Conversations About the Downstream

Oil Company of the Future —

The Virtual Oil Company™

AN ARTHUR D. LITTLE ENERGY

INDUSTRY ROUNDTABLE
 P Amoco • EOTT Energy • ExxonMobil • Equiva Services
L.L.C. • PROS Revenue Management • Williams Energy Mar-
keting & Trading Co. • Citgo Petroleum Co. • Conoco, Inc. •
Ul
tramar Diamond Shamrock • BP Amoco • EOTT Energy •
Exx onMobil • Equiva Services L.L.C. • PROS Revenue Man-
agemen t • Williams Energy Marketing & Trading Co. • Citgo
Petroleum Co. • Conoco, Inc. • Ultramar Diamond Sham-
rock • BP Amoco • EOTT Energy • ExxonMobil • Equiva
Services L.L.C. • PROS Revenue Management • Williams En-
BACK
ergy Marketing & Trading Co. • Citgo Petroleum Co. •
Conoco, Inc. • Ultramar Diamond Shamrock • BP Amoco •
EOTT Energy • Exx onMobil • Equiva Services L.L.C. •
PROS Revenue Managmen t • Williams Energy Marketing &
Trading Co. • Citgo Petroleum Co. • Conoco, Inc. • Ultra-
mar Diamond Shamrock • BP Amo co • EOTT Energy •
ExxonMobil • Equiva Services L.L.C. • PROS Revenue Man-
agement • Williams Energy Marketing & Tra ding Co. • Citgo
Petroleum Co. •on Conoco, Inc. • Ultramar Dia mond Sham-
For more information
Energy Industry Roundtables,
rockplease
• contact:
BP Amoco • EOTT Energy • ExxonMobil • Equiva
Services L.L.C.
Christopher Ross • PROS Revenue Management • Willia ms
Arthur D. Little, Inc.
nergy Marketing & Trading Co. • Citgo Petroleum Co. • C
1001 McKinney, Suite 1700
Houston, TX 77002
onoco, Inc. • Ultramar Diamond Shamrock • BP Amoco •
Telephone: (1) 713-646-2200
EO TTEmail:Energy • ExxonMobil • Equiva Services L.L.C. •
[email protected]

PROS Re venue Management • Williams Energy Marketing &

Toward the Successful E-connected Oil Business of 2010

IN THE SUMMER OF 2000, ARTHUR D. LITTLE,

INC. invited a group of leading thinkers from energy
companies and key e-business enablers to discuss how e-
business will change the future of the downstream oil in-
dustry. We gathered an industry cross-section of majors,
large independents, midstream companies, and service
providers. In addition, we included e-business companies
who work both within and outside the oil industry. Here,
we briefly outline the issues facing the oil industry in the
new e-commerce era and recount the conversation from
the roundtable discussion. Over a day of vigorous debate,
we developed a surprising degree of consensus on the ele-
ments of the future structure and dynamics of the indus-
try, some outlying scenarios, the possible events that will
trigger change, and the potential barriers for companies
in this new environment. While much uncertainty exists
as to the final direction the future will take, we came
away with a better understanding of what the industry
must do to be responsive and adaptable to the inevitable
change and ultimately to achieve superior results despite
the potentially volatile environment.

This booklet reports on the learning from the Downstream

Roundtable. We feel privileged to be part of this fascinating

discussion and hope that our readers will find it interesting,

informative, and worth further exploration.

An Arthur D. Little Energy Industry Rountable i

 The Executives

Jim Alderman Vice President-Operations, U.S. Commercial Fuels, BP

Amoco

Michael Burke President & CEO, EOTT Energy

Scott Deaton Customer Development Specialist, ExxonMobil

Patricia M. Giedris Manager – eBusiness Ventures, Equiva Services L.L.C.

Colin Goodall CEO, Quaris

Nick Hauser Manager – eBusiness Ventures, Equiva Services L.L.C.

Matthew Johnson Vice President – Energy, PROS Revenue Management

Bill Lawson Director – Strategic Development, Williams Energy Marketing &

Trading Company

Bill McCollough General Manager – Marketing Services, Citgo Petroleum

Company

Brent Meyers Manager – Knowledge Management, Conoco Inc.

Mark S. Palmer Vice President – Technology Channels, Enron

Doug Rosenberg, eBusiness Project Team Leader, Global Fuels Marketing ,

ExxonMobil

Reed Williams Vice President – Business Development, Ultramar Diamond

Shamrock

HOST AND FACILITATOR: Chris Ross Vice President in the Global

Energy Practice of Arthur D. Little and head of the
Houston office

Greg Bean Vice President in the Global Energy Practice of Arthur D.

Little and North American Energy Practice Leader

J. Tim Wilk Director in the Global Energy Practice of Arthur D. Lit-

tle and leader of the energy e-business initiative

ii E-BUSINESS AND THE VIRTUAL OIL COMPANY

The Overview
GIVEN THE DIFFICULT INDUSTRY ENVIRONMENT OVER THE PAST ten years, downstream oil
companies have focused internally on reducing costs, cutting marginal activities that do not fit into long-
term strategic plans, finding more efficient organizational structures, and improving capital utilization.
More recently, the emphasis has been on restructuring with alliances and mergers, creating huge entities
with massive scale and sometimes very different cultures inside them. The challenge for these organizations
has been to integrate the different corporate personalities to a seamless whole, capture the benefits of scale,
and set a sound path forward.

The Virtual Oil Company

develops strategies for
growth and renewal...

…concentrates its efforts

on its core business
processes...

…assures the resources

required for competitive …and organizes in teams for
advantage... maximum effectiveness and
employee satisfaction

The Virtual Oil Company Model

The industry has, in fact, been striving to emulate what Arthur D. Little calls the Virtual Oil Company
model. It is based on a concept of a successful company, which we call the High Performance Business. We
define the high performance business as one that regularly reviews and adjusts strategies to satisfy its key
stakeholders – owners, customers, and employees – within the context of the changing external environ-
ment. It also continuously improves critical business processes, and aligns resources and organizations
around these processes. Its organizational principles include a flat, information-based structure, and em-
phasis on teams with strong accountability and decision authority at the lowest levels.

While this model has demonstrated significant results, matters have been complicated further by rapid tech-
nology advances such as the Internet and broadband, which are broadly changing the way that business is
done. Consumers and businesses have access to more and better data, can do banking and shopping on-
line and can connect with a much larger multitude of companies and service providers. Businesses have
access to technology that can reduce procurement costs, enable better customer relationship management,
and empower more diverse partnerships and opportunities than ever before.

With the tremendous benefits this technology brings, there are also complications and headaches for busi-
ness, including the downstream oil industry. While most companies have resources devoted to understand-
ing the technology advances and how they can be harnessed, there is a growing need to relook at long-term
vision and strategy in light of the changing environment. Will there be a major transformation of the indus-
try as a result of these advances? How should e-business be addressed in a downstream company’s long-
term strategy? How can a leading edge oil company best deal with the accelerating changes? What can be
done to enable the information flow to catch up with the technology currently available? How does the cus-
tomer fit into this new environment? Does the downstream oil company organization need to change to a
more “e-oriented” one? What relationships will be necessary to compete in the new environment? And,
looking beyond e-procurement and mergers, how can leading oil companies position themselves for sus-

An Arthur D. Little Energy Industry Rountable iii

 The Downstream Business Model in 2010
The Roundtable used the high performance business concept to drive a
discussion of what the industry could look like in 2010. For each of
the model segments, key questions were explored to help define the
possible elements and issues of the future downstream industry.

