Pumped up future

It's the Middle East's biggest industry, but how effectively does the oil and gas sector use IT? Eliot Beer digs for details.

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By  Eliot Beer Published  May 1, 2006

|~|mitchell200.jpg|~|Mitchell: Would you allow a junior accountant with two to three years' experience to run your entire company?|~|The world is in the middle of one of the longest sustained booms in oil prices for many years. It shows no signs of stopping; only last month a Goldman Sachs report suggested oil would remain above US$50 a barrel for some years to come. At the time of writing oil prices were hovering above $70, with many analysts predicting $75-a-barrel oil in the short term, and $100-a-barrel oil in the not-too-distant future.

Unlike the previous spike throughout the 1970s and into the early 1980s, there is now little slack in the system and shortages are not being caused by cuts in production. This time China, India, Brazil and other fast-developing states are eating up any increases in production; combined with instability in Iraq, Iran, Russia, Venezuela and Nigeria which is currently keeping the markets jittery, prices are wildly unstable, with an upward trend.

For many states in the Middle East this would seem to be a licence to, if not print money, then at least pump it out of the ground - contrasting sharply with the late 1990s and lows of around $10 a barrel. But Middle Eastern oil producers have their own challenges at the moment, between political instability, security fears, speculation on the levels of provable reserves, and a lack of spare capacity (one estimate cited by The Economist puts spare OPEC production at only 1.5 million barrels per day).

So where does this leave IT? The answer seems to be with a surprisingly large amount to do; while many of the issues relating to oil and gas (O&G) in the Middle East come under the political or security headings, many of the rest are reliant on robust IT infrastructures and other technology-based solutions. Indeed the issue of opening up new oilfields or reopening abandoned ones relies heavily on increasingly sophisticated computer models, making the oil and gas sector one of the biggest users of high performance computing in the world.

Exploration aside, the process of oil extraction and distribution is turning increasingly to IT to solve some of its key problems, both in the 'upstream' production side, and the 'downstream' distribution networks. To a degree, the challenges facing O&G firms are the same as those facing the majority of larger Middle Eastern enterprises.

"Security is a big issue, automation is a big issue, business intelligence is a big issue; what is facing the oil and gas sector is facing enterprises in the Middle East as a whole," says Dwight Mitchell, president of Mitchell Associates, an Oracle Partner based in Dubai. Mitchell has done work for a number of O&G companies throughout the world, including the US and Nigeria.

For Mitchell, one of the most frustrating challenges of working in the Middle East IT sector is some of the attitudes towards investment in IT systems.

"A lot of the time it can be very difficult to understand the way decision-making happens in some of these organisations," he says. "One example we came across was seeing a proposal to introduce a completely automated monitoring and ERP system rejected because the company concerned didn't have any flow monitors on its pipelines; instead they had a guy who checked the oil manually, for a dollar a day. ||**|||~|koc200.jpg|~|KOC's Al Nouri was one of ACN's IT managers of the year for 2005.|~|"When the company saw the cost of fitting new flow monitors, they said 'no way'. These organisations are making as much as O&G companies in the US, and they know how much US companies spend on their IT, but they simply refuse to spend that amount. If some of the US operators came into this region on an equal footing, they would eat a lot of the local operators for breakfast."

Mitchell also cites the way many IT managers are placed into organisations as a major weakness, saying that many do not have the necessary experience to run a large IT department. He compares it to other areas of the business: "When I ask these companies: 'Would you allow a junior accountant with two to three years' experience to run your entire company?' Without fail each of them says 'no'. I tell them this is exactly what they are doing with the IT solutions they are attempting to implement. This lack of business experience of the IT professional is why they are failing; they understand the computer programs, but not the intended results."

One important exception to this way of working is Saudi Aramco, according to Mitchell. Formerly the Arabian American Oil Company (hence: Aramco), Mitchell agrees that some of the working practices from the West have become entrenched in the organisation, in this case giving it an advantage over other regional O&G firms.

Mitchell says this shows most clearly in Aramco's hiring procedure for IT project managers; they apparently insist on professionals with proven track records from the US, and are extremely focused on acquiring exactly the right person for the job. This is borne out in the organisational structure of Aramco; while the senior department managers tend to be Saudi nationals, a very large number of expats still inhabit the Aramco compounds around Dhahran.

"Communication and connectivity is the biggest single issue for oil companies in the Middle East right now," says Samir Eid, energy industry director for the Middle East and Africa at Oracle. "Organisations need accurate data flowing from their oilfields to their headquarters, and to the distribution operations; all of it is critical."

