The Big Online Energy Slide

Published Dec 12, 2003
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The slowdown of the world economy has hit everybody, but the technology sector has suffered the most. One can say that the first true sign that an era has passed is the assimilation into popular culture. If that is true, then the era of the dotcoms and the easy money is truly over. Movies and books are popping up, describing the rise and fall of companies without any real product, overconfident investors, an inflated market, and a feeling of anything being possible; turning into huge debts, venture capitalists without jobs, a market in free fall, and general despair all around? So how bad is it in the energy industry?

The Big Online Energy Slide-Link

Illustration: SOGM

About a year ago, I wrote about the proliferation of electronic hubs – the business-to-business marketplaces for procurement of goods and services, auctions, and information. Among the companies that were set to take a piece of the huge cake, were PetroCosm, an online exchange for the oil and gas industry that looked to linking buyers, sellers, partners and service providers in real-time, for trading across the supply chain. The e-hub was backed by such giants as Chevron, Texaco, and Petrobras, and seemed to have the necessary capital and market knowledge to take a promising position in what seemed to be a booming market, even in the face of the struggling Internet economy.

The PetroCosm adventure lasted less than a year. Launched in June 2000, the exchange closed down in April 2001, after a period of experiencing problems both related to the nature of the oil and gas industry, and to the wily ways of Internet business. The analysts watched the company struggle almost from the start. Some of the troubles came from a lack of broad support from the industry players.

‘This was an issue of building a buyer side B2B marketplace where only one buyer showed up, which was Texaco,’ Leif Ericksen, an analyst at AMR Research, told CNET last year. ‘They were one of the earlier adopters of Ariba, going back to 1999. At the beginning of 2000, they decided to spin PetroCosm off as its own entity, under the assumption that others would sign on.’

But few other companies did. The major players in the oil and gas industry either built their own marketplace – like Trade-Ranger, the e-hub created by Royal Dutch/Shell, BP Amoco, Conoco, and Statoil, among others – or took the conservative approach and waited to see how the online exchanges performed. Exxon/Mobil adopted the latter stance.

The fall of PetroCosm was influenced also by the general lack of faith in the Internet as a place of business. By the end of 2000, the markets had turned from the boundless optimism that peaked in March that year. The oil and gas industry is by most standards conservative and cautious when it comes to developing new business methods – quite natural for an industry that concerns itself with high-risk production and refinement of hazardous materials. The industry didn’t embrace PetroCosm, partly because the oil and gas sector was not reassured that the exchange could offer the combination of security and efficiency needed to make it the premier marketplace for procurement. With PetroCosm gone, Chevron has not abandoned its strategy for online procurement, but wants to pursue online business through its own service company. Chevron merged with Texaco to become ChevronTexaco in October 2001.

Trade-Ranger is the procurement exchange that seems to have established a firmer hold on the market. The company was founded in July 2000, and has grown steadily since, in the face of a turbulent world economy. Statoil are among the 16 companies that hold shares in the hub. And they are enthusiastic about the future of online procurement. ‘In the petrochemical industry, the value chain is complex, and a lot of time is spent trying to gather enough information to set up a business transaction,’ says Morten Sven Johannessen at Statoil. ‘You can look at the services offered through Trade-Ranger as a kind of outsourcing. By pooling the processes that are essential to each transaction, the time and resources used by each company are drastically reduced by using a centralized hub.’

When I asked Svein Engenes, a consultant at A.T. Kearney, a similar question last year, he pointed to standardization as a chief motivating factor for the creation of Trade-Ranger. Engenes cautioned that issues such as quality control and the deep commitment to security and safety might act as a decelerating factor in the development of an online business community in the oil and gas sector.

Johannessen recognizes this emphasis on safety and quality assurance. But he points out that the enthusiasm surrounding the joint venture is strong. ‘If we fail to make Trade-Ranger the online marketplace we want it to be, I wonder if we’ll ever be able to do it,’ he says. Even with BP Amoco withdrawing from the exchange last year, due to necessary financial adjustments, Trade-Ranger is growing steadily, and predicts it will be turning a profit by the beginning of 2003. In a December 2001, press statement, CEO Claire Farley said that there were 684 members of the exchange on the supply side, from the U.S., Europe, and Asia. In June 2001 there were fewer than 100, and now they are joining at a rate of 25 to 50 per week, according to the statement. ‘The equity sold, in combination with current buyer membership subscriptions, puts us on a solid path to self-financing by the fourth quarter of 2002,’ said Farley.

Since the demise of PetroCosm, Trade-Ranger has no real competition. This may be the key factor that will position the company as a spearhead in the online evolution in the energy business. One of the key qualities promoted by the B2B idea is openness, an indispensable tool for the fast, secure and efficient organization of online transactions. The gigantic crash and burn of energy giant Enron has illustrated that there is a real need for modernization of business practices, and universal exchanges may be the most comprehensive way of ensuring (relatively) fair play in the energy industry.

The big shakedown in the World markets over the last year or so has clearly shown that there isn’t enough room on the field for everybody who wants to play. This is equally true for the oil and gas industry. PetroCosm couldn’t hold up, even with the backing of some of the biggest actors in the industry. Other planned e-commerce portals have been shelved before launch. The only sites that are still around are purveyors of information, such as Schlumberger’s, WordOil, Upstreaminfo, or the recently launched OFS Portal, which provides standardized information to ‘facilitate e-commerce within the Oil Field Services industry,’ as the company states on the website, The information-mongers are in tune with the times, it seems, when they focus on a product that is cheaper to produce, and distribute, and thus cheaper to obtain for the needy. Maybe information will still be the product of choice for most online oil and gas players for some time.

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