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How Oil Companies Use BI to Maximize Profits

by Maroushka Kanywani, Editor, Dashboard InsightTuesday, June 10, 2008

Written by Kim S. Nash

Gas tops US$4 per gallon. Crude is trading at all-time highs-above $125 a barrel. And oil and gas companies are booking fat profits. In May, Exxon Mobil reported $10.9 billion in profits for its latest quarter, just short of its record-breaking $11.7 billion the quarter before. It's tempting - and politically expedient to explain such astounding numbers by saying that greedy oil companies are taking advantage of market fears, making money on the bent backs of corporate and individual consumers. So many of us, after all, have no choice but to buy fuel. We fill our cars to drive to work, where buildings must be heated in winter, supplies must be shipped, products trucked and executives jetted hither and yon.

Yet economists will counter that taking advantage, spotting a revenue opportunity, and moving on it is exactly what companies should do: That's capitalism. Oil companies excel at identifying where their profit advantage lies. And they obtain that advantage through sophisticated business intelligence systems.

Without good BI, oil companies risk their livelihoods, says David Knapp, a senior editor at the Energy Intelligence Group, an information provider for the oil industry. "Those that have lagged in understanding have lagged in performance," Knapp says. And BI is all about understanding what makes your company-and your industry-thrive. Mortgage lenders, for example, are going under in part because they didn't analyze enough of the right customer data and signed up risky borrowers. Retailers in trouble are studying financial intelligence to determine whether they should seek loans to stay afloat, like Borders Group, or, like RedEnvelope and Lillian Vernon, file Chapter 11.

Oil companies have always lived and died on BI, says Gary Lensing, VP and CIO for global exploration and production at the $32 billion Hess. "Data drives what we do, always quantifying where that value is."

Hess and its competitors harvest data from inside and outside their four walls, plus they factor in wild cards such as war, weather and global politics. BI in oil and gas isn't a simple matter of buying a set of analysis tools and feeding data into them. Oil companies pass information through multiple layers of software, with nearly every employee focused on collecting and storing some kind of data. Exxon, for example, wants its geophysicists to know Fortran, C and Java so they can code their own, quick analyses. When Hess drills a well, Lensing says, engineers collect status data every 15 seconds.
Typically, specialized applications for oil and gas such as Geolog from Paradigm Geotechnology (to find patterns in seismic measures) or PDI FocalPoint from Professional DataSolutions (to track gas station store sales in a dashboard) have their own analysis capabilities. But to get a global view of company performance, that data must be fed into off-the-shelf BI analysis and reporting packages familiar to most CIOs, such as those from Cognos or SAS Institute. Then the companies add supply-chain information. SAP for Oil & Gas modules manages the supply chains at companies like Hess and Valero. Those companies also use at least some of SAP's analysis and storage applications, including Business Warehouse. Oil companies store data in both common databases, such as Oracle, and specialized ones for the oil industry, such as OpenWorks or StratWorks from Halliburton.

When it comes to BI, Big Oil has a big view. "We're not as transactionally driven as other industries," Lensing says. "Are you trying to gain operational efficiencies by squeezing pennies out of transactions, or are you looking at core assets and trying to extract additional value?"

Examine how oil companies approach BI and you will uncover valuable lessons for improving your own BI efforts, whether you're trying to optimize profits or uncover untapped markets.

Factors in the Price of Gas

Old-timers called oil "Texas Tea," but the U.S. oil industry really started in Pennsylvania, with the 1859 discovery of light crude burbling between rocks in a farmer's creek. People at first used it to grease machinery and light lamps. Fifty years later, rigs pumped black gold from wells across the country and fortunes were made. Now, as then, oilmen cagey about their claims don't say much about what they know. But some will talk about how they know it.

In an industry where the top five oil companies last year booked $1.5 trillion in sales, thieves target that intelligence. In February, for example, Petrobras, the $112 billion state-owned oil giant in Brazil, had four laptops and two hard drives stolen. They contained "secret and important information," the company told Brazilian news outlets, about an ocean reservoir that in the next few years could produce up to 8 billion barrels of oil. Brazilian police are said to be investigating. Geologic information like the sort believed to have been stolen from Petrobras is one piece of the "upstream" part of the business, where companies and countries explore and drill for oil deposits deep in the earth. Analysts combine geologic and seismic data with what-if engineering models showing how best to get the oil out and the projected costs of such a multiyear project, explains Louie Ehrlich, CIO and president of Chevron Information Technology.

Then there is the "downstream" work of refining crude oil into something usable, such as gasoline or diesel, and of getting those products sold and delivered. Those jobs generate information on refinery capacity and throughput, for example, and the cost of marketing and distribution.

Exxon and Chevron, the biggest oil companies in the United States, are known as "integrated," meaning they work both the upstream and downstream ends of the business. Petrobras does, too, though Ehrlich points out that no company is perfectly integrated, meaning that what it finds in the ground always ends up in its own refineries. Chevron might find crude that its refineries don't handle, he says. "Some types of oil require more complex refining capability to process." Chevron produces about 2 million barrels of oil per day and only refines about 15 percent in its own refineries.

Others focus on just one end or the other. Valero, for example, is the biggest U.S. refiner, concentrating on the downstream work of turning oil into other things to sell.

Upstream usually costs more than downstream. Exxon, for example, spent $15.7 billion on upstream jobs in 2007; Chevron, $15.5 billion. But downstream costs stack up, too. Exxon's were $1.1 billion and Chevron's $3.4 billion.

Prices at the pump reflect these expenses. The cost of crude oil constitutes most of the price of gas, accounting for 73 percent of today's $4-plus figure, according to the U.S. Department of Energy. Refining, meanwhile, is 8 percent; so is distribution and marketing. The remaining 12 percent goes to state and federal taxes. Each oil company analyzes its costs and potential income, says David Smith, an IT consultant to the oil industry at Electronic Data Systems, trying to profit at each step (except for taxes, which are fixed).

Traditional economic principles of supply and demand alone fall short when you try to forecast prices, Smith says. "With political instability, fear about Iran and Iraq-those have ripple effects and an emotional response at the pump," he says.

"You have to blend that volatility with real-time market data and factors you can't predict."

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