise" software. Novistar's clients include companies such as Bellwether Exploration, Cabot Oil & Gas, Mallon Oil, Newfield Exploration, Nuevo Energy, PennzEnergy E & P, and Torch Operating Company.

Another upstream example is www.indigopool.com, where users can access Merak's PEEP evaluation and PetroDesk data mapping and integration software. These applications can be used over the Internet to evaluate properties for sale. Maurer Engineering (www.maureng.com) offers use of a suite of drilling software applications over the Internet, with pricing based on subscription, pre-paid time allotments, and pay "by-the-drink" options. Applied Terravision (www.atsi.com), provides software for accounting, land, royalty, tax, and AFE management tasks via Artesia, its popular enterprise resource planning (ERP) package for small to mid-sized companies. Applied Terravision has joined with another ASP, TransZap Inc. of Denver, to host the Oildex.com Community at www.oildex.com. The Oildex Connect approach is to automate workflows using secure Web transactions. TransZap has developed a set of tags for vendor invoicing that will enable operators and vendors to send electronic invoices to each other regardless of what accounting systems they use. More than 76 million oilfield invoices are processed each year according to TransZap, with an average internal cost of $16 each. TransZap believes that electronic invoicing could save the industry more than $1 billion of these costs.

Trading Hubs
A dozen sites aspire to become the "premier" marketplace for oil and gas E&P transactions. These sites hope to become the place where most online purchases are carried out, either because they offer the most products, the lowest prices, the best service, or all of the above. While some of these sites, www.indigopool.com and www.petrocosm.com for example, are being launched by major service or producing companies, they each propose to provide a neutral marketplace where all buyers and sellers are equal.

Chevron and Ariba's www.petrocosm.com, for example, will be an equipment marketplace where buyers and sellers will own the market. This marketplace is expected to include catalogs with millions of items and services, hosted and enterprise e-procurement for goods and services, auctions, reverse auctions, bid/ask exchanges, strategic sourcing, spot buying, customer-specific pricing, electronic payments, logistics, integration to enterprise resource planning (ERP) systems and online community forums. Chevron and Ariba plan to leverage components of a system that, already fully functional in Chevron's Bakersfield, CA operations, is now capturing 90 percent of the business unit's annual materials purchasing.

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

What is still unclear is exactly how these marketplaces will deal with pricing. Will prices be transparent and easily translated online for all to see, or will the final deal remain unseen? This will be important if the full benefit of an Internet marketplace is to be realized for equipment purchasers.

Buying equipment over the Internet requires a relatively small shift in behavior compared to placing a conventional catalog telephone order. The more difficult shift (and also the greater potential savings) lies in online contracting for the lower-volume, higher-value E&P services that make up a large part of producing company budgets. The approach of several sites has been to distill the requested service into a series of descriptive entries on a form (or template), that can be responded to by multiple vendors. This approach permits an apples-to-apples comparison of the resulting bids.

For service companies that have spent a lot of time and money developing technologies and methodologies that are not easily characterized by such templates, the prospect of competing on price alone is not attractive. The new e-commerce sites are responding by creating ways to allow vendors to highlight their unique attributes.

One company has found a way to improve the efficiency of the equipment and services procurement process by providing an online procurement application service where engineers and service companies can communicate requests and negotiate bids for goods and services (see sidebar). This site, www.wellbid.com, is the first of its kind to focus on procurement for well construction and repair. Wellbid.com is a good example of a hybrid site: it provides software (like an ASP) but also provides a place for buyers and sellers to communicate more efficiently (like a trading hub). As this article was being written, WellBid had 22 bid categories for products and services, including cementing, fracturing, acidizing, and perforating. More than 1800 bid requests from 200 operators had been received.

The wellbid.com approach has avoided creating a site that promotes the buying and selling of services based on price alone, helping both operators and service companies save money by streamlining the process. The system provides a way for service and supply companies to differentiate themselves based on other factors besides price (safety record, geographical convenience, case histories, etc.). WellBid is not charging for its service while the site's utility is demonstrated. A price structure will be developed before the middle of 2000, probably involving subscription and transaction fees for both buyers and sellers.

Other sites also plan to add value by improving the workflow process for both buyers and sellers. At www.enersection.com, vendors will have the option of submitting several alternatives that provide optional solutions to more complex producer problems. The eNersection.com templates will also contain links to vendor websites where technical data, success stories, or even technical experts can provide the sort of information that differentiates a service. On the eNersection.com site, both buyers and sellers will be charged a fee to make deals.

Next Six Months Will Be Busy
The number of sites leaving the starting gate this spring means that 2000 will be the scene of a lot of online activity in the upstream sector. After the dust settles, what will probably remain will be one or two dominant e-commerce marketplaces and a larger number of niche providers in specific markets. A prudent independent should keep aware of what is developing in the e-commerce world by:

• Visiting some of the sites that are up and running and getting familiar with them (the list on the PTTC site can be a good jumping off spot for that process)
• Testing the appropriate e-commerce options when they become 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 specific business and technical needs.

e-Commerce Option Reaps Benefits for Purchaser, Supplier
Using WellBid's online procurement application service, Chahta Petroleum, Inc. realized a significant time savings when requesting drilling mud services for a well north of Midland, TX. In addition to allowing Chahta convenient access to potential suppliers, the WellBid service helped Chahta in evaluating and choosing the winning quote. For Lone Star Mud, the service provided business from a new customer without the normal marketing expenses.

"I had a job I needed to put together for a well and had to get the information to my suppliers," said Tony Sam, President of Chahta Petroleum, Inc. "I'm looking for anything that will improve efficiency on the bid process, so I gave the WellBid service a try.

"The templates definitely helped with the planning and bidding process. I feel like WellBid saves as much as 30% of my time over sitting down and explaining the same service to three different vendors each time I'm specifying a new job."

For Doug Rogers, Executive Sales & Marketing Manager of Lone Star, the service provided an opportunity to secure new business. "We had never worked with Chahta before," Rogers said. "I received the request through WellBid, we responded to it, and everything went well. WellBid gives us the opportunity to reach people who are unaware of Lone Star Mud. We probably wouldn't have heard from Chahta otherwise. We not only got a sales lead, but also the pertinent information we needed to quote the job."

Both parties felt the service streamlined the procurement process. "I particularly like the idea of a common format for requesting and receiving quotes," Sam said. "Also, response time with the service was more than adequate. The first proposal came in the same afternoon."

"I think the time savings is really important with this service. You spend 20% of your day talking to people about proposals. This is a good opportunity for an engineer to sit down and submit those proposals and get the responses pretty quickly. One of the real plusses for WellBid's service is during development drilling, particularly if you've got repetition in anything from location to mud and completion services. I certainly plan to keep using the service."

Rogers agrees. "I think it's going to make us more efficient," he said. "WellBid takes a step out of prospecting. We're down to the meat and potatoes when we get a request through their service."

Author: Karl Lang is Director of Custom Publishing at Hart Energy Publications, a part of Phillips Business Information, Inc. He edits GasTIPS, a technical journal produced by Hart for Gas Research Institute (GRI). He also writes for a number of Hart energy publications. A registered petroleum engineer, Lang spent nine years with Chevron USA before moving into technical communications and consulting. He is a graduate of Marietta College in Ohio. E-mail: klang@phillips.com