Online oil exchange launches

Online procurement of oil, gas and petrochemicals began this week, following the launch of the world's biggest online exchange...

Online procurement of oil, gas and petrochemicals began this week, following the launch of the world's biggest online exchange that is set to cut costs and make industry players more competitive, writes Julia Vowler

On 5 July, the world's biggest online exchange started trading. In all, 14 oil and gas companies with names like BP, Statoil, Conoco, Tosco, Unocal and Shell with a combined annual spend of $125bn, started to buy what they need to stay in business over the Web.

The oil, gas and petrochemical exchange is the latest in the global rush to electronic procurement that is already being pursued by the aerospace, automobile and telecoms industries. Setting up of the exchange was agreed after a 40-minute discussion in January, and announced on 11 April.

So why are all the partners so keen?

"The real key to e-procurement is the completeness of the data," says Chris Miller, group adviser of strategic sourcing at Shell International. "All the procurement flows through a common database where you can analyse what's going on in order to make better commercial decisions."

"Thecompetitive advantage goes to those which become masters of the data created and make the best procurement deals," he added.

To date there have been buyers facing off to suppliers individually, says Miller. Now they'll be facing off in a marketplace. In the exchange, the catalogues will be maintained by suppliers which have control of changes in prices, even minute by minute if they want.

"Up till now we've maintained the catalogues," says Miller. This has been both costly and inaccurate, owing to the ease of duplication.

"At a stroke [the exchange] takes a massive amount of cost out, making oil and gas more competitive in the 21st century," he points out.

Reducing costs for everyone is the key. The exchange reduces procurement effort via one hub for transaction flow.

"E-procurement is not about screwing suppliers," Miller emphasises. "It's about taking cost out for both suppliers and buyers and reducing institutionalised inefficiencies. Plus it supports smaller buyers and suppliers just as much as larger ones. It's not a big boys club."

The greater transparency of pricing over the exchange, will, he argues, be commercially healthier all round than the current practice of sealed bids.

Having a single, transparent marketplace will also, the participants hope, attack the costly, but all too frequent, practice of off-contract, maverick buying by departments evading their own corporate purchasing policies and standards.

Shell expects 23% of the savings it anticipates from e-procurement to come from the greater efficiency it will get from doing volume deals it had previously been unable to guarantee because it did not know its spend accurately enough. But the biggest tranche of savings, 40%, will come, says Miller, from cutting out maverick procurement and complying to corporate standards. He also expects about 20% to come from auctions. "They're a terrific opportunity," he enthuses.

Altogether, Miller anticipates the transaction cost of purchasing should plunge. "Most companies have no idea [what each purchase costs them] - it's something like $200-$250 per transaction. Now it will be under $1," he says.

E-procurement will also change the way orders are put together and issued. Most purchases, he points out, are done on the basis of the specification of the equipment needed, which is affected by the conditions in which it has to be used. On an exchange, a supplier could simply ask the buyer to tell them what conditions the kit has to be suitable for, and they can select what meets that requirement and offer it, instead of the buyer having to specifically request it.

"The condition of use could become the purchase order," suggests Miller.

As the exchange gets under way more innovations in how suppliers could do business with purchasers, more cheaply and efficiently, are bound to emerge. And already, e-procurement also promises other value-added services, such as cheap capital, logistics and auctions.

"We can even book our travel over it," says Miller.

Eventually, he believes, the transaction charges that the exchange levies "will disappear, and it will exist on the value-added services themselves."

Vertical exchanges in specific industry sectors, believes Miller, grow very quickly once trading starts. Market liquidity will increase as more suppliers come on to the exchange. They get a shop window seen by all their customers. Their customers get yet more choice in what to buy, from whom, at what price.

"It means we can be far more imaginative about sourcing - we were a very conservative industry," says Miller.

As the market liquidity increases and the conservative tradition erodes, there is an opportunity for oil and gas companies to tighten inventory. "Our industry has massive inventory - we have lots of duplicates sitting in warehouses 100 metres apart," he points out.

Miller believes the exchange has allayed any initial fears that the industry's suppliers felt would distance them from their customers. "We feared they thought we wouldn't be able to differentiate between them," he says.

In fact, he argues, the reverse is true - exchanges offer suppliers the chance of getting even closer to their customers.

"Suppliers can use the software to get to the desk of the manager calling off the service," he says. Even out on an oil platform, for example, offshore workers can go to the exchange and look at all the data they need about a drilling tool.

"The exchange makes for a far closer relationship than they were able to have before," says Miller.

With all the upside, is there any downside to e-procurement? Certainly there are some caveats, warns Miller.

Firstly, the very ease of purchasing can mean that not every purchase is the best possible automatically, without effort.

"The system can support bad deals as well as good," he points out.

Dangerously, at any rate to begin with, having an exchange can "create a legitimacy for bad deals".

