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October 2012 Exclusive Story

Solutions Align with Independents’ Business Needs

By Gregory DL Morris, Special Correspondent

Much has been made about independent oil and gas producers teaching the global majors and national oil companies how to unlock the potential of unconventional resources, but technology transfer flows in both directions. One prime example, according to industry analysts and service providers, is in making the best use of enterprise business software.

Most large and midsized independents, as well as many smaller firms, have enterprise resource planning (ERP) systems, but many small, private firms still use spreadsheets or even paper records for everything from royalties to taxes.

Industry analysts say a dumbbell-shaped curve has developed in ERP adoption by independent producers. In many cases, they say, the companies that got on board early have seen the benefits of ERP flatten over time. Meanwhile, many smaller firms are leery of the expense or complication of adopting such sophisticated systems. Capital usually is allocated first to leases and other revenue-producing investments.

“ERP has been migrating from the majors to independents for a couple decades,” says John Pavel, North American leader for advanced enterprise solutions at consulting firm Accenture. “We have seen the larger independents implement ERP, but some have yet to fully realize its full capabilities. In general, they have favored streamlining applications to emphasize commonality of operations and ease of support.”

The developing trend, says Pavel, that is starting to drive early adopters to revisit their ERP platforms is coming from the back end, from the data. “For the past 10 years, some of these companies have been gathering data using their ERP systems,” he observes. “Now they want to make better use of it. They are asking what more they can do with what they already have.”

In effect, he adds, companies using ERP are starting to think of the data they pull out of their processes as just as much of a resource as the hydrocarbon molecules they pull out of the ground.

One common snag, Pavel cautions, is that projects usually require a quick turnaround. “If senior executives or field managers ask whether they can get one type of data or another, the answer from the ERP operators is usually, ‘Yeah, we can do that,’” he illustrates. “But if the project to get the data takes more than a few weeks, it tends to peter out. Management or operations want information or comparisons on costs or production, and ERP can do that. But applications can’t take six months, or they just die.”

Business Proposition

The innovative approach, says Pavel, is to start with the business proposition. “Start with the question from the field, then move back into the information technology system,” he advises.

He says a great deal of the ERP installation and support that Accenture has been doing lately has involved core financial and production-related data through to accounting, including taxes and royalties.

In the terminology of SAP, one of the top global ERP vendors, that type of work falls under “production revenue accounting,” which is not a new feature in the software. “That functionality has been in the system for years,” affirms Pavel. “The supermajors have been using it, and now we are seeing it moving more into the independent sector.”

There is not as large a body of application and consulting experience for ERP implementation among small producers, Pavel reports. “There are, however, some interesting cloud-based, remote-hosted services that we support,” he adds. “That is a very promising area. It allows for faster implementation without the large capital investment or time for training. Small-company personnel don’t even need all the ERP skills.”

Where To From Here?

In many ways, the ERP question for companies that already have systems in place is the same as for those who have yet to embrace the technology: Now what?

“Smaller oil and gas companies either want to grow organically, or they want to make themselves attractive to investors or acquirers,” poses David Huether, vice president of energy solutions at AX4energy, a subsidiary of mcaConnect LLC, based in Houston. “AX” is what Microsoft Corp. calls its ERP platform, and AX4energy specializes in ERP installations for energy companies.

“We started three years ago with producers with annual revenues of $60 million up to $4 billion, and from there our energy practice has expanded to include oil field service companies,” Huether says. “We now have more service company clients than producers.”

Returning to the business case for ERP for smaller producers, Huether notes that whatever the growth objective for a company, the system it is using–whether spreadsheets or early-generation ERP solutions–“probably is not flexible enough or does not offer enough potential for expansion.”

“Even the best legacy systems often cannot add capabilities,” he points out. “Smaller producers need good ERP foundations. Given the expenses and disruptions of even the simplest installations, you want to do this once and you want to do it right.”

And therein lay the two keys to ERP, Huether maintains: functionality and installation. In both cases, he says, the trick is managing expectations. “The producers should understand exactly what the solution can do, and how much time and energy it is going to take to get that capability in place,” he advises.

Platform Evolution

In some ways, Huether says, smaller firms starting fresh may have an advantage over larger companies that may have been early ERP adopters. “Some of the larger companies bought first-generation ERP from the 1970s or ’80s. Those platforms did not deploy modern technology, especially for process operations such as oil and gas production,” he observes. “Systems such as AX were developed in the 1990s with future development in mind, so they incorporate flexibility and adaptability.”

That is not just touting his wares, Huether explains, but is because first-generation systems were built around database formats, whereas more recent systems are more transactional. As an example, Huether notes that global positioning systems and satellite communications were unknown when first-generation ERP platforms were designed. “That communication technology now has come into the mainstream,” he remarks. “Today, you can stream real-time data from the field to the cloud and get back real-time integrated responses.”

That is not merely a matter of convenience, according to Huether. “There is a great deal of value to the parameters of the flow,” he insists. “In the field, billable and payable events are taking place all the time. If you can get those costs and billables dispersed quickly to where they need to go, royalty owners can get paid and invoices can be sent.”

The hang-up, Huether says, “Small organizations often do not necessarily look at the value in their systems in the same way they look at the value they are getting out of the ground. Sure, oil and gas give you a payback. But accurate budgeting can become a payback, too.”

There also are safety and security benefits. He notes that a well or pump that is connected to an integrated, real-time system can report a problem or emergency at any time, without having to wait for a pumper to make his rounds. “Also, wells in a system are harder to tamper with or to have equipment removed,” he continues. “Service companies have to report that they have done their work. This is one way to capture that work record independent of the service company.”

