MANAGEMENT & ECONOMICS: E-commerce 101: A practical guide to E&P challenges and opportunities

Toward the end of 1999, with Y2K approaching, there was relatively little emphasis on e-commerce by oil and gas companies and the trade press. After the first of the year, however, there was an onslaught.

Dozens of new dot-coms formed to serve every segment of the petroleum industry. These included online commodity trading services, equipment procurement sites, oil property auction markets, and a large number of other services. Today, there are many companies across the industry that are sorting through all of these new services and form-ulating their e-commerce strategies.

E-commerce represents a very good opportunity for independents to gain competitively, relative to the majors. This is because smaller oil and gas companies are able to aggressively implement a range of e-commerce initiatives. The key e-commerce risk is that smaller oil and gas companies may fall behind in Internet e-commerce use, and then find it difficult to catch up.

Internet basics

Descriptions of the Internet typically emphasize features over benefits. For example, the Internet is:

• A large network made up of a number of smaller computer networks
• A global network of overlapping and interconnected computer networks that use a common protocol
• Made up of more than 65 million interconnected computers in more than 100 countries covering commercial, academic and government endeavors.

Originally developed for the US military, the Internet became widely used for academic and commercial research. Today, the Internet has become commercialized into a worldwide information highway, providing information on every subject known to humankind. These descriptions are a start, but it is more helpful to think of the Internet in terms of its functions. It is:

• The world's economic platform for the foreseeable future.
• A communications medium that enables tens of millions of people to share ideas.
• A library that contains a large portion of mankind's accumulated knowledge.
• A communications medium that changes the relationships between groups of people.

The Internet is first and foremost a communications medium. There is an often-noted property known as Metcalf's law. It essentially says that every time one additional person is added to a network, the value of the network increases exponentially, not linearly.

E-mail network

At the end of last year, about 570 million e-mail boxes existed worldwide, almost six times the number in 1995. US surfers access most of these e-mail boxes - 334 million, according to Messaging Online. Jupiter Communications expects that US surfers alone will send 432 billion e-mail messages in 2003, up from 132 billion in 1999 (source: The Industry Standard). These figures reflect the advantages of e-mail:

• Scalability: sending out 500 e-mails is easier than making a similar number of phone calls and faxes
• Record keeping: saving messages efficiently from months ago
• Collaboration: a message can be sent to a large number of individuals with each adding their comments
• Low cost: the incremental cost of an e-mail is virtually zero
• Data sharing: files are easily attached.

E-mail use is projected to continue to increase by an average of 35% per year through 2003.

E-commerce

Why care about e-commerce?

• Merrill Lynch has predicted that by 2009, up to 85% of all business transactions will be conducted on the Internet ("E-Commerce Rewards the Fearless," E-Commerce Times; August 3, 2000).
• Jupiter Research predicts that 42% of all domestic US business-to-business trade will take place online in five years' time, up from the current figure of 3%.
• According to Forrester Research, global e-commerce is expected to reach $6.8 trillion by 2004.
• Other sectors of the economy that are critical to the oil and gas industry are adopting e-commerce very rapidly. The ways in which independent oil and gas companies interact and do business with law firms, logistics companies, equipment suppliers, banks, regulatory agencies, and hundreds of other organizations will change significantly over the next five years.

E-commerce is about using the unique characteristics of the Internet to change and influence the competitive dynamics of an industry. Many reports about oil and gas e-commerce list a large number of general benefits to be derived from the adoption of e-commerce initiatives. Some of these include: lower costs, better knowledge management, improved customer service, etc.

Trends and issues

For many months, oil and gas industry people have predicted a shakeout or consolidation among the new e-commerce companies that were formed in late 1999 and early 2000. There were at least 50 e-commerce companies planning to offer services to the oil and gas industry by March, 2000. The shakeout was widely thought to be inevitable for a least two important reasons:

• It was unlikely that the upstream petroleum industry would support five procurement sites, eight property auction sites, etc.
• The revenue models were un-tested.

A major cause of the shakeout was the impact that brick and mortar companies had on the development of e-commerce in the oil and gas industry. When dozens of industry consortia throughout the US were announced early last spring, stock market investors quickly abandoned many of the "pure" dot-coms that had developed, or were developing, industry specific e-commerce exchanges. In the private equity markets, venture capital firms also moved away from business-to-business (B2B) e-commerce companies very quickly. The new e-commerce companies formed through industry consortia now have many key advantages:

• Significant financial resources ($50-100 million is not unusual)
• Very large sponsors with commitments to buy through their exchanges
• Tremendous technological resources.

Time will tell how successful these organizations are in developing e-commerce exchanges.

Issues and challenges

There are a number of issues and challenges that developed early in the business:

1. Inflated expectations: Much of the en-thusiasm and high expectations surrounding the potential for B2B e-commerce was experienced in the oil and gas industry as well. This is understandable; the petroleum industry accounts for $2.5 trillion of annual gross trade revenues and total annual procurement is approximately $430 billion.
2. Ease of use: Ease of use and excellent customer service are likely to be key requirements for the success of any e-commerce service.
3. Lack of standards: The development and adoption of technical standards is critical for the success of e-commerce in the oil and gas industry.
   Many large organizations use Elec-tronic Data Interchange while many smaller companies do not. XML is thought to be a good alternative to EDI because it is used on the Internet. However, XML is highly customizable, and any version used by the petroleum industry would have to capture terms and processes, like joint interest billing, which are unique to the industry. One oil and gas e-commerce company is attempting to develop a standard version of XML for the industry, which we believe is critical for the development of e-commerce.
4. Resistance to change: This may seem obvious, however, oil and gas e-commerce companies must realize just how compelling their e-commerce services must be before they will become widely adopted. An order of magnitude change is sometimes necessary before people will change their habits.
5. Logistics and operations management: With global e-commerce expected to reach $6.8 trillion by 2004, processes that are barely able to handle today's $57 billion in worldwide e-commerce trade will be paralyzed. Resolving today's inadequate manufacturing techniques and inefficient global logistics market is imperative.
6. Value propositions, revenue models, and execution: The ideal value proposition is to identify a problem and then design the solution in a way that directly solves the problem. This is basic, but the issues start getting more complex during the development of the solution.
7. The revenue model is really the answer to the question: Who is going to pay for this and how? Will suppliers or the car companies pay the transaction fees? Who will own the marketplace? What are the aggregate savings in relation to the cost of developing the marketplace? How much of the benefit will be passed along to consumers? In our view, the last six months is the beginning of a 5-10 year process that will profoundly change the petroleum industry.
8. Internet time vs. corporate time: Inter-net time generally refers to the extremely rapid conception, development, implementation, and adoption of new business models on the web. Prior to January 2000, when B2B e-commerce really began, Internet speed was more of an advantage than it is today.
9. Hiring e-commerce employees: The typ- ical oil and gas company tends to have employees that are on average more experienced and somewhat older than comparable companies in other industries. Given today's environment of tight human resource supplies and the desire of many college graduates to work in high tech, consulting or investment banking, the oil and gas industry will continue to find it a challenge to recruit e-commerce talent.
10. Security issues: Security has historically been a high priority among oil and gas companies. The reality of online security is that billions of dollars of transactions are conducted over the Internet despite the occasional high profile security breach.

Conclusion

The growth of the Internet economy has slowed somewhat over the past six months. We have all seen that Internet-based business models can be developed, implemented, and fail in a relatively short period of time. The enthusiasm for the potential of e-commerce has been replaced with a bit of skepticism, at least among a portion of oil and gas professionals. However, e-commerce in the oil and gas industry has barely begun.

Nothing, of course, ever goes straight up or straight down forever. Oil prices are not likely to remain at $35 indefinitely. The chaos we have experienced in e-commerce this year is typical of many new markets and is likely to turn around once the under-funded or poorly performing companies are weeded-out or merged. This is a 5-10 year process. The investments being made today in optical networks, wireless communications, and dozens of other technologies will significantly impact our economy and industry in the years to come. ;

Editor's Note: This is a synopsis of a longer White Paper prepared by the management of OilfieldCapital.com and is reproduced with permission. A full-length copy of the paper is available from the author (Tel: 914-725-8894 or Email: [email protected]).

Dot com lifecycle

Network Solutions defines five stages of Web site evolution, the "Dot Com Lifecycle."

• Secure an online identity: 63% of the 840,000 domain names Network Solutions registered one year ago are in stage one. These companies have their Web address and perhaps have some rudimentary home page posted, but nothing beyond that.
• Establish a web presence: Approximately 31% of sites registered with Network Solution are in this stage. These sites are often referred to as billboard or advertising or promotional sites. They tend to contain general company or product information, but do not allow visitors to order on-line.
• Enable e-commerce: 4% of sites are true e-commerce sites. These sites allow visitors to order products directly on the Web.
• Provide e-commerce and customer relationship management: About 1% of companies are using their site to develop and maintain a relationship with their customers. Sites in this stage have Web-enabled key business processes on an intranet or extranet - for instance, allowing distributors to check product inventory online.
• Utilize a service application model: The final 1% of Web sites are in this category. These sites use the most advanced Internet technologies to offer real-time business processing for functions such as financial management and human resources.

Given these percentages, a company is not behind if its site is currently a stage two site. That places the company on equal footing or ahead of the game with 94% of the companies on the Web.

Common web terminology

Below are definitions, which are useful when getting started on any e-commerce initiative (Source for passages - TechEncyclopedia).

• Browser: "The computer program that serves as your front end to the World Wide Web on the Internet. In order to view a site, you type its address (URL) into the browser's location box; for example, www.ibm.com, and the home page of that site is downloaded to you. The home page is an index to other pages on that site that you can jump to by clicking a "click here" message or an icon."
• Server: "A computer in a network shared by multiple users." The Internet is made up millions of servers (computers) that are connected together and that serve web pages to Internet users.
• Internet Service Provider (ISP): "An organization that provides access to the Internet. Small Internet service providers provide service via modem and ISDN while the larger ones also offer private line hookups. Customers are generally billed a fixed rate per month, but other charges may apply."
• Modem (MOdulator-DEModulator): A device that adapts a terminal or computer to an analog telephone line by converting digital pulses to audio frequencies and vice versa. The term usually refers to 56 Kbps modems (V.90), the current top speed, or to older 28.8 Kbps modems (V.34)."
• Web Hosting: "Placing a customer's web page or web site on a commercial web server. Many ISPs host a personal web page at no additional cost above the monthly service fee, while multi-page, commercial web sites are hosted at a very wide range of prices. The customer's registered domain name is typically used."
• Domain Name: "An Internet domain name is an organization's unique name combined with a top level domain name (ie .com)." For example, Amazon.com is the domain name for Amazon. Common extensions include: * .com - commercial, .gov - government, .net - gateway or host, .mil - military agency, .org - non-profit organization, .int - international intergovernmental, .edu - educational and research.