Quick show of hands among all the manufacturing professionals out there: How many of you are happy about the skyrocketing costs of energy? If you could look around at all of your peers, you'd see that nobody's hand is raised, not even the oil & gas companies. It's one of the best-kept secrets in today's economy that the oil & gas producers -- major consumers of energy themselves -- have to pay the same high energy prices as any other manufacturer. Like other industries, these companies operate on very tight margins, and are constantly being challenged to eke as much out of their capital assets as possible. And to achieve better results, oil & gas companies are increasingly turning to information technology as a route to improved efficiencies and dramatic cost reductions.
Still, the popular press has succeeded in painting the oil & gas industry as the ultimate villain, and in an era when a gallon of gas in the United States costs more than $4 and some of the multinational oil companies are reporting record profits, it's a fair question to ask, "So why should we care what technologies the oil & gas companies are using?" One reason is because the oil & gas industry is pursuing the same types of technological solutions that other manufacturing sectors are looking at under the pressure of public scrutiny to improve performance. Just as importantly, as oil & gas companies become more efficient at operating their enterprises, the long-term prospects for all U.S. manufacturing should also improve. That's the theory, anyway.
"We're in an odd place right now in the oil & gas business," admits Brunson White, vice president and chief information officer with Energen Corp., a diversified energy holding company specializing in the distribution of natural gas. "The rules of supply and demand are starting to work, but like everybody else we're affected by commodity price volatility in the natural gas industry." That puts Energen under constant pressure to keep its other costs under control and as low as possible, he notes.
One way to manage costs is hedging, which Energen practices in a major way, according to White. Another way is technology.
"The biggest technological challenge for the oil & gas industry is that nobody has time to focus on their long-term needs," White says. "There's a tremendous scramble for talent, and right now companies are so busy that they can't focus on their information technology (IT) needs."
Partly for that reason, companies such as Energen are looking outside of their internal talent for solutions, wherever they can find it. "Oil and gas companies -- whether majors, national oil companies, services companies, refiners or pipeline companies -- are going to be increasing their spending on IT in the next five years," observes Jill Feblowitz, practice director, business technology, with analyst firm Energy Insights, an IDC company. "Much of this spending will be with external providers of hardware, software or services." Another analyst firm, AMR Research, reports that nearly 70% of all U.S. oil & gas companies expect to increase software spending in 2008 over 2007. Of that number (AMR includes chemical firms in its study), 67% plan to spend from $1 million to over $20 million on manufacturing operations software.
Energen, for instance, uses an industry-specific solution suite from SAP that's allowed the company to introduce automation into its transactional processes while eliminating inefficiencies, according to White. The majority of Energen's revenues come from its regulated utility, Alabama Gas, which distributes natural gas to half a million customers, and the SAP solutions provide the company with transparency to what it's spending money and resources on. The software makes it possible for Energen to track what it costs for each customer transaction, leverage its buying power across the enterprise and realize productivity gains in the maintenance of fixed assets, explains Lucy Dichiara, director of Energen's project management office.
"Unfortunately, the oil & gas industry did not invest in capital equipment for a number of years, so they're looking for ways to improve on their asset lifecycle management," adds Ken Evans, director of oil & gas with SAP. "They're trying to make their assets perform as effectively as possible, and to get there, they have to understand their cost structure. One way to do that is to share data with other areas of the company and identify where the best practices are."
Don't Underestimate the Importance of Estimating
ConocoPhillips, the third-largest U.S. oil company, produces 2.6 million barrels per day out of 12 refineries in the United States and Canada. Despite annual sales of $194 billion, the company is under pressure to increase its capital project workload without adding to its staff levels. ConocoPhillips' growth investments include clean fuel and emissions upgrades, as well as ongoing maintenance projects, with a total budget of $1.4 billion. The challenge for the company has been to increase the productivity of its capital cost estimation process.