• Who are the target • What is the nature

customers? of customer
interaction?
• What are they
buying? • What processes are
key to success?
• What is the Business
competitive Strategies Processes • How is technology
landscape? being leveraged?
Culture
• What are the • What is the optimal
compelling value asset mix?
propositions?

Resources &
• How are Organization • How are key
players skills acquired
organized for and managed?
success?

• How are appropriate

attitudes and behaviors
created?

Strategies
The roundtable discussion of strategies for 2010 focused on the key
areas of customers and information, brand, and price discovery. It was
in these arenas that the roundtable participants saw the biggest depar-
ture in 2010 from “how it’s done today”.

On Customers and Information

Tim Wilk, a Vice President of Arthur D. Little, noted that the oil indus-
try has not typically been as focused on customers as other industries.
In defining the industry in 2010, he asked, “Who are the target cus-
tomers? What are they buying? Not what are we going to be selling to
them, but what are they buying?”

To Brent Meyers, Knowledge Management Manager for Conoco Inc.,

the needs of the 2010 customer are not that different from the custom-
ers of 2000. “They want energy cheap and readily accessible. In some

1 E-BUSINESS AND THE VIRTUAL OIL COMPANY

parts of the world, they will want it to be sustainable; in other words:
clean, environmentally friendly, and non-damaging to the health and
safety of the population.” For some customers, sustainability and af-
fordability may be even more important than today, he added.

“With the emergence of hybrid automobiles, I think the retail con-

sumer may be consuming a different mix of fuels. I don’t know exactly
what that is, but it may be fuel cells in their cars or a higher quality,
still cleaner gasoline,” said Mark Palmer, Vice President – Technology
Channels for Enron. “So the $20 of gasoline I put in my tank every
week now is probably not going to be the same in 2010.” Bill Lawson,
Director of Strategic Development for Williams Energy Marketing &
Trading Company, envisions a vehicle with fuel-switching capabilities.
“Those that are environmentally sensitive or those that are price sensi-
tive can switch among fuels to power their vehicles.”

“You will have physical delivery of product to whatever you’re putting

it into: your house, your automobile, your hovercraft or whatever,”
added Meyers. “There could be a destination zone where you go to a
certain spot and do a lot of business, and every once in a while you fill
up with some petrol.”

“Customers are always going to want their energy fast, convenient and
available anytime that they want. That’s not going to change,” com-
mented Scott Deaton, Customer Development Specialist of ExxonMo-
bil. “How we meet those needs is what will change.”

Patricia Giedris, Manager of eBusiness Ventures for Equiva Services

L.L.C., agreed. “Convenience is going to be key in 2010. Today we see
that our tank is empty and we go fill it up. In the future, either it’s go-
ing to be anticipated somehow so that it gets done for you, or the fuel
will be delivered to you in a bundled way with electricity and some
other things as well. But convenience is what will be captured.”

“Price and reliability will have to be an ante to play. If you can’t pro-
vide those, you’re not even in the game; but providing those is not the
differentiator,” noted Tim Wilk of Arthur D. Little. “The differentiator
is going to be meeting each individual’s experience needs.”

“We’ll need to go from asset-minded companies to customer-minded

companies,” stated Bill McCollough, Marketing Services General
Manager of CITGO. “I see us moving more and more towards that in-
dividual one-on-one marketing, with different models and customer
segmentation much like other industries do. And some of our competi-
tors aren’t going to be energy marketers. HEB1 doesn’t consider them-
selves an energy marketer, but they’re selling a lot of gasoline.”

1
HEB is a major grocery chain based in Texas

An Arthur D. Little Energy Industry Rountable 2

 “What about the energy experience?” asked Wilk. “Why would I not
just buy my energy requirements, lubricants, and all related require-
ments from one company at one time if I could? And they also guaran-
tee I will have transportation when I need it. We’ll be sure your car
gets its oil changes, all the fuel it needs, and we’re going to sell you a
driving experience for ‘x’ cents a mile.”

“And to add to that, wherever you choose to stop – say the most con-
venient service station along your way home – you get this pricing sce-
nario at that station. They’re just dispensing the product to you.
You’ve negotiated your price in advance,” said Lawson.

I
“It’s going to be irresistible not to use all the data we have,” said Wilk.
“ t’s going to be “For instance, every time I buy at Randall’s2, whether I pay cash or
credit, I swipe my Randall’s key chain in order to get a discount. All of
a sudden Randall’s is now collecting more data than the average retail
irresistible to location does about its customers. They know how often I buy gasoline,
how often I go to the grocery store and what I buy. So it’s going to be
have that much irresistible to have that much data about specific customers and not
use it in the way you structure your company.”

data about spe- “What about privacy when you start doing that?” queried Conoco’s
Brent Meyers. “Ten years from now you have a mobile device squawk-
cific customers ing who you are and what you like. You drive down the street and peo-
ple are tracking where you are and sending you messages. It’s a real
and not use it in issue.”

the way you

“That’s where permission marketing, which is a buzz word out there
now, comes in,” said Scott Deaton of ExxonMobil. “That’s critical, es-
pecially for Big Oil. People like to pick on us and single us out when-
structure your ever we seem to make the slightest indiscretion.”

Wilk continued, “One of the big powers of the Internet is the ability to
separate information from physical location. You no longer have to go
somewhere to find something out about it. For instance, you might not
have to go to a gas station to find out the price of gasoline there. So if
that’s true, then the way I locate a service station may be very different
because visibility to the street may not be so important as ease of ac-
cess.”

McCollough added, “We’re going to learn that customers are individu-

als. It’s the customer experience that they encounter, and that will help
set what the brand might be.”

2
Randall’s is a Texas grocery chain, now owned by Safeway

3 E-BUSINESS AND THE VIRTUAL OIL COMPANY

On Brand

“What I’m hearing is convenience and bundling of services. Does that

mean that the brand disappears or can you have some brand differen-
tiation in this new environment?” asked Chris Ross, a Vice President
of Arthur D. Little who heads the firm’s Houston office.

“One way to maintain a differentiated brand could be through e-

commerce. You could offer services that would allow a consumer to fix
their price with you,” proposed Bill Lawson of Williams. “We’ll give
you a fixed price of $1.20 for the year. You can lock in now and we’ll
give you a certain volume at our facilities and our alliance facilities
across the country.”

“What the brand gives you is comfort that the price is going to be a fair
one and that the quality is going to be there. But the energy needs,
whatever they may be, will be available when you need them,” said

Will the brand

Colin Goodall, CEO of Quaris. “In some cases that coverage might be
provision of the service by a third party. And how you protect the brand
using a third party will be an interesting question.”

