1 ROUND TABLES RT 8 WORLD ENERGY MARKET CHALLENGES E-Business in Energy Industry: What will it change? Questions and Answers Mr. Hodges Given the success of Enron on-line, do you see expansion of other services that you can offer to your customers, and if so what kind? Mr. Piper: What we are trying to do right now is see how we can do more than just show the prices that are traded and to get out in the market. So we are looking at several things, one clearly is focus on the application commodity logic that we are working with the industry on where we are trying to provide the service logistics and settlement in a more central fashion. Clearly, I think that Enron does that fairly well for itself; what we believe is happening is with a dramatic increase in trade counts in many markets. A lot of enterprises can only handle a certain amount of trade counts. We are very focused on trying to get the industry to be able to handle these processes a little bit better. Clearly if that will happen Enron can benefit as well from more velocity in the market. The second thing is we've had several companies ask us about the application as enterprise tools and so we are talking to a few companies how we can help them with our technology and enable them a little bit better on how they show markets to their customers as well. Is there a way to quantify the economic impact of e-business over the lifting cost, or the finding cost of oil and gas for Chevron? Mr. Casserly: This kind of question is something that IT manager continuously struggle with. We continually go to our management and say: "We'd like to make an investment in IT infrastructure to lower the total cost of our operations", and the usual response is "how much it will cost?". It is very difficult for people to quantify the return of an IT investment which is why we try to sell it. If you just look at the literature of what people say the cost of the price is for e-procurement, in the oil and gas industry I think the number is somewhere around 200 billion dollars a year. So if you can improve the work process and take 5 % of the cost added value equation, then you
2 can save 10 billion dollars a year, and for a company like Chevron that will translate almost in 50 cents per barrel of oil. But that is only the e-procurement side, but I think that the power of what people call e-business is really more broad than that. It is also using the web to improve work processes, to lower the cost, doing by the things we used to do by paper or fax, or participating in the marketplace. And that also lowers your operating cost, which goes against your cost per barrel, cost per finding, etc. Working as a virtual team is another way that we save money. And finally let me say that oil field of the future, this e-oil field. I showed a very complicated slide which was in the form of a puzzle. Chips are now much smarter and smaller and you can put them virtually anywhere. If you can put enough information gathering instruments in your oil field and then accept that information and then use that information to turn into knowledge by running new er models and new simulation models, you really can run your oil field more efficiently; you can make better operating decisions, you can find out which parameters you need to adjust so you can match your production history to the earth s model and make some adjustments in fluids flow pressure, etc. And that again fits into the equation of lower cost per barrel. So I think it is very difficult to put a number on it but as an IT manager I have learnt to wave my hand a lot, as I just did. What is the R&D budget for e-business? Do you have a budget to build up new initiatives? And if so, how is that decided by your management team? Mr. Pappier First I need to clarify something. We do not have a budget for R&D specifically for e-business, we rely on this in companies such as IBM. What we indeed have is a large budget for R&D in our industry, it is development of new steels, development of new unions, development of grades that were not manufactured before. And we use Internet and we plan to use it more extensively to make selected parts of this information available to our customers. You take a look to the steel industry and 95% of the steel is being produced is very similar to the steel which was produced 20 years ago, maybe; but you go for example to pipelines and they are projects in the Gulf of Mexico or in the North Sea, that were just not possible 2 or 3 years ago. What makes these projects possible are new grades of steel and the engineering and the oil and gas companies need to be aware of all he developments and all the things they can do with our products and with our R&D, and what we are using is Internet in order to be able to better communicate selected parts of this knowledge to the proper people in these organizations. What steps are you taking at Tenaris to ensure the security of your data and the manageability of your data for your customers to obtain? I think we are not being extremely creative there, it is the standard procedures that are used by companies that manage maybe even more valuable information over the net as banks; so basically what we are using are passwords, digital certificates,
3 we are actually having a separate environment where customers can access to the data and our transactional backend, so really we are taking security very seriously, as most large institutions but because of the nature of the information that is provided to our customers, we do not see a huge risk. It is information that is extremely valuable for the customer and it is almost not valuable for anybody else. What percentage of all energy trading is being captured by Enron on-line? Mr. Piper In our core markets like natural gas and electricity in North America, clearly a significant number of the transactions in the industry are going through Enron on line, there is only a few other electronic trading venues in the industry; so in the US power and gas market, in I would say on any given day probably 20 to 30 % of the industry goes through the system. The second reason is a little bit difficult to answer as there is so much velocity in those key markets, velocity meaning 10/15 times financial volume in trade and physical delivery and it is really hard to know how many products