The Right Information

There are several tiers of information technology. At the operational level are the process control and automation systems. Suppliers in that segment include Invensys plc., Aspen Technology, ABB and Honeywell International. Those systems link to ERP, which operates like an umbrella over the whole company. SAP, Microsoft and Oracle Corporation are among the global leaders in ERP technology.

At all levels, what the systems have in common is a business issue, says Trevor Cusworth, vice president of business value consulting for Invensys. “You are trying to get the right information to make business decisions,” he says, explaining that can be an optimum set point for a valve or processing vessel, a price at which to hedge, or an interest rate at which to refinance debt.

“ERP is transactional–gathering and reporting financials,” says Cusworth. “Scheduling and planning, and production management can be added. But the real value is when you connect ERP to the operational level: the shop floor or the field. You get better information from operations into the ERP system, and the system reports that to management. When decisions are made, the flow is reversed and operational orders move back to the field, even to the well level. The information flows both ways.

“Process control and automation are essential to visualizing business operations,” Cusworth continues. “If you can get real-time information, you can make faster decisions, and that is what creates value. When we assess a problem, we start very ‘technology agnostic.’ We try to determine where the operator is and where he wants to get to. The key determining factor is whether that gap between today and tomorrow is worth bridging.”

Human Element

Amid all the technology, the human element cannot be overlooked, says Cusworth. “Companies in all segments of the economy have cut back on employees, and in many cases, there are just too few people,” he reflects.

Cusworth is quick to add that independent oil and gas producers rarely are overstaffed, and indeed, often seem to suffer from a lack of qualified personnel, especially in the field. But his point, Cusworth says, is that “everyone is spending most of his time fighting fires, and rarely does anyone have a chance to step back and assess the business.”

Even when there is an opportunity to reflect, Cusworth adds, “People often don’t know the true potential of their businesses because they already have accepted the assumed norms. That is where automation systems come in. If you can solve the constraints of the business, there are more opportunities to get at those hidden values. The object is to get on the other side of that potential.”

He cites as one example producers that still have pumpers making rounds and making records manually on paper. “Replacing those paper rounds with electronic information is not just automating the workflow,” Cusworth holds. “Sure, you get immediate feedback and information on deviations, but you also are building a decision tree. You are building the knowledge of the field workers into the system. You can act on situations sooner, cutting days out of the turnaround time for taking action.”

Cusworth also is an advocate for the most advanced instrumentation at the granular level. “There are meters now that can measure two-phase flow from a well,” he observes. “That really gives you an accurate measure of production.”

Process Application

One of the long-standing knocks on ERP from the oil and gas sector–indeed from all process industries, from refining and chemicals to steel making–is that ERP was developed originally for discrete manufacturing; making things, not stuff.

Factually, that is true, but irrelevant, says Jason Palmer, industry principal for oil and gas with SAP North America. “We definitely have a long-term relationship with the oil and gas industry,” he avers. “Nine of the top 10 North American upstream companies run SAP-suite systems–not only ERP–and 19 of the top 20 downstream companies run SAP.”

Palmer estimates that North American independent producers have invested more than $2 billion in ERP overall. Most systems are on-premise or reside at the vendor. There are pockets of systems that run in the cloud, but that is still in its early days, he adds.

Reciprocating Cusworth’s assessment, Palmer confirms that ERP leans heavily on process control systems, noting, “We have special hooks to connect into those systems.”

ERP vendors view the independent oil and gas sector with what could be called enlightened self interest. Palmer says the growth opportunities for his company in the upstream segment derive from the growth opportunities for the producers themselves. “As the oil and gas companies evolve and expand, so does their use of ERP. Established companies renew their systems,” he says. “There are a lot of legacy landscapes out there, and a lot of platforms in silos. New companies don’t have that standard footprint.”

Whether an existing system is homegrown or an early ERP system, there has been a reluctance to “rip and replace,” says Palmer. “There are integration packages today that allow faster, more agile implementation,” he says. “The templates for the upstream sector are all integrated with the technology. We are not talking about years for installation as in the past; we are talking a few months.”

That said, there always will be some time and effort required to upgrade, replace, or install ERP initially. And those costs in time and treasure always make smaller oil and gas companies think twice, Palmer acknowledges, recognizing that in a capital-intensive industry, there always are other demands on capital.

Starting Small

While operational efficiency may not have the same visibility as barrels or cubic feet, Palmer nevertheless insists, “Over time, you need to have the technology to get those resources. You need to be able to model historical data. You can’t really scale spreadsheets.”

Palmer says SAP has implemented ERP systems for new producers with zero revenue. “If the aspiration is to go global, it is better to start when you are small,” he contends.

He estimates a company with $30 million in revenue can implement ERP. “We have worked with pipeline companies that have only three people in their IT departments,” he confirms.

Turning the ERP question back on itself, Palmer asserts that there is actually a business risk to not having an integrated business management system. “Each manual connection is a cost and a risk,” he reasons. “It can cost from $8,000 to $15,000 a year to feed, water and maintain those manual connections–and that is just to sit still. You still are losing the agility to respond to business trends.”

In conclusion, Palmer says the drivers for ERP are the drivers for the oil and gas industry. “Those are safety, profitability, and regulatory compliance,” he enumerates. “None of those things are going to get any easier in the future. They already are much more than filling out forms. You have to know what every activity in the company costs and what it gains. You have to manage your supply chain and sales structure.”

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