Much of the discussion centered on whether the brand of tomorrow

would be a product brand or a customer service brand. “Whose brand
of tomorrow be a
is it ten years from now?” asked Wilk. “Is it the brand of whatever the
interface with the customer is? Is it the brand of the manufacturer? Is product brand or
it the brand of the service provider or the transportation provider?
Whose brand dominates in this world?” a customer ser-
Meyers felt that the brand could be entirely different in 2010 than it is
today. “It could be MS-Energy. Or you could have Coca-Cola stops,
vice brand?
where you also buy petrol.” Coca-Cola’s model of disaggregating de-
livery from the brand was discussed as a possibility for the downstream
industry as well.

“And that’s the fundamental change: the brand would no longer be on

the mast. The brand is on the computer or your credit card,” said Colin
Goodall.

“I think there will be a lot of creation of new brands that are associ-
ated with companies that are now second- or third-tier companies,”
said Doug Rosenberg, eBusiness Project Team Leader for ExxonMo-
bil’s Global
Fuels Marketing. “Your flagship brand may serve a certain purpose,
then you might spin off a whole separate brand that facilitates a cer-
tain type of segment.”

An Arthur D. Little Energy Industry Rountable 4

 “I think the difference between QuikTrip3 and the oil companies is the
oil companies are selling gas. QuikTrip is selling what the customer is
looking for, and they’ve taken a different approach to them,” stated
Jim Alderman, BP Amoco’s Vice President of Operations for U.S.
Commercial Fuels. “In the future, we’ll see the oil companies coming
to the realization that gasoline doesn’t make it anymore and we’ve got
to transform into new revenue models – either Web-enabled or not. If
we’re going to fight Costco4 and Randall’s, it’s not about gasoline.”

“But I think it’s taken the oil companies a long time to come to grips
with it and start developing strategies around it,” said Equiva’s Patricia
Giedris. “That’s why RaceTrac5 and the other guys are beating us.
They’re counting on the fact that it will take the oil companies so long
to come around and do these things. The RaceTracs are just doing it.”

“The interesting issue for a lot of companies is how fast you get to
commoditizing your brand,” said Doug Rosenberg. “What kind of li-
quidity are you going to get from any major when you want to com-
moditize their brand as fast as you can?”

“A couple of marketers in Europe went from nothing to half the mar-

ket share while people sat around saying, ‘They’re not going to get li-
quidity.’ They only needed a little bit and they had success,” said Wilk.

“How do you use the Web to grow your brand or create a new brand

We need to
that will differentiate yourself from a Priceline.com model?” asked
“ Rosenberg. “I don’t think the Proctor and Gambles of the world are
happy about what the Web is doing to their brand right now.”

start talking to “They are losing customer contacts,” noted Wilk. “They’ve lost rela-
tionships that they had for many, many years.”

customers.” “In our industry, 50 percent of the purchases are at the pump, so
there’s no one there saying, ‘Thank you for your business’,” said
Deaton. “We need to start talking to the customers.”

On Price Discovery

“Is there a way the industry can get out of that mind-set where people
price shop on something that really doesn’t have an impact on them?”
asked Tim Wilk. “Today people will do anything to save 5 cents a gal-
lon. But for the average consumer, that’s only 50 cents to a dollar a
tank and any other purchase they make is likely to eradicate it.”

“I think for the price-driven customer, you could offer a whole myriad

3
QuikTrip is a rapidly growing convenience store chain based in Oklahoma
4
Costco is a California-based grocery chain
5
RaceTrac is a convenience store chain based in the Southeast

5 E-BUSINESS AND THE VIRTUAL OIL COMPANY

of services directed toward them: whether it’s fixing your prices or
having variable prices or having callers,” surmised Bill Lawson.

Matthew Johnson, PROS Revenue Management’s Vice President-

Energy, has seen the airline industry successfully segment its market
and differentiate between customers wanting a fixed price and those
willing to have dynamic pricing. “The airlines broke a commodity seat
into 22 or 26 different products by wrapping services around it. Then
they price-discriminated between those very effectively so that on the
day of departure they’re selling $1200 tickets and $200 tickets simulta-
neously. Both ends of the consumer spectrum are happy: the business
guy is happy he got his ticket at the last minute and there was a seat
available and the person on Priceline.com is happy he got a $200
ticket. It boils down to productizing a fungible commodity into a differ-
entiable product.”

“To differentiate on a gasoline sale, you’re going to have to make it

very clear and publish what the terms and conditions around commit-
ting to buy that gas so many days ahead or in such a volume are,” said
Wilk. “And all of that will have to be created to be able to differentiate
on price.”

“On the airlines, the issue was with publishing those terms. You could
have a very consistent pricing policy, but if it was unpublished, you
were going to get beat up. That’s been a trial-and-error process for al-
most 20 years,” said Johnson.

Johnson continued, “Historically, we’ve seen the oil companies sell

their products based on its intrinsic value. They sell the gas or the
transportation form, but they don’t capture the extrinsic value, the real
options value of their capacity. That’s where the Enrons of the world
have done an extremely good job. Most of the other marketers basi-
cally buy firm capacity at or above the intrinsic value, so that the pipe-
line feels like it’s getting a great deal and makes a lot of money off the
extrinsic value: having the storage and taking advantage of the market
peaks. Most of the pipelines are now realizing that as the intrinsic
value is getting smashed down, they’ve got to be able to capture a piece
of extrinsic value.”

Noted Michael Burke, President & CEO of EOTT, “Although in

EOTT we price on crude quality and location to some extent, we’re ac-
tually paying people unfairly in that a number of producers give us re-
liable barrels day after day while others bunch it up at the end of the
month. They have a free option to give it to us or not give it to us. So I
think it’s a great opportunity to take the commodity and turn it into the
specialized product and hopefully add some value in that.”

An Arthur D. Little Energy Industry Rountable 6

 “Ideally what you want to set the price on is the value to the customer

I
“ deally you
rather than purely on cost,” said Matthew Johnson.
Should the oil companies consider dynamic pricing similar to what the
airlines do?

want to set the “Customers don’t generally like dynamic pricing where they can see it
happening,” explained Johnson. “Most of the dynamic pricing we’ve
price on value to seen is fairly invisible to the specific customer. They dial in and get a
price. They don’t see the fact that the customer before them got a dif-

the customer ferent price and the customer after them got a different price.”

To Johnson, the way that Randall’s supermarkets use a market basket

rather than of products to adjust pricing is very effective. “Randall’s has conclu-
sive evidence that consumers have a market basket of products that
purely on cost.” they track the prices of in lieu of tracking everything. They use the bas-
ket as a surrogate for the fairness of pricing throughout the whole
store. Randall’s has figured out what those items are, and they give
those almost as loss leaders. They then increase the prices of every-
thing else that they haven’t found any price elasticity to.”

“To do that effectively, the industry will have to start measuring con-
sumer behaviors in ways they haven’t measured or analyzed them be-
fore,” commented Wilk.

Business Processes
In the Virtual Oil Company model, the core business processes are
viewed holistically across the industry to include partners and suppli-
ers. Particular attention must be paid to value creation processes,
those distinctive processes that set corporate direction and assure stra-
tegic capabilities. For Roundtable participants, the most important
value creation process for discussion was value chain integration. The
key question they debated Distinctive
was whether vertical and
Value Creation Processes
“Differentiate and Excel” • Set Corporate Direction and Manage
the Portfolio
• Assure Strategic Capabilities
• Manage Relationships and
Communication With Key Stakeholders

Operational Effectiveness Processes

• Manage Business Performance
“Remain Competitive” • Manage Senior Staff Resources
Protection Processes
• Ensure Fiduciary Control and
Compliance
• Manage Key Corporate Risks
“Keep the Wolves at Bay”
Particular attention must be
paid to value creation processes
Threshold

7 E-BUSINESS AND THE VIRTUAL OIL COMPANY

horizontal integration of the supply chain would remain or whether
disintegration of the supply chain would predominate in 2010.

