Worldwide Oil Exchange – the Shell perspective
On 5 July 2000, 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 $125 bn 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.’
‘The competitive 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 emphasizes. ‘It’s about taking
cost out for both suppliers and buyers and reducing institutionalized 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 per cent 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 per cent, will come, says Miller,
from cutting out maverick procurement and complying with corporate standards. He also expects about 20
per cent 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.’
© Marketing Insights Ltd 2004
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 100s of 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 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.’
© Marketing Insights Ltd 2004
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.
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
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
Source: Article in Computer Weekly, 6 July 2000, pp. 26–7. Reproduced with permission of Reed Business
Information.
Questions
1. Using your judgement and by refereng to the article summarize the benefits to Shell of using
an exchange rather than a buy-side or sell-side e-procurement.
2. Which of the commercial and technical challenges do you think are unique to an exchange,
and which may occur for other forms of e-procurement?
© Marketing Insights Ltd 2004