are going through the over the counter market versus going through our over the counter electronic market. And the third thing is the transaction that we see there are various volume numbers so the volumes that get announced in the industry it is also difficult to statistically figure out which volumes are being counted twice or three times so to speak. But after having said all that mumble jumble I would say that probably a third of our core markets go through the system, and then on the non-gas, non-power commodities is much less. What is the real meaning of BtoB? and do you think that real e business and e commerce can work in such remote areas of Africa and its towns? Mr. Casserly First, I will give you my definition of B to B, it is business to business, and this is not the same that when I go to 1800 flowers.com and buy flowers for our anniversary for example, that is not business to business. Business to business is much more complicated than that. One example of B to B is Internet marketplaces, where companies put catalogues of all of the goods and services that they provide, they have pricing for all those items, up to day pricing. And even to the point that for member companies it might be different for each member, because of strategic alliances, etc. So all those catalogues have to be kept up to date. So one company goes in and tries to secure some products and services and once they have decided what products or services they need that transaction has to find its way from a web enabled front end all the way back through the financial back office system of both and may be more companies that are involved in that transaction. And this is a very difficult part because you have to have, you have to build a lot of middleware to handle that, to get that transaction back into the ERPs of the companies involved. So that is kind of what B to B is, unless in my definition. Now as far as Africa goes, in my last position I worked in Angola and one of the issues there was communications. We had to rely on satellite communication because there was no fiber although just this year fiber has been laid on the west
4 coast of Africa; there are connections to all the major cities along the west coast and I believe that is gonna improve the connectivity of the continent tremendously once it is all in place. The problem is that interior to that, the Internet penetration, the number of PCs available for, the question mentioned e-commerce, that infrastructure is not there. Wireless has really taken off in the country of Angola, because the infrastructure and the ground is not there and that will certainly help, but still because of the low standard of living, they are not able to afford PCs so Internet penetration is not just what it would be I think to make e-commerce really take off in west Africa at this time. I think it is going to be a while. Mr. Piper When the whole dot com thing started, we actually took over a year to be sure what B to B was, because we though what we had done was B to B and everyone told us every day that what we were doing was not B to B. But I think when we think of this is simply how to use technology to do two things, one reach out to your customer and increase your order flow, our business requires us to see as much order flow in the industry as possible. We need to be able to make sure that quickly and efficiently every single customer that may want to buy from us or sell to us to is able to put an order in front of us or at least see a price on the transaction and have a choice to do that. The second thing is the ability. Once that order is captured take them electronically through the fulfillment process, if you have to take orders and then re enter them by hand and then re enter them by hand into another system it is very cumbersome, and one of the beauties that we have been able to do with our B to B efforts is to be able to capture a lot of orders and then populate all of our different systems electronically, never touching it again. So we simply think of B to B in its early stages, how people could use technology to improve their interaction with their customers as an enterprise Mr. Pappier I agree with Mr. Piper. B to B is just another acronym, what you have is an old fashioned process improvement into the company that now extends its frontiers and also has to cover what you do with suppliers, customers and your partners into this process. But it is a lot of infrastructure work, a lot of process improvement and nothing else. Thank you very much. One question that people should be asking nowadays is if marketplaces are the right model. We are facing today, not only in this industry, but in many industries a very simple economic problem. Before the NASDA crisis everybody was trying to grab first boomer advantage. Now people are trying to really use other people's efforts and money, including the infrastructure, and then to work taking advantage of this infrastructure. So, basically companies are reducing their spending, the infrastructure is not been built. You don't have a common description of products or services, and it's very difficult for e-commerce to begin to grow very fast from
5 there. So, how you really divide into companies the money and the efforts to build the infrastructure that is going to be used by all of us is really the key question. And probably they are not going to be the marketplaces the ones that are going to profit as they thought they were going to profit from this before. Maybe it's going to be B to B, maybe it's going to be another paradigm. So, as Mr. Casserly said, we have to keep looking for changes in terms of paradigms, in terms of business models, and try to get to short term goals. In Tenaris our goal today is to be able to serve business customers needs through Internet. Visibility is one, collaboration tools for technical information is another. Whether e-commerce is going to be the key application we do not know. Mr. Hodges: I will also offer some comments here. Dealing with different oil companies around the globe the real inhibitors I see is the readiness of the culture and the backing system to accept the different way of working. And that goes all the way to the items that Carlos mentioned earlier about standards and this challenge we have in the industry. I guess