On Value Chain Integration I

“ s integration
“Let’s carry the technology forward to where we have the dream of all
exchanges,” proposed Arthur D. Little’s Tim Wilk. “I’m the perfect en-
from wellhead to
retail location
ergy exchange hung into the perfect consumer exchange hung into the
perfect flat screen in my TV exchange of the future. And now as a con-
sumer, I can basically have pure supplier discovery: I know everybody
that can provide me with what I need. I have pure price transparency: I valid in this fu-
know every price that’s available, all the delivery terms and all the
other value-added propositions that are out there. I can assemble my
own value chain – what does that mean for the oil industry? Is integra-
ture world?”
tion from wellhead to retail location valid in this future world?”

“I think that the concept of the major oil company in this long vertical
chain is going to go away,” said BP Amoco’s Jim Alderman. “You’re
going to have co-branding relationships where you have multiple areas
of trust that come together to bond them to the customer.”

“Does that mean that the oil companies evolve to the two or three best
refiners and the two or three best infrastructure providers and the two
or three best producers? Is there a role in 2010 for someone who can
do all those things well?” asked Wilk.

Colin Goodall replied, “The technology, like the Internet, is massively

dropping the entry barriers. Information is becoming cheaper by the
day. This may well make it easier for niche players who are highly fo-
cused to bundle and provide services in a very attractive way.”

“So I’m the value chain assembler for a customer group?” asked Wilk.

“Yes, and the petroleum company becomes the supplier, the manufac-
turer. We’re not very good about focusing on customers; we’re good at
managing assets,” answered Citgo’s Bill McCollough.

An Arthur D. Little Energy Industry Rountable 8

 Lawson pointed out that where the lion’s share of the profit is distrib-
uted along the value chain becomes a bigger issue in this type of
‘virtual’ value chain. “Is it those who control the customers and have
access to them either through electronic or other means, or is it the
manufacturer who’s going to be able to dictate stronger pricing
terms?”

Chris Ross added, “It

seems like bundling is go-
ing to become very cheap,
very easy to do, and what
may be much more diffi-
cult is to make money out
of the physical delivery.”

“But the paradox is that if

physical delivery is unreli-
able, the rest of it’s not
worth anything,” said
Goodall. “For the party
providing the reliability to
be relegated to a position of the lowest margin earner would seem
somewhat unfortunate.”

“It’s interesting what’s happening with Cisco and in the electronics

industry in general. A lot of the manufacturing is outsourced, but in
fact, the expert manufacturers are doing pretty well. The people who
do it well are getting very good multiples and are growing rapidly,”
noted Ross.

“The bet I’m making,” said Goodall, “is that unless there is a strong
affinity between the clicks and bricks, there actually is not sustainabil-
ity.”

“Could you take a manufacturing competence, say, and move it across

industries if that was your focus?” queried Ross.

Williams and Enron were cited as examples where this was working
today. Lawson of Williams said, “We have a good focus in midstream,
just looking at that piece of the value chain and building our compe-
tencies within that arena. We are carving out a position of strength so
that we can go ahead and capitalize on market opportunities.”

Similarly at Enron, Palmer noted that risk management and commod-

ity trading services are being provided across facilities and industries.

9 E-BUSINESS AND THE VIRTUAL OIL COMPANY

“Along the financial services spectrum we’ve taken expertise that’s
worked once and then cookie-cuttered it across others such as metals,
electric power, gas, energy, bandwidth and pulp & paper.”

There was some debate as to whether this would apply to manufactur-

ing as well. “I think you’ll fundamentally lose out on being attractive
to the investment community,” noted Goodall.

“Traditionally refinery return on investments have been horrible, but

they’ve been measured against a sort of open market front and back
end to the refinery. Maybe if you put a risk package around these as-
sets, you can create an environment where you have a chance to man-
age the money in that chain,” suggested Wilk.

Palmer also noted that there are significant differences between manu-
facturing aluminum and manufacturing unleaded premium gasoline
that could make transfer of manufacturing competence across com-
modities difficult. EOTT’s Michael Burke agreed, “I think to run a
process extremely well, there are so many specific things to that par-
ticular process.”

“The chemistry is different, but I bet a lot of the processes are more
similar than people will admit,” said Ross.

“You already see that to a certain extent amongst the so-called super
majors in refining and chemicals,” added Greg Bean, an Arthur D.
Little Vice President and North American Energy Practice Leader.
“There is increasing emphasis on getting scale and integration benefits
associated with large integrated sites. That’s one point of evidence that
there is a lot of transferability of skills and competencies. You can ar-
gue that chemicals is a half step removed from refining, but it’s a sub-
stantially different business in a lot of ways.”

“So I can’t quite reassemble virtually, as I might like. I might like to

just run refineries, but the marketplace has never been conducive to
that,” said Wilk. “For some people to reside within the value chain,
they’re going to have to do more than what they do perfectly well. They
have to try to backward integrate or forward integrate to have enough
margin to have a sustainable business. What might have to change be-
fore the marketplace starts to reward the risks and capital intensity of
each piece of the value chain?”

“A player within the business becomes expert in a piece of the value

chain and starts taking that expertise across commodity lines to come
up with a growth play,” hypothesized Ross.

An Arthur D. Little Energy Industry Rountable 10

 Meyers raised a fundamental question. “Is manufacturing ever going
to be a growth business that attracts high rates of return? Or is manu-
facturing a steady state kind of business where you can do optimization
and operational excellence and shaving the cost and risk formulae to
optimize within certain bounds? The other piece is the customer con-
tact and it may not even look like it does today. Right now we think of
the customer interface as a gas station. Could it be McDonald’s or
Eckerd’s? Are traditional oil companies going to playing in this new
space?”

“This is one of the things the airlines have struggled with in the last

I
“ n the exchange
several years,” said Johnson. “The Internet has created the ability for
folks to come in very easily and market seats. The airlines have strug-
gled with whether they are asset operators or travel service providers.
The problem is that when people come in and steal your business, they
world where don’t steal the bad parts, they steal the good parts. The airlines are
pushing to actually take back the customer contact out of pure survival
there’s full price instincts.”

and supply trans- “But didn’t the airlines make that possible by giving the liquidity to the
Priceline.com’s?” asked Wilk. “Priceline.com was nothing but an idea
if they hadn’t been able to buy cheap seats.”
parency, the cus-
“The same thing happened in the oil industry,” noted Ross. “You’ve
tomer is going to got a whole bunch of merchant refiners and therefore you’ve got un-
branded products widely available and midstream companies delighted
be the king.” to convey that product from where it’s manufactured to where it’s
needed. How do you jam that genie back in the bottle?”