Moataz Khalaf, business systems specialist on the Information Systems team within Kuwait Oil Company's (KOC) Information Technology Group (ITG), expands on this view, noting that while the amount of data flowing across an O&G organisation has increased, the volume of data does not necessarily correspond with the criticality.

KOC is an upstream company, focusing on the extraction of oil rather than distribution.

"As you go through the different layers of information, down to the level of the wellhead for example, the volume of data decreases, but the importance of it goes up massively," says Khalaf. "With so much emphasis being placed on real-time drilling and initiatives such as the digital oilfield, this data is so critical to your operation that you cannot ignore it."

Sajid Qayyum comes in at this point, quoting realistic uptime figures of anywhere between 30% and 80% for KOC's data flow from its oil installations. Qayyum is also a business systems specialist at KOC's ITG; he adds that the usual and an "acceptable" uptime range would be from 40% to 50%.

"Obviously 100% would be the ideal, but realistically we are working towards 80% uptime as an industry; this is the sort of level you see being achieved in the North Sea, for example, and we are working to bring the new technologies which make this possible to the Middle East," says Qayyum.

KOC is one of the more successful producers in the region, successfully maintaining a low production cost per barrel, while continuing to invest in new IT systems to improve efficiency. KOC's ITG manager, Hesham Al Nouri, was one of ACN's IT managers of the year for 2005, on the back of a successful ERP implementation at the oil giant.

But while the upstream producers like KOC have the benefit of spectacularly high oil prices - and a reasonable expectation that they will be maintained for the foreseeable future - downstream firms have not been so lucky. Far from benefiting from high oil prices, distribution networks actually suffer reduced margins and even reduced sales in price-responsive markets. On top of this they have to operate massive logistics operations on a global scale, transporting some of the most volatile high-volume materials in the world.||**|||~||~||~|The Emirates National Oil Corporation (ENOC) is a case in point; it has just implemented an Oracle ERP (enterprise resource planning) system covering much of its business (which does include some production as well as the massive distribution operation).

"ENOC is a massive organisation - our revenues run into billions of dollars, there are more than 30 companies under our portfolio, and we employ more than 4,000 staff in multiple locations across the UAE, Europe, and Central Asia," says Hussain Sultan, group chief executive and board member at ENOC. "Our Oracle-based IT infrastructure is extensive and covers the whole business group."

ENOC's ERP implementation is partly meant to facilitate expansion overseas, with the necessary legal and regulatory compliance this entails. But running an efficient supply chain operation also requires robust IT reporting tools, and automated systems to anticipate common situations.

Another key challenge for O&G companies in the Middle East is the issue of procurement; with such large operations (whether upstream or downstream) covering a wide range of activities, O&G firms often end up with many thousands of approved vendors. The prospect of putting out manual requests for quotation (RFQs) to all the suppliers in a particular category is not one which appeals to most O&G procurement departments, according to Alan Livingston, CEO of EOS Technologies.

"I think the benefits of an automated supply chain are quite amazing when you consider how much companies will invest in an ERP system; they will spend $30m to reduce the admin cost per purchase from up to $160 to around $75, and they're quite happy to do that," says Livingston.

"And yet almost all of them have missed the trick; why reduce that figure by automating what is almost exclusively an internal cost? Yes, you end up taking all these diverse systems and integrating them internally, but then still fax the documents to your vendors - why not automate this process?"

Livingston claims that by automating the procurement process between vendors and buyers, the cost per purchase can come down to as low as $30. EOS Technologies, along with partners such as OTN in Oman, has set up a Middle Eastern O&G exchange, which Livingston says is the largest in the world, and rapidly gaining converts among vendors and O&G companies.

Mitchell also sees procurement as a pain point for O&G firms, and a frustration generally: "The attitude that a lot of procurement teams have is that the cheapest option is always the best; they don't differentiate between items of different quality. For example if they see a Swedish pump, a German pump and a Chinese pump, they won't look at the features or the build standards. I always compare it to cars, and ask them what's the difference between a Lada, a Ford and a Porsche; and they say, they're cars, they get you from A to B. I try to explain that they're not just cars, they are very different things."

The O&G sector in the Middle East is currently at a crossroads; with the promise of, at the very least,high oil revenues in the medium term, as well as a growing demand for LPG worldwide, O&G companies in the region can either invest some of the extra revenues in robust, long-term IT projects, or they can continue on dealing with individual pain points, reluctant to tackle more underlying issues.

Neither approach will stop them benefiting from the current high - and growing - demand. But in the longer term when oil prices drop again, reserves become exhausted, or consumer nations start asking serious questions about projected oil yields, regional O&G producers will find these issues easier to deal with if they have implemented a decent IT infrastructure.||**||

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