Keyboard-happy purchasers let loose on the exchange can get literally carried away, buying is so easy. "Three clicks and you've spent a quarter of a million dollars," warns Miller. "And you've done it in three seconds, not three weeks."

Second, is the tricky issue of data confidentiality. There is so much data generated by, or passing through, the exchange that ownership and levels of access have to be scrupulously worked out and adhered to. It may be in the interests of rival oil and gas industries to reduce the cost of procurement across the board, and ditto for their rival suppliers, but respect for each other's commercially sensitive data is crucial for the overall success of the exchange.

Thirdly, a global, industry-wide exchange will, inevitably, operate globally. Will that mean that local suppliers are squeezed out, or their support costs are exposed as higher than lower cost suppliers in cheaper parts of the world, which will now become more accessible through a cyberspace marketplace?

"It's true to an extent," concedes Miller, "but we must get suppliers on the exchange."

The final caveat has to be issued in the direction of the IT department. Inevitably, every business opportunity is an IT challenge to make happen and e-procurement is no exception.

"How on earth is the exchange going to integrate with our enterprise resource planning systems? It's an enormous headache," allows Miller.

However it's done, integration must be fully automatic, he stipulates.

The sheer scale of the user community within a major company like Shell is a challenge for IT. "We'll have 100,000 users in 120 countries," says Miller.

Just training them how to use the e-procurement system is a significant task. Shell is rolling out training across countries that are as different in scale and culture as the US and Gabon - not forgetting its tanker fleet and offshore platforms.

Operational management will also be a challenge. "It's important to maintain a data hierarchy," says Miller.

"We must gather data in regional and global hubs. We have to put lots of management in place to make it work."

One thing though is clear. E-procurement is not IT-led. "It has been a business-led initiative - it did not come from the IT department," says Miller.

Being business-led "the business demanded IT service it - IT has had to make it integrate with our ERP, and make the speed up to scratch." That business commitment to e-procurement marks, says Miller, a sea-change in Shell. "For 15 years IT has said, 'we've got a new idea, we've got to have it!' For example, ERP, that the business has then been puzzled about how to use. Now [with e-business] there's a new self-confidence in business about making IT systems increase profits and get costs down."

Profit, should, hopefully, be arriving even more directly. This latest exchange on the Web has a chief executive from outside the oil and gas industry, and with outside equity partners is looking to float shortly.

Chris Miller was speaking at the launch of the BuyIT e-Procurement Best Practice Network, sponsored by the Computer Weekly 500 club of IT directors

The E-Procurement Best Practice Network

E-procurement holds out the promise of reduced costs while providing faster, better quality and easier service to the end-user. Organisations are embracing e-procurement, and the electronic business-to-business exchange, or marketplace, is probably the most extreme example of this. One such company is Shell International, whose group adviser of strategic sourcing, Chris Miller, spoke at the recent launch of the e-Procurement Best Practice Network, a BuyIT initiative, supported by government and industry.

The e-Procurement Best Practice Network was set up by the BuyIT Best Practice Group with the backing of the e-envoy and the Department of Trade & Industry and with the active participation of trade and professional bodies such as the British Computer Society, Computer Weekly's 500 Club, the CBI, the Chartered Institute of Purchasing, the CSSA and the NCC. A wide range of companies such as 3Com, Basaar.com, Infobank, MRO.com, Oracle, Reuters and Shell are supporting the initiative,

Starting in the autumn, the e-Procurement Best Practice Network programme will include facilitated dialogue events, surveys, guidelines and case studies to provide UK industry the opportunity to share experience, gain confidence and adopt the emerging best principles of e-procurement.

The BuyIT Web site will contain full details of the programme are available or contact Peter Duschinsky on 020-7828 7300.

Challenge for IT and business

  • ERP interfaces

  • Supporting the infrastructure

  • Speed and integrity of transactions (security; Intranet vs extranet)

  • Maintaining the data hierarchy (management information)

  • Controlling the external interfaces

  • Business-led initiatives in the IT domain

    Commercial challenges

  • Extending the use of contractual agreements for purchasing - but what will the contractual relationships be in the e-world?

  • How will suppliers differentiate their products?

  • At the end of the day, who will actually be the masters of the data being created?

    Benefits for sellers and buyers

    What value will buyers get from the exchange?

  • Cut down maverick purchasing by enforcing corporate contracts and standards

  • Cut transaction costs and boost internal productivity by saving time and effort in purchasing

  • Better demand management and inventory control

  • Better information leading to better decision making

    Suppliers will benefit from:

  • Closer integration with buyers

  • Lower catalogue content management costs

  • Lower cost electronic sales channels

  • Lower inventory, better planning and less volatility

  • Global reach and visibility for all, irrespective of size

  • Better management information

  • Read more on IT supplier relationship management

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