“The airlines are going to fight back, and I think the oil industry will
also reinvent itself again,” said Goodall. “An affinity of the clicks with
the bricks is the model that will work. It’s what’s starting to happen
with the airline industry. The oil companies, even though the entry
barriers are low, will potentially be able to leverage their grasp in crea-
tive ways that provide an interesting experience for their customers. So
the question is: can they reinvent themselves from asset-based busi-
nesses to customer-based businesses?”

Another interesting discussion centered on the ability of the oil compa-

nies to keep the efficiency savings created by having world-class par-
ticipants in a virtual value chain. “How do you keep it all from flowing
to the customer?” asked Wilk. “In the exchange world where there’s
full price and supply transparency, the customer is going to be king.”

Ross proposed one hypothesis. “I’m Valero. I cut an exclusive deal

with Williams to get my product from my coastal refineries to wherever

11 E-BUSINESS AND THE VIRTUAL OIL COMPANY

it’s needed. I cut another deal with Safeway so that we’ve got all of our
product distributed. I’m now in deep partnerships, reintegrated, and
able to provide the product.”

“But as the customer, I’m going to reassemble that value chain to the
lowest price possible, so that set of deep partnerships you just put to-
gether may now be outbid by a virtual reassembler,” said Wilk.

“But if I’ve reintegrated and am really honing the supply chain, I can
make it quite difficult for you to find your barrel, and it’s going to be-
come a much more risky barrel,” replied Ross.

Resources
With the rapid advances in new technology already evident, roundtable
participants envisioned continued rapid evolution of technology, im-
pacting customer interactions and enabling new entrants to success-
fully compete in the 2010 down-
stream. To sustain competitive ad-
vantage in 2010, companies will be
challenged to acquire and keep the
necessary technology know-how
and resources.

On Technology

“Today they’re talking about smart

appliances,” said Nick Hauser,
eBusiness Ventures Manager for
Equiva Services L.L.C. “It would-
n’t be too much of a stretch to
think about Internet devices on cars that could allow intelligent deci-
sion-making based on programming in what kind of service station you
go to.”

“To augment that,” added Bill Lawson, “it could be something as sim-
ple as a display that starts to read when your gas tank gets low. It
shows different fuel prices from stations along your particular route in
the direction you’re heading. So if you are price-oriented, you go to the
cheapest one; if you are convenience-oriented, you just go to the first
one you see.”
“My objective is minimum time on site,” said Arthur D. Little’s Greg
Bean. “If I have information that tells me that the fifth station is going
to get me my gas the fastest, I’m going to do that. Whereas now I have

An Arthur D. Little Energy Industry Rountable 12

 to make a guess about what the line at Randall’s is like compared to what it is
at the Corner Store.”

Meyers added, “Technology could actually provide some value to the cus-
tomer-perceived value if you have a destination site. You’re cruising home –
you don’t need gasoline for another week – and all of a sudden your car sig-
nals that you’ve got an UPS package to pick up at your destination store. Or
when you drop off your laundry, it sets off a trigger on your electronic device
that reminds you two days from now to pick up the clean clothes.”

“It’s like the IBM commercial, where the guy goes through the grocery store
stuffing items in his jacket. The doors actually read everything he’s purchased
and bill him automatically. I don’t see any reason you couldn’t do that in the

We have an
service station with an easy tag,” said Johnson. “Who better than the oil com-
“ panies to be able to deploy that kind of functionality. You already have the in-
frastructure to a much greater degree than the rest of the world.”

industry full of Meyers envisions taking it one step further. “If you could sit at your office and
order pizza or groceries on the Web and give an estimated time of arrival, the
people who store would get signals as you are driving that you are getting closer and closer
and ETA is 2 minutes. If you can execute it well, you can add a lot of value.”

know how to So will fuel cell vehicles or alternative fuels change things in 2010?

manufacture “If there are a lot of fuel cell or alternative fuel vehicles, you could very rap-
idly find yourself with half the volume compared to today,” said Chris Ross.
things and…to “With fuel cells, you’ve got to sell a different product, as well.”

push products,
“Even if you’re using the same fuel, I would argue that fuel economy of the
average vehicle could quite easily double over the next ten years,” noted
Quaris’ Goodall. “So the frequency of going to the gas station for a fill-up will
and we don’t be much less. Either you have another offering at the gas station to draw peo-
ple in, or there are less gas stations, or both.”
have a lot of peo- “In ten years’ time, I wonder if you’re actually going to buy cars. I think you
ple who spend might pay a fee for a motoring experience which may not be the same as buy-
ing a car,” continued Goodall. “So why don’t you bundle everything with that
vehicle experience: the fuel, the lubes, everything?”
enough time
On Resources and Skills
with custom- “We’re coming into a serious conundrum because we have an industry full of
ers…” people who know how to manufacture things and know how to sell and push
products, and we don’t have a lot of people who spend enough time with cus-
tomers and understand behaviors. How are key skills acquired and managed?”
asked Tim Wilk.

“It’s very hard to attract those people,” said Williams. “You bring them in to
an oil company, you put them on a pay scale, you don’t incentivize them at all,

13 E-BUSINESS AND THE VIRTUAL OIL COMPANY

you give them a manager who cannot spell ‘e-commerce’ and pretty
soon you’ve lost them.”

“One of the key learnings when you look at how Silicon Valley works
and why it’s successful in nurturing so many successful start-ups is
the fact that companies have lost the sense of ownership of human re-
sources. In other words, you can expect the best people to go to the
best projects and when your project is no longer an ‘A’ project, you’re
going to lose them. It’s a whole different mentality of how you acquire
resources, what you expect to give them, how long you expect to have
them, and what you expect them to contribute,” said Wilk.

“People don’t sign up for a lifetime anymore – they sign up for what
excites them and what keeps them interested,” continued Wilk. “One
of the big challenges for us, both in consulting and in the oil industry,
is to find ways to put good people on good projects, not put them on a
pay scale, and give them a career path that fits what they want to do.”
“I’m now building a start-up,” commented Goodall. “My team will
come out of Big Oil themselves. The reason they’re here is they’re hav-
ing fun. They can make their own mistakes. They’re moderately paid,
so it’s not competing with oil patch salaries, but they’ve got a piece of
the action.”

Goodall continued, “The ones that are really successful outside are
those that have created their own skunkworks and given people a
much longer lease to make changes, to make mistakes. To me, that’s
the model I would see going forward. You don’t necessarily bring
these bright people into your culture. You actually provide a little bit of
a comfort blanket to protect them from the outside.”

“You need to create a culture

where they will be accepted. The
risk preference of these people is
completely different than that of
most people at their level in ma-
jor oil companies. It’s almost an
incompatible situation,” said
Brent Meyers.

Enron is an example of a com-

pany that successfully attracted
and retains the best and bright-
est. “It started nine or ten years
ago when Ken (Lay) and Jeff
(Skilling) decided to go to the
best schools in the country and

An Arthur D. Little Energy Industry Rountable 14

 hire the best and brightest,” said Burke. “They took a huge risk in that
they bought more intellectual capital than they knew what they could
do with. The bet was that collectively these people would come up with
enough new ideas to generate new businesses to fund this investment.
It’s been a huge gamble, but it’s paid off extremely well. They encour-
age a lot of free thinking, risk taking, skunkworks. Enron Online,
which has become incredibly successful, was not sanctioned and Ken
and Jeff didn’t even know about it until $25 million dollars had been
spent.”