One of the biggest challenges in estimating is collecting and organizing data, which sent ConocoPhillips in search of a solution that could both enhance and speed up project decision making. The company adopted a cost estimation solution from Aspen Technology Inc., which allows process manufacturers to generate detailed estimates and implementation schedules for large engineering-procurement-construction projects from minimal information. For ConocoPhillips, estimator productivity increased over a period of two years from $30 million per day to $80 million per day. Overruns dropped to nearly zero, while variability in estimates were reduced from 35% to 12%. A statistical database enables the review and analysis of post-project results to allow for continuous improvement.
By using the solution on a systematic basis while tracking historical project cost performance, the company has been able to improve its ability to predict and manage capital costs, observes Jim Whiteside, a principal engineer with ConocoPhillips Downstream. "This has made the estimating function strategically valuable in the downstream capital investment decision process."
Simulating Compliance Scenarios
Simulation software offers oil & gas companies the ability to design and map out potential scenarios on the computer, where it's far cheaper, before moving them out to the field. For instance, Silver Eagle Refining Inc., a Utah-based independent petroleum refiner, uses simulation software from Invensys Process Systems, in tandem with sizing methodology from Koch-Glitsch, to create models of petroleum distillation columns and air-cooled exchangers that satisfy new Environmental Protection Agency (EPA) requirements for benzene emissions.
As of January 1, 2011, the EPA will require all refiners to reduce the annual average amount of benzene content in their gasoline to 0.62% of volume. Benzene is a known carcinogen that's been linked to leukemia.
Prompted by the new EPA regulations to rethink its processes, Silver Eagle Refining used the Invensys/Koch-Glitsch solution to model its designs for future benzene isomerization and saturation units. Silver Eagle modeled the units itself, but to be certain that they did it right, they also contracted with Invensys to perform the same analysis, explains Joe Brown, a Silver Eagle process engineer.
"I was deliberately cryptic in the beginning because I didn't want our results to skew theirs, but was comforted to see that they came up with similar results," Brown says. "The software has definitely helped us verify that the changes we are making will meet the benzene regulations."
Collaborating in a Virtual Workspace
The fierce competition for talent in the oil & gas industry is forcing companies to rethink how to gather, retain and benefit from the invaluable knowledge their employees bring with them, and just as importantly, take with them should they leave or retire, observes Hal Bradwell, business development executive with Avanade Inc., an IT consulting firm. "In many respects, addressing these pressing business challenges requires the same level of ingenuity as it takes to locate, extract and refine the very oil on which business success is based."
As Bradwell sees it, digital collaborative technologies, also known as Web 2.0 technologies, offer a competitive edge through their capabilities to locate, extract and save intellectual capital. By focusing on collaboration, collection and retrieval, companies can achieve efficiency and productivity breakthroughs in the way people work with information and each other throughout the enterprise, he claims.
One increasingly popular way to encapsulate corporate knowledge, Bradwell explains, is through a wiki, "a collaboration tool comprised of editable Web pages that allow users within an organization to contribute and access information in a supervised manner." He cites the example of an oil and gas operator that branched into new extraction methods, known as steam-assisted gravity drainage (SAGD), which is considerably different from conventional production.
"It is often a challenge for new employees to learn and remain current with acronyms and unfamiliar terminology. In order to remove information obstacles, the company implemented SAGDPedia, a wiki site designed to capture information such as technical terms and process descriptions specific to their new and unconventional line of business." The site, according to Bradwell, is a proven success with several hundred employees participating and sharing
their knowledge.
Future Tech Strategies
According to AMR Research, two strategies that will gain significance in the next few years for the oil & gas industry are:
- Improving manufacturing performance visibility across manufacturing site;
- Product authentication, track and trace, and integrity of the supply chain.
"Firms are moving away from primarily financial-driven corporate performance management programs, which include items like budgets, forecasting, financial metrics, analytics and scorecards," notes AMR analyst Bill Polk. Instead, he sees them moving to what he calls "an enterprise performance management model," which includes information from operational transaction systems, such as sales and marketing, supply chain management, customer relationship management and actual performance information from the production arena.
"Ultimately, it will not be individual technologies that will provide competitive advantage for oil & gas companies," adds Energy Insights' Jill Feblowitz. "Rather, with complex requirements, the practical need for real time and the ability to handle massive amounts of data, technology investments will most likely be in bundles of hardware and software."
