Petroleum has been the primary source of the world’s energy needs for decades, and overall consumption has been growing steadily. But the tide is turning, as oil and gas companies now face new market realities:
- A decrease in the demand for oil — While the current economic downturn is contributing significantly to this precipitous drop in demand, oil is also reaching a tipping point driven by a combination of climate change concerns, cost deterrents (oil reached US$147 per barrel in July 2008), the development of economically viable energy alternatives such as solar power, and the evolution of energy-efficient combustion engines, which affect the transportation sector.
As the overall demand for energy increases, the demand for oil and gas is not growing as quickly
- A transformed competitive environment — This decrease in oil demand will change the world’s future energy mix forever, thus resulting in an increasingly diverse and complex energy market (see Figure 1). The new competitive environment is further compounded and complicated by accelerated and amplified regulatory changes and the challenges of new oil reserves being found in remote and increasingly harsh operating environments, resulting in high exploration and production costs.
- Volatility and uncertainty in energy prices — No one can predict exactly how oil and gas markets will recover, but it’s clear that volatility and uncertainty in energy prices will continue, as illustrated by projected oil prices (see Figure 2).
Projected oil prices span a wide range
While a down cycle is nothing new for the oil and gas industry, the required response for today’s energy companies is dramatically different. To deal with this completely new set of realities, the industry has to transform. True, it must refocus on the strategic imperatives that have been key to its long-term success. But energy companies cannot afford to solely rest on their laurels — they must also explore and invest in new areas, thinking strategically about how to move forward. As more forms of energy become available to consumers, the industry must drive efficiencies into the development and operation of capital assets so companies can keep consumer costs low. Now is also an ideal time for oil and gas companies to prepare for this revolution and more fully integrate alternate energy forms.
In the following pages, we’ll discuss what oil and gas companies need to do to navigate this uncertain market and come out on top. We’ll also highlight how SAP solutions for oil and gas provide the foundation for energy companies to achieve both their short-term and long-term performance objectives.
Industry Insights: The State of the Energy Market
“[P]roducers and traders are struggling with the new reality: The world wants less oil, not more. And turning off the spigot is about as easy as turning around one of those tankers.”
— Chris Kahn, Associated Press*
“If historians now see the turn of the 19th century as the dawn of the industrial revolution, I hope they will see the turn of the 21st century as the dawn of the energy revolution.”
— Rob Routs, Executive Director Downstream, Royal Dutch Shell plc, Apeldoorn Conference, June 2007
“The break point is already here. Oil is in the process of losing its almost total domination in ground transport. It is not going to fade away soon — such is the scale of its use and convenience that it will retain a dominant position for many years. But it will share the transport market with other sources as never before, reinforced by a new drive for fuel efficiency.”
— Daniel Yergin, Chairman of Cambridge Energy Research Associates and author of The Prize: the Epic Quest for Oil, Money and Power**
* “As recession saps demand, a world awash in oil,” Chris Kahn, Associated Press (March 3, 2008).
** “Oil has reached a turning point,” Daniel Yergin, The Financial Times (May 27, 2008).
How to Thrive in the Current Market While Preparing for the Energy Revolution
Given the new market realities, energy companies must be lean enough to withstand the pressures of price volatility and a mid-term, low-price scenario and agile enough to quickly respond to changing market dynamics.
Fulfilling the world’s growing energy demands in a sustainable manner requires transparency, visibility, and accountability. Companies must meet their desired business outcomes while maintaining their asset development and operational excellence — all in collaboration with key business and regulatory stakeholders. Energy companies that can achieve this critical balance are well positioned to succeed not only in the current market realities, but also in whatever conditions they encounter in the future.
Best-run energy companies today have become lean in their operations and agile within their supply chains by deploying and utilizing a closed-loop management system that interoperates across its business network. This sustainable management system has both a vertical and a horizontal dimension (see Figure 3):
- Vertical integration from the top floor to the shop floor supports the operational efficiencies necessary for success in any energy price scenario. Within the closed-loop system, strategic business decisions are passed down from the boardroom to the various operations across the enterprise where changes are made. Closing the loop, boardroom decision makers have immediate visibility into the performance impact of their decisions. As energy’s tipping point approaches, this vertical integration will enable increased efficiencies and lower costs as best practices are more quickly identified and propagated across the enterprise.
- Collaborative management across horizontal business networks enables the necessary agility to respond to market dynamics and the fundamental changes in the energy mix and energy policies that companies will face in the coming decades. As companies reach horizontally across networks to other energy sectors, their development of energy forms will become more diverse.
A closed-loop management system includes both vertical and horizontal dimensions; the vertical dimension links the top floor to the shop floor, and the horizontal dimension encompasses companies exploring new energy forms in response to market dynamics
So how can energy companies achieve this lean (vertical) process approach and still maintain their (horizontal) business agility? They must see clearly, think clearly, and act clearly.
Seeing clearly means having a direct line of sight between the daily operations and performance of an enterprise’s complete business network and the corresponding effects on business outcomes. Any deviations must be transparent, timely, and actionable. The pace of business is too fast to postpone your response to a change in the market by a month — or even a week — simply because the required data is not available on time. Using SAP’s industry-specific and business intelligence solutions as a platform for integration, energy companies can gain plant-wide visibility and quickly gather the necessary data to monitor and manage performance at all levels of their organization.