“It seems another shift has happened since my generation,” said Ross.
“Many of my generation had the Depression in their parents’ back-
ground. Stability and security were extremely important and capital
was something that you built and conserved and you lived off income.
I think the new generation thinks about capital as something you use;
you don’t build and conserve it, you spend it. Because there are more
growth opportunities out there. It’s part of your portfolio, which in-
cludes some cash and some capital appreciation. That’s a totally dif-
ferent mind-set. It changes your whole relationship with your em-
ployer.”

“I wonder how many companies truly treat their employees as an as-

set,” queried Deaton. “Maintaining them, managing them. Assets
make mistakes. You don’t throw away the asset that makes one or two
mistakes. You try to fix it and make it a better functioning part of the
whole organization.”

“One idea I’ve heard,” offered Wilk, “is that 10-15 years from now the
vast majority of the U.S. workforce will work for temporary agencies.
We will all basically become contract employees. The temps are re-
sponsible for placing us in ways that build our skill base and increase
our value because they get a piece of the action at the top. People will
have a lot more flexibility to move from employer to employer.”

“In reality there has already been a huge change over the past 15
years,” said Ross. “The lifetime employment contract died in 1986.
We’ve got portable benefits now, like 401(k)s instead of pension obli-
gations. A lot of the heavy lifting in that changing has happened and
yet the system in which people work in large oil companies has not
changed.”

“The downside for not having a full-time job has gone down for the
employee as well. I read in the Wall Street Journal last year that there
are 90,000 new job openings for high-tech positions and 24,000 people
graduating, so that was exaggerating an already growing gap between
what was needed and what was there,” said PROS Revenue Manage-

15 E-BUSINESS AND THE VIRTUAL OIL COMPANY

ment’s Johnson.

“On the technology side, you’re going to have to get used to using con-
sultants,” continued Johnson. “It’s so much more lucrative for these
individuals and there’s so little risk in being a consultant as a technol-
ogy person. You’re going to be able to afford to rent them but not to
hire them.”

“Absolutely,” agreed Colin Goodall. “These high-tech jobs are already

being exported because the supply isn’t here. I talked to one of the big
consulting firms and they are sold out for this year. It’s very frighten-
ing.”

“The majority of people that get trained in the current technologies get
trained in the U.S.,” said Johnson. “Then we won’t give them an H-1
visa and we ship them out. The rest of the world suddenly becomes
very competitive and we say, ‘How did they get so smart so fast?’
Guess what? They were down at the University of Houston or Rice.”

Organization
In 2010, Roundtable participants saw a need for different organization
structures to accommodate e-business, better retain skilled resources
and put more emphasis on customer relationship management. The
level of value chain integration necessary to compete effectively with
new entrants also impacts organization structure.

“The Internet is making a difference in that it is an enabler,” said

Matthew Johnson. “It has made networking a very dispersed group of
businesses very easy and economical. For instance, in the hospitality
industry, pricing decisions used to be made at the local level. Now
companies like Marriott are installing systems at the corporate level to
pull in data from all of the local businesses and push back out the ag-
gregated data.” Companies that now operate mainly at a regional level
will be better able to operate nationally or globally.

“We talk about getting the right people and right talents. What about
requiring people to come to the bricks-and-mortar office versus work-
ing at home? Is this something we need to think about?” asked Meyer.
“When we did some work for the National Petroleum Council we
thought about that. There seemed to be two options: either you work
from home or you put your office in your pocket and travel,” said
Ross. “It seems like the second model is winning out. Perversely, tele-
commuting is leading to more travel rather than less. A study of home
workers in California showed they drive more than when they com-
muted.”

An Arthur D. Little Energy Industry Rountable 16

 “Telecommuting from home is still very bandwidth limited today,”
noted Wilk. “There are only certain things you can do practically and
with any kind of reasonable speed.”

Our organiza-
“With adequate bandwidth though, there are a lot of jobs within our
“ organizations that can be done as well either at your desk or at home.
Or if you want to sleep until noon and start work at 4 PM, so be it,”
said Meyers. “We have to be really flexible about what each individual
tion will need to wants. The old way of saying you have to be in the office during cer-
tain hours is an old paradigm.”
provide a more “I think it actually has a lot to do with performance measurement,”
said Johnson. “With software developers, we found that one of the rea-
flexible work en- sons you were there when your employees were there was you could
look over their shoulder and sample periodically. When you don’t
vironment…and overlap as much, you can’t physically sample, so you have to get more
sophisticated about how you measure performance. IBM does a lot of
a lot better meas- this in their virtual organizations.”

ures to make sure

“It can become very negative if people don’t feel like they are getting
recognized for what they do when they are not being watched,” contin-
ued Johnson. “That was our biggest issue and we’re a little company.
things are actu- So on a big company scale, finding ways to manage that is a tremen-
dous challenge.”
ally being accom- “So ten years from now,” summarized Meyers, “our organization will
plished.” need to provide a more flexible work environment, with more free
agency and a lot better measures to make sure things are actually be-
ing accomplished.”

Wilk said, “I think marketers will have a whole new role in the world
that is very different from today. It’s not marketing like we think of
marketing: brand marketing and retail location marketing. It’s about
customer management and customer relationship management, which
is actually much more interesting. Marketers in the future are going to
be technologists, analytical people who understand how to use these
customer relationship management systems and draw inferences from
them.”

“In other industries”, noted Johnson, “there’s been a move away from
managing every transaction to management by exception. The ana-
lytics are used to identify and cue the opportunities to your business
people so that folks don’t spend too much time on the wrong deals or
miss opportunities that don’t happen in traditional places.”

17 E-BUSINESS AND THE VIRTUAL OIL COMPANY

“Marketing will also be about partnering with the other people who
are providing the other pieces of the puzzle,” noted Chris Ross.
“Marketers will be deeply involved in making these partnerships
work.”

Two types of
“So in that scenario,” said Wilk, “we now have a 2010 where we have
lots of majors, either singularly owned or owned by deep partnerships,
but only five or six very large conglomerates. That’s a very interesting “
scenario, because it would be like the reemergence of the integrated oil
company - although not integrated in the traditional sense.”
companies will
“Isn’t that a model we’ve seen happen in other industries?” asked
Johnson. “The deregulation model in the U.S. right now is geared on
taking this big integrated company, breaking it into pieces, having all
emerge…those
the commoditized midstream pieces beat each other to death, and drive
all the costs out. Then you see Baby Bells now joining back together to
that are really
good at aggregat-
create big companies.”

ing customers and

Scenarios those who aggre-
Based on the in-depth discussion of the issues and potential outlooks
for 2010, three possible scenarios were developed during the Roundta-
gate services and
ble. The most widely accepted case, “Demand Aggregation”, further
develops the evolution of the new players currently entering the market products…”
while at the same time maintaining a strong group competing on com-
petencies such as manufacturing and risk management. The “eNuff”
scenario illustrates what could happen if acceptance of the new tech-
nologies is resisted by consumers and the industry. Finally, “MS-
Energy” shows the other extreme: dominance of the downstream in-
dustry by high tech customer relationship managers.

