On the Cover

Gushing oil prices have sent IT companies rushing to get their share of the black gold`s profits. But will the oil industry grab the opportunity to regain former glory, as it still smarts over the lean times of yesterday? IT COMES AS NO SURPRISE that a company such as (BCX) should be salivating over the possibility of riding the wave of oil price increases. It makes sense that as world demand for the "black gold" increases and oil companies` profits gush, then IT spending should rise strongly too.

And BCX is well positioned to take advantage.

, BCX`s Western Cape regional chief executive, whose Century City offices are not far from the Caltex refinery in Milnerton, sees the oil industry as a potential growth point for his operations. "Petrochemical companies are under intense pressure to improve reserve accounting, operational efficiency, environmental compliance and industry performance through the use of technology," he says.

BCX already has a strong presence in the oil sector. It holds a substantial outsourcing contract with synthetic fuel producer Sasol, which according to Savides, makes up the majority of revenues it currently receives from that sector.

Jonathan Saulez, MD of Datamonitor`s local agents Marketworks, says as the IT industry looks to verticalise its sales and marketing strategies, it needs to identify the next big potential market after financial services and the public sector.

"The next obvious target is the energy sector, which has recently seen a spurt of profitability that it has not experienced for almost 30 years. But understanding the synergies between the two industries may prove more complex than anything the IT industry has had to deal with in the past," he says.

NO KIDS` GAME

The energy industry makes the IT industry look like a kids` game. It has been around for a lot longer, is far more capital-intensive than the IT industry probably will ever be, it has weathered a number of wild economic cycles and has faced various instances of nationalisation and deregulation.

The oil companies` collective experience over the past 100 years has developed a deep pool of institutional knowledge and business acumen. The recent rise in profits is something it knows to enjoy responsibly, as it knows that the good times won`t last for ever.

Furthermore, the oil industry is highly complex. Oil companies not only source the crude, refine it and then resell it, but they do this through a maze of networks that often include middle men who broker the commodity, which means that a consignment of oil on being transported on the high seas could often be sold and resold a multiple of times before reaching its eventual destination.

Lead times in the energy sector are far longer than what the IT sector is generally used to. The banking industry is fairly agile at adopting new technologies and implementing new business models. On the other hand refineries take years to plan, build and eventually become profitable, if at all.

Regulation has been a constant issue with which the oil industry has had to deal with. From issues of nationalisation in various countries, to where and how they can explore and drill for oil, to the controlling of pollution through to the generation of greenhouse gases by their end products and manufacturing processes all contribute to a tight profit margin.

Right now the oil industry is also undergoing bouts of restructuring. For instance, the proposed joint venture between Sasol`s liquid fuels division and Engen is being scrutinised by the .

According to research organisation , energy companies around the world continue to operate in an environment in which demand is spiralling upward while global sources of supply remain unstable. This has led to the companies being under intense pressure to improve operational efficiencies through the innovative application of technology.

MAYBE, MAYBE NOT

But maybe the road ahead for IT companies waiting to pounce is more treacherous than even that sounds. So will there be new IT investment in the oil industry? Not really, says Datamonitor`s research.

The company says that while oil prices have risen, so has the cost of manufacturing, and to maximise profits many oil companies have initiated stringent cost-cutting and efficiency drives.

"The net effect of such initiatives is that IT budgets themselves remain largely flat and, in order to fund investments for new initiatives, technologies that will help reduce operational costs have increased their importance," Datamonitor says.

ROLE OF OIL COMPANY CIOS

But oil companies will be looking more to their chief information officers to help solve their problems through the deployment of technologies to maximise their gains.

Datamonitor says these technologies will include those that help engineers to understand where to drill and explore, and solutions that fall into this include the likes of geology and geophysics interpretation and visualisation software.

It also says that project management software will become increasingly more important to oil companies to help them reduce costs by eliminating wasteful tasks.

Communications technologies will be needed that ensure information from diverse sites around the world are relayed to head offices, which in turn can analyse and determine what is needed to get the best from each location.

Finally, Datamonitor says, greater integration and system consolidation will be needed as traditionally, numerous proprietary systems were deployed to support exploration, production and distribution and a greater degree of integration and consolidation is needed to introduce important IT systems management.

The role of IT in the mergers and acquisition process that is being experienced in the oil industry will also be essential.

Datamonitor says IT`s role will be particularly important in two parts of the M&A process. Firstly, before and during the merger, as the role of secure communications is to allow greater collaboration.

"This will make the M&A process much smoother and avoid conflicts that would delay deals and push up integration costs. From a general perspective this will revolve around technologies such as portal solutions so that all parties involved in the process can share information. Because the information being shared needs to be kept secret, technologies such as encryption and strong authentication are deployed to ensure confidentiality," the research says.

The second role becomes apparent after the merger where the new organisation`s aim will be to integrate operations as swiftly as possible. A key goal would be to integrate the different systems.

OUTSOURCING

BCX`s Savides has a vision of South Africa becoming an IT outsourcing hub for oil companies operating in sub-Saharan Africa. On the face of it, it makes sense as, compared to many of this country`s neighbours, it has a highly eveloved ICT infrastructure.

"The petrochemical industry has long recognised the value of outsourcing its IT," he says. "It recognises that it helps companies to focus on their core business and gives them the ability to access critical IT skills, processes, infrastructure and global resources from their outsourced partners, as well as giving IT staff an ability to focus on strategic projects.

"The industry has very specific requirements from IT," he says. "From specialised business applications [such as the IS-Oil module within the enterprise resource planning solution] covering items such as densities, volumes and temperatures to calculating the pump price and to managing the supply chain."

Savides agrees that South Africa`s petrochemical industry is small compared to the US and European equivalents and the local industry is still heavily regulated, but says the operating models do not differ significantly.

"As a result, we can play a major role in the petrochemical industry and we can in future also start looking at becoming a facilities hub for the industry for certain shared services," he says.

Research firm Gartner says there is a high level of maturity in outsourcing IT for this industry - with many companies having outsourced their IT for more than 10 years.

What is more, many of the international oil companies have well-established relationships with IT outsourcing companies in their home markets.

"Our experiences of operating in remote regions have forced us to develop a system where our IT needs, including outsourcing, are run from a central location. The only instances we need to localise our IT systems is on the retail side," one oil industry executive commented to iWeek.

However, this executive agrees that regional hubs do add to an oil company`s flexibility.

"But our priority will be to get the stuff (oil) out of the ground, processed and sold as quickly as possible. Building an IT infrastructure is not a priority," he says.Phil savides

Tags: On  The  Cover