many of you may know that in the United States there's right now a petroleum industry data exchange with several major oil companies to work on complex products and services to get to a common way of packaging the information so as to allow for easier transmission. It's a good start addressing the issues that Carlos has put forward. But the big thing that I've run into in a couple of clients I deal with is, one client I know for sure, I'm trying to work with somebody's big marketplace as they have 24 different instances of SAP in their different business units. So they've got lots of internal work to do before they can really begin to take advantage of some of these marketplaces. Several chemical companies are having what I would call hedging plays. They have a play with a public e-market, and they have customer-customized based on various business relationships that they want to strike with different customer segments. I think the big challenge is trying to figure out how a market segment you want to play in some of this marketplace. Mr. Piper: There's only two kinds of systems that can function. An enterprise can put up a system where they're committed to putting up standard products and standard terms and conditions and standard legal conditions all the time, so the customers know they can come there every day, and it's not a matter if it's there it's what price it is and that's liquidity. And it's easy for a company to do that if they're committed to doing that. What these exchanges have is no commitment to liquidity and fairly ad hoc standards on what the products are, and so they're not having very much success. So what I think we're going to have to do is we would like to see some other exchanges do well in addition to Enron on-line, but until other systems can follow the over the counter model with their standard contracts and their standard terms and conditions and some of these other industries will accept standardization of their products and physical spot markets, etc it will be very difficult for any of them to survive because no one would be committed to going to a place where you might see it one day and you may not see it the next day, and you're not sure what you're getting and pretty soon you're tired of it and you come to your old way of buying and selling.
6 Mr. Casserly: What's happening is that e-business model is constantly changing. When the concept of the Internet marketplace first came out it made sense to everybody. Let's pitch in a little bit, let's have some consortium, build a space, the links that build up all these catalogues and all these back-office systems. In fact, the problem is the standards were never agreed to, there were lots of other issues for which it was not to participate, because people had strategic alliances with different companies they did not want to break or get out of. Maybe for that service or product they were looking after they did not want to expose it to a common marketplace. Maybe there was also proprietor information that was associated with it that they did not want to share. So, I think that there are lots of reasons looking back now why a company may not want to participate in Internet marketplace. And that is why I think we have gone back to these private marketplaces with other strategic alliance partners, as Craig has mentioned. And then, maybe at the end of the cycle we'll use some of the functionality, but that e- business model is continuously changing and we have to adapt to it. I think this is probably the greatest challenge of e-business. I happened to ran across a July M&T study, and their research indicated that for every dollar you spend on technology, you have to spend about 10 dollar within your organization, that is a firm can only gain the benefit of a new technology when they make substantial investment in organizational capital within the form of training, new processes and improved decision practices. We really are asking people to not just automate an old process but to fundamentally change the way they do their business. And for a lot of people that's a threat. So management has to be fully behind it and you have to convince your employees that this is for their good and growth as well as for the company's. Are there any things you've done at Chevron Texaco to encourage that culture change? Mr. Ray Casserly: The thing that works for us is when management wants to talk. If I have some new technology that I think will enable the business unit then I go to the head man or woman and say: "Get out there and start doing this", and a lot of other people see what you're doing and using those new tools, for example, to operate a virtual team and then it catches on. So you've got to start at the top. Mr. Craig Hodges: Thanks, that's excellent. Just as a little bit of a different way, IBM when we go through all this kind of change we do that sometimes. Sometimes we just use blunt force, just the blunt instrument. We're going to do this this way just starting on Monday. And if you don't do that this way on Monday then you'll find something else to do. I couldn't recommend that all the time but sometimes those kinds of things need to be thought about to try to drive the right cultural change. Mr. Greg Piper: The internal culture we have at Enron has evolved quite a bit over the last ten years, and it's evolved into a culture of almost everything, everyone looks at involves their professional and their personal life. It's a risk-award cost-