“Demand Aggregation”

The strong consensus was that “demand aggregators” would dominate

the retail segment of the business. “The market will probably bifurcate
and you’ll see two types of companies emerge in the marketplace:
those that are really good at aggregating customers and those who ag-
gregate services and product offerings,” hypothesized Lawson.
Some of these will be successful on a location basis, providing prod-
ucts and services, including gasoline, along the lines of Wal-Mart and
the major supermarkets. A smaller scale location-based success model
would provide convenience goods and services including packaged
groceries, fast food and pick-up facilities for Internet purchases. Both

An Arthur D. Little Energy Industry Rountable 18

 of the location models will be assisted by the ability to order in advance
through the Internet, and through GPS and wireless technologies that
would allow two-way communications and regional price and avail-
ability information to motorists. These new location brands would su-
percede traditional gasoline brands.

“The supermarkets know how to use information very intelligently.

They have real estate in the right places,” commented Goodall. “ So
my model of the future might be Randall’s or HEB, a huge supermar-
ket. They have tremendous data and knowledge about their customer
base and could provide home delivery where the economics work.”

“Whether they are grocery store chains or not, they are going to be ex-
perts at pulling together big groups of customers with like buying hab-
its, understanding them very well, and understanding how to price
them,” remarked Wilk.

A second group of successful demand aggregators will provide a suite

of consumer needs through the Internet. These companies would bun-
dle electricity, phone, water, gasoline and other essentials in a form
that guarantees fair, predictable prices, provides a convenient one-stop
payment mechanism and builds customer intimacy by discretely lever-
aging their detailed knowledge base of customer preferences.

“My vision is of the ultimate utility company,” said Palmer. “Their

motto is: ‘What can I provide for you today?’ So in 2006 or maybe
even sooner, I can go to a web site and choose which services I want
them to provide for a given month. I may want my gas tank refilled in
my garage every four days, my core food items in my pantry and re-
frigerator to be restocked every week, and my car oil changed every
three months. Then on demand I may want to watch movies over my
high-speed Internet connection. I want gas and electricity on an ongo-
ing basis.”
A balance must be drawn that sustains the appropriate level of con-
sumer privacy while more fully leveraging available e-data.

Other segments of the downstream industry would center on compe-

tencies. Mid-stream companies such as Enron and Williams have built
their businesses on skills in risk management and delivery. These com-
panies will choose an appropriate level of asset ownership, and will
continue to grow their businesses horizontally by adding new com-
modities to their portfolio, beyond the current mix of oil, gas, gas liq-
uids and bandwidth. There will also be a segment of companies expert
in process plant management. These companies will favor sites that
process hydrocarbons into petroleum, petrochemical products and
power. They will mitigate the capital intensity of this segment by risk

19 E-BUSINESS AND THE VIRTUAL OIL COMPANY

management tools that allow high leverage and a low cost of capital.

“What we have now as far as manufacturing facilities will still be

around,” said Meyers. “There may be fewer or more aggregated com-
plexes, but operational excellence is going to be important for the
downstream business. The risk management associated with that is
also key.”

“Brick-and-mortar and real expertise about the industries you work in

is incredibly important,” noted Johnson. “People who do have the as-
“ The successful
sets and the real expertise as well as the long-term commitment in the
marketplace will do well in the e-commerce arena.” company is go-
“The difference between these capabilities providers in the future and
what we would think of as merchant pipeliners or refiners today is that ing to have a
these companies are going to do it with data integration in mind,” as-
serted Wilk. “If I am one of these customer aggregators and try to put balance between
together my own value chain, I want participants that are going to give
me the information I need to make the guarantees to the customer I
have to make. These asset companies are going to be very good at run-
customers, em-
ning low-cost, high-quality assets, but they’re going to have to do it
with a whole lot of data coming out.” ployees, and
In each of the horizontal segments, we were persuaded that successful shareholders…”
companies would decommoditize their products along the lines of the
airlines by narrow customer segmentation, and careful pricing of de-
livery capacity. Deep partnerships may also develop in areas of trust to
link horizontal segments of the value chain. There will certainly be a
period of transition, during which traditional integrated oil company
models coexist uncomfortably with the new horizontal structures.

“The successful company is really going to have to have a balance be-

tween customers, employees, and shareholders, like Southwest Airlines
does,” asserted McCullough. “And like the VISA association, a group
that has really dominated market share, they will have to be customer
and information focused.”

“eNuff”

We were duly disturbed by the degree of consensus, and developed two

outlying scenarios. In the second scenario, which we dubbed “eNuff”,
the industry will re-integrate and deny the necessary liquidity that will
allow the horizontal demand aggregators to flourish.

“Let’s say someone really wants to protect brand and there are some
efforts to do things differently inside the oil companies that would

An Arthur D. Little Energy Industry Rountable 20

 forestall any significant change,” proposed Meyers.

Johnson proposed an alternative: “Senior management looks out and

sees all the dot com stuff and none of the potential scenarios sounds
better than what they have today. Management says, ‘Why am I going

J
to spend money on anything if I don’t have to? Why don’t I spend the
“ ohn Q. Public same money on trying to obfuscate the world and keep it the way it
is?’”

says, ‘Enough’s “A lot of companies are getting to a point of scale where they just ig-
nore things and let things ride out and the clock just ticks,” observed

enough.”
Rosenberg. “One of the comments you hear from Big Oil management
is ‘Why should we join the marketplace? We’re bigger than any mar-
ketplace ever will be.’”

“So the majors refuse to provide liquidity,” said Ross. “Or they don’t
invest the capital for change,” added Wilk. “Anything that would
cause the perception that there’s no liquidity in the market kills the ex-
change concept quickly.”

A slower acceptance of this high tech “e-world” by customers or short-

ages in the availability of necessary e-business capabilities to the in-
dustry could also drive this scenario.

“The inability of humankind to change as rapidly as the technology is

changing may be an issue,” suggested Meyers. “It’s almost a cultural
pushback: John Q. Public saying, ‘Enough’s enough.’”

“One of the other problems is there is going to be a perception there’s

change when there hasn’t,” said Johnson. “As an example, in the av-
erage C-store right now there are seven phone lines, most of them
never used. So they go in and provide two high-speed lines and it looks
like there is progress, but they’ve really only cleaned up some phone
lines.”
This holds true for the oil companies as well. “The oil companies can
have a lot of eNuff e-commerce activity to keep the Board off their
backs, such as using the Internet for procurement,” said Johnson.

Meyers added, “I think that’s really what we’re going to be doing to

ourselves. We’re going to do the process changes, inventory optimiza-
tion, supply chain optimization – where it’s basically internal to our
own operations.”