To identify exceptions and update business performance models, you need rapid access to meaningful, aggregated information drawn from the entire business network. Shared and common information, delivered across functional areas, must concur and support a single view of the truth on any business issue. SAP Business Suite can accommodate this need and present consolidated information that’s tailored for the energy industry. This ability is based on SAP’s more than 25 years of experience providing solutions that span all segments of the energy value chain.
Accurate information relies on quality data. A company’s ecosystem is often made up of collaborative business processes from different solution providers. To ensure the compatibility and interoperability of data, you should have a single source of truth and a service-oriented architecture (SOA)-enabled business process platform that can comply with industry-specific standards for both communication and structure.
The SAP business process integration platform provides this flexibility and is used by a number of SAP customers. “There’s a terrific opportunity for companies to use SAP’s application of enterprise service-oriented architecture to achieve speed and efficiency while eliminating duplicate work and duplicate data,” says Hal Zesch, Senior Vice President and CIO, Valero Energy Corporation.1
Access to transparent information, coupled with a clear understanding of risk and consequence, equips an enterprise to crystallize strategic decisions and objectives. With the complexities of the energy business, long gone are the days that any individual can juggle all the various alternative scenarios and their current inputs to make an objective decision based on facts. Investing in joint ventures on a global basis, deciding on the exploration and production portfolio, evaluating various supply and replenishment scenarios in the supply chain, and responding to market movements downstream are only a few examples reflecting the complexity of the decisions that energy companies must make every day. Each of these decisions has its own specific risks to the business, and they all must also factor in broader environmental, health, and safety concerns.
Comprehensive and detailed risk analysis across a number of key functional areas of the business is made possible through SAP BusinessObjects analytics together with SAP BusinessObjects governance, risk, and compliance (GRC) solutions and complementary partner software applications. Of course, you then need to innovate to leverage and fully capitalize on this information and intelligence. Such innovation can come in the form of establishing new policies and programs or even codifying new business processes into composite applications aimed at mitigating newly identified or growing risks.
But above all, thinking clearly still comes down to people. You need to position the right decision makers very carefully, empowering them with the appropriate authority, training, and certification. You can do this most effectively by infusing your management system with role-based governance and compliance. An effective business process management (BPM) platform with resource management capabilities then allows you to make all these decisions transparent, repeatable, and auditable. For example, SAP BusinessObjects Access Control enables segregation of duties to ensure compliance.
This ability to think clearly across all delegated levels of authority within an organization, using a common understanding of business performance, unleashes the power of an organization. Each individual can play his or her part in the corporate symphony composed by the leadership team.
At this point, you have accessed accurate data and made the decision to act on it. But bad timing or poor execution can turn a seemingly good decision into an enterprise-quaking disaster. Clear and timely action requires process-based solutions that enable predictable, repeatable, and robust execution. This is the area where numerous energy companies have standardized their business processes using SAP Business Suite software.
While many companies have already mastered execution within the enterprise, the elusive next stage of maturity is being able to bring this same level of reliable execution to the extended enterprise. Achieving efficiencies beyond a company’s four walls is possible and necessary, especially as the demand in the energy market shifts. To be successful, organizations should — and can — have collaborative work processes that extend across both internal and external functions. Such collaborative actions can span horizontally when dealing with either suppliers or customers or vertically when collaborating across multiple operations or outsourced functions.
While the quest for clarity of sight, thought, and action is unique to each enterprise, common situations and scenarios do arise, presenting opportunities for best practices:
- Start with a strategic analysis and benchmarking effort, which allows you to ascertain a clear and value-driven perspective of current performance.
- By reviewing your current performance, you’ll expose best practices and the potential for business process optimization, integration, and standardization to achieve a lean organization and agility across markets. This will allow you to identify underlying solution requirements, choose the best solution partner, and plan the right course of action for your organization.
- Act where necessary to manage and mitigate the risks of each planned implementation project.
SAP’s expertise with the co-innovation and delivery of energy industry solutions is already helping to deliver almost half of the world’s daily oil demand. Couple this with our experience working with over 650 of the world’s largest and smallest energy companies, and you have a formula that uniquely qualifies SAP to fully prepare the industry for the challenges of this new energy revolution.
To learn more, contact your SAP account team or visit www.sap.com/industries/oil-gas/index.epx.
- The Logistics and Supply Chain Management 2010 conference in Orlando, February 23-26, 2010, for optimization strategies, best practices, and product education on procurement, demand and supply planning, inventory and warehouse management, forecasting and replenishment, and more (www.scm2010.com)
- “Valero and ESA Bring Acquisitions Online FAST!” by John Parker
(SAP NetWeaver Magazine, Spring 2006, www.NetWeaverMagazine.com)
Isabella Groegor-Cechowicz (firstname.lastname@example.org) is Vice President of the Industry Business Unit Oil & Gas at SAP AG, responsible for the industry solution portfolio. She has more than 10 years of experience in the oil and gas industry and in IT. Before joining SAP, Isabella worked as a program manager for SAP implementation projects in the oil downstream business and held account management and business process management positions with SAP partners.
Ken Evans (email@example.com) is Senior Director of Industry Solution Marketing for Oil & Gas at SAP. Prior to joining SAP, Ken served as Vice President of Marketing for FuelQuest and Senior Director and General Manager of i2 Technologies Energy and Chemical Business Unit. He also brings over 16 years of experience working directly in the energy industry in a variety of roles at BP. Ken holds a bachelor’s degree in chemical engineering from the University of Colorado.