7 benefit decision. My bet on a dollar makes three dollars and my bet on three dollars will make a dollar, and it's fairly engrained in our culture the risk-award analysis on everything not just the business. Where we're going to lunch, or if it's going to rain. So the way we can roll our technology initiatives is we've got to convince our culture that they're making a good bet, that what is going to happen is when they adopt these tools and they adopt these initiatives that there might be some cost involved but it is an investment for them, not an expense. And the big example out there was the Enron on-line system. We have a lot of people who were very comfortable taking orders the way they were taking them, buying and taking the positions they wanted to take. And what this would require them to do is an addition to that piece of their work. They would almost have to be like specialists in addition to what they were doing. And that meant some scrutiny because it got them out of their comfort zone. But once again as they started to analyze the cost-benefit of what that would do for their business the increased information, the increased order flow they figured out that there could be some downside to that option, but there'd be a lot more upside. Mr. Craig Hodges: Carlos, you have a unique opportunity at Tenaris because you've rolled out the Tenaris tracking application, you've talked about that. What steps are you undertaking to drive that culture change with your customers as well as with your internal staff to adopt to that way of working with Tenaris tracking. Mr. Carlos Pappier: Really very, very simple. E-business is just business, so you have to empower your business units, empower the procurement people, empower the sales people, and not trying to push technology for them to do things in a way that they don't think it makes sense. People need to learn about what they can do with the new technology, how they can change different processes, and once they take ownership and once they feel they're really using the new tool, they can provide a better service to the customer and discuss it with the customer initiatives grow in a very easy way. That's not to say we do not have to have the commitment from the top. That's also essential. But the buying of the business units, the ownership of the business units in this process is absolutely critical. I'm sorry to say that, but the worst initiatives I have seen in the last couple of years are things that came from headquarters that have pushed the operating units or the subsidiaries without any consensus. I cannot mention one of them that has been a success. You have to really educate the procurement, the operating, the sales people. Mr. Craig Hodges: Thank you very much. I'd like to provide some summary comments on the things that I've picked up, but first I'd like to thank all of you for participating today and the good questions that you put forward to this panel. I do appreciate that participation. I would also like to thank the fellow participants of my panel for being on this e-business panel today. Here are some of the things that I wrote down during this panel as I listened to all these speakers. Mr. Casserly talked in his comments about this key issue of management support. Now there's a last question. Here it is: No relation has been
8 mentioned so far between e-commerce and CRM, does this mean that they are of no relation, e-commerce and CRM? Greg, I think you would be ideal to talk about that. Mr. Greg Piper: I think there's clearly a correlation and a relationship between your customer resource management and the e-commerce that you do, because you gain so much information flow so quickly through the data base that you can't help but have some idea there. However, in an organization like ours, where we process significant numbers of transactions with counter parties, we need to be really careful of that. Most of our CRM doesn't connect to what we do from the Enron on-line system. It's mainly out in the business units where they track what they're doing with their customers on the marketing side. Mr. Craig Hodges: Carlos, you're a manufacturing company. At Tenaris tracking would you consider that to be a CRM type of application, customer relationship management? Mr. Carlos Pappier: Certainly it's an important piece, particularly if you are talking about fragmented markets with a whole variety of customers. We are having some thoughts on return of investment of CRM system where you have people that are addressing very few customers each, which is something that happens a lot in the energy community. Returning investment would be very different from banking or telecommunications. Mr. Craig Hodges: I have just a brief comment on that particular question. In all my dealings with the oil companies in the different geographies I've found that CRM is less important at this point in time in their portfolio of activities. I do see them with initiatives in the loops business, around customer segmentation and those kinds of things, then I see applications rolling out around that. So you do see some different initiatives taking shape but not really big wholesale implementation of packages, although I do see those kinds of activities in the chemical industry. So I appreciate that final question. Now let me try to summarize just briefly. Greg mentioned that the management support is very key to success. We all talked about the need for cultural acceptance and the way to drive cultural change is probably the same in all of our organizations. Integration and infrastructure. Carlos and Greg talked about that. I spoke about that in my opening comments. That's really some of the foundation building blocks we must put in place and I think up to this time it has been a difficult road around integration and infrastructure. But that's one of the critical success factors as we move into And a couple of quotes I've written down, I thought were very insightful. Greg mentioned the notion of things that Enron does well. They use technology to make it more effective. So they are always looking at their core competencies, the core things they do, then they look for different applications of technology to really drive efficiency, really drive productivity and really drive market share. The other one I thought was an interesting comment by Carlos. His words were: visibility builds customer trust and deeper collaboration opportunities.
9 And that's so true when we think about it. And our customers collaborate with us. We have a chance to build trust, which hopefully will build stronger relationships and that would turn in hopefully to more business. And Tenaris is an example. They're using their tracking system to give that visibility to their customers to try to build that trust. So those are some of the comments that I would like to make to the audience. I hope that you've found your time spent here this afternoon to be valuable. The panelists will remain here for a few minutes if you want to have one to one discussions. I thank you for participating and I wish you a good afternoon and evening here in Buenos Aires. Thank you very much.