“The oil companies can sit out here and almost trick themselves for
the next ten years into believing that they’ve actually entered e-

21 E-BUSINESS AND THE VIRTUAL OIL COMPANY

commerce,” said Reed Williams, Business Development Vice President
for Ultramar Diamond Shamrock. “And you can say that these other
competitors will come after them. They only will if they want to go in-
vest in the bricks and mortar that the oil companies already have. The
oil companies preserve their capital and keep their assets up. They
control some of the volume and move a small amount through e-
commerce. They convince themselves they are moving forward as op-
posed to actually jumping in and adapting the whole system to it.” “ Customer re-
“I see a parallel between this and the original wave of environmental
regulation,” said Wilk. “For a while, the oil companies, big and small, lationship devel-
stood back and fought every single environmental change on the basis
of sound science and return on investment. Then we started to see a
break-away movement where some began to embrace environmental
opment with a
change and say ‘It’s going to cost me money to do this, but maybe it
will drive out some competition or improve my position with custom- passion and dog-
ers.”
gednes of mind-
“There are huge capability gaps, too, in our current organizations,”
said Rosenberg. “Addressing the capability gap of just getting Internet
ready is a huge task right now.”
set.”
“The catastrophic failure of the Internet start-ups is likely to retrench
whatever resistance is already there in Big Oil,” said Wilk.

“MS-Energy”

A third scenario, “MS-Energy”, will totally upset the status quo as new
entrants from the high tech sector take over portions of the petroleum
value chain. “ The knowledge culture that’s imbedded within Micro-
soft would create value through knowledge and knowledge workers. It
would be basically imprinted upon the energy company’s business re-
sulting in complete transformation of processes, culture, the way of
working, the whole skill set,” said Conoco’s Brent Meyers. “Customer
relationship development with a passion and doggedness of mindset.”

Amazon.com may come to dominate retail, Cisco will take over the
mid-stream, and manufacturing specialists will absorb the refining
segment. “Cisco only owns 2 out of 42 plants,” noted Meyers. “They
could actually imprint their real-time financial model onto oil compa-
nies and they’d probably be pretty successful. They’ve got the work
processes and behaviors that would really transform the way business
is now done in oil companies.”
“Their processes take care of the whole supply chain,” added Meyers.

An Arthur D. Little Energy Industry Rountable 22

 “The manufacturing at the various plants and even on the upstream
side could be completely outsourced to preferred suppliers and ven-
dors.”

“But why would companies like Cisco want to get into this business?”
asked Deaton.

The drivers will be the desire to leverage supply chain competencies

that are clearly superior to those of the oil companies, the search for
growth along all dimensions, and their ability to attract the best and
brightest employees. “The reason may be that they look at the ineffi-
ciencies still in the marketplace and believe that they can extract them
and get a good margin,” said Bill Lawson.

“It seems to me that some of these companies that have enjoyed rapid
growth – even in rapidly growing industries – are going to run out of
the ability to keep adding 20 percent every year,” suggested Chris
Ross. “They are going to really have to start looking around for the
odd dinosaur to chew on.”

“Particularly if they stay focused on North America and Western

Europe,” added Reed Williams of Ultramar Diamond Shamrock. “If
they broaden out geographically, there are pretty large growth oppor-
tunities still available.”

“These are pretty voracious organisms,” commented Ross. “They will

probably start feeding in every direction.”
Meyers noted, “There could be massive lay-offs of current staff to en-
able the new ways of working.”

“You’re looking ten years out. There’s going to be some attrition in

staff, anyway,” said Lawson. “So as you start to infiltrate with differ-
ent mind-sets, you can come up with different solutions.”

The group reviewed the events that might signal the change to the
most likely scenario and beyond to “MS-Energy”. These included the
choice of high tech trained executives to run a major oil company,
takeovers of oil companies or segments of oil companies by demand
aggregators, and announcements of deep partnerships between oil
companies, retailers and Internet portals.

“A future Wall Street Journal headline describing what triggered

changes in the oil industry might be: ‘Jack Welch Decides to Become
Chairman of ExxonMobil’,” proposed Wilk. “This was an individual
who got on the bandwagon later than some of his cohorts wanted, but
once he decided that the Internet was opportunity, he actually created

23 E-BUSINESS AND THE VIRTUAL OIL COMPANY

a lot of very rapid change in GE. They did some very progressive
things and continue to do those.”

Barriers to Change
There was also a consensus that most oil companies are currently in
denial on the revolutionary potential of the Internet for their business.
“ The metrics
The main reason is that the cures that are being presented to top man-
agement in most cases seem worse than the disease of steady decay. used to justify in-
Top management deems that it is better to continue to milk the inte-
grated downstream business model until change becomes inevitable,
than to kill it in favor of a new model with uncertain growth and reve-
vestment by the
nue potential.
demand aggrega-
“I was shocked about some of the attitudes of oil industry executives
who saw no role for the Internet in their business,” commented tors are quite dif-
Rosenberg.

“There are a lot of people who define themselves by the way things
ferent from those
have been done in the past, and they don’t like the idea of losing that
definition,” noted Ross. “It’s very slow to change. And it’s not just re-
employed by com-
panies used to
tailers. It’s on the commercial side as well.”

“You have to do one of two things to convince management of the

need to change,” said Wilk. “It’s got to be there’s a wolf at the door or large capital pro-
there’s gold in them thar hills. Right now, I’m not sure there’s a com-
pelling case for either one. We have a scenario that says we almost
could just trudge along, have some of our business cannibalized and
jects.”
maybe not be as profitable. If that business is already marginally mate-
rial to my overall integrated business, then who cares?”

This dilemma is exacerbated in the largest companies by the domi-

nance of the upstream business in the Boardroom, and in the minds of
the financial community. The metrics used to justify investment by the
demand aggregators are quite different from those employed by com-
panies used to large capital projects. This difference is as acute for
Wal-Mart as it is for dot com start-ups.

“The industry is extremely driven by short-term returns and business

cases,” noted Doug Rosenberg.

“The biggest problem,” said Wilk, “is the ROI measure to make trans-
formational change. You don’t get ROIs on these kind of investments
that meet any hurdle rates.”

An Arthur D. Little Energy Industry Rountable 24

 “The concern we’ve talked about is that these dot coms don’t have to
meet the same sort of hurdle rates that we have to meet,” said Jim Al-
derman. “While I’m busy capturing the small successes, they can actu-
ally come in and steal my business from me.”

“They also don’t have the legacy behind them that the oil companies
do,” said Wilk. “While we’re worried about getting the next invoice out
right, they’re able to leapfrog us on technology. They don’t have to
worry about that hundreds of millions of dollars of investment that no-
body wants to let go of even though it may not have been the wisest in-
vestment ever made.”

“One lesson learned in the airline industry is to at least start off and
jump in,” related Johnson. “There are obviously some infrastructure
steps to begin: you’re going to have to understand your customers bet-
ter and more dynamically value your assets. A lot of that infrastructure
doesn’t exist internally. So you can actually incrementally start build-
ing the systems that will give you flexibility and the corporate agility to
right the ship faster when the time comes.”

One participant summed up the group’s view by saying, “it seems

unlikely that the large oil companies will take decisive action unless
they are prepared to totally separate the upstream and downstream
businesses”. This may need to be taken further into separation of busi-
nesses within the downstream industry.

The group was continually reminded that much of the transformation

potential of the Internet centered on the exploitation of customer
knowledge. Perhaps the last word should rest with the participant who
admitted, “I had never fully internalized before the importance of cus-
tomer data management”. The question remains whether it is realistic
for oil companies to aspire to the same level of scale and effectiveness
in leveraging customer knowledge as the new wave of demand aggre-
gators and the vertical specialists.

25 E-BUSINESS AND THE VIRTUAL OIL COMPANY

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