An electronic intermediary is a “virtual forum” where parties (interested buyers and sellers) share information about their respective needs and offerings (products and services).  By channeling this information into a single centralized source or “trading hub” the buyers and sellers are able to communicate with a wider group of parties than would otherwise be possible.  Importantly, the costs of maintaining this increased number of trading partners do not grow incrementally as they did traditionally. There are various categories of electronic intermediaries which over differing types of services. 

Characteristics of the Oil Industry

 Several characteristics of the oil industry make it an ideal opportunity for e-commerce:

- Size of market:  Oil and gas trade represents one of the largest businesses in the world – gushing $1.65 trillion in gross trade revenues and $330 billion in annual procurement costs worldwide; 
- Concentration of business-to-business trade:  Approximately 90% of the transactions within the oil industry occur between businesses rather than with consumers;
- Degree of intermediation:  A high degree of intermediation exists within the industry due to its highly structured vertical integration; 
- Opportunities for improvement:  A high degree of capital inefficiency exists within the industry;
- Degree of fragmentation:  There is a high degree of fragmentation among the end-market buyers, particularly in the area of refined products; 
- Degree of Competition:  The industry is highly competitive with players competing for thin profit margins; the annual growth rate is fairly limited to 1-3% per year.  Thus, players are compelled to exploit every opportunity to improve the bottom line; 
- Search Costs:  Search costs in the industry are high as compared to those in other industries due to the industry’s guarded, proprietary approach to  sharing data and technology. 

 In spite of the lucrative opportunity these factors may represent for exploiting e-commerce opportunities, the oil industry has lagged other traditional industries (particularly the automobile industry) in adopting internet-based technologies.  A potential cause for this slowed response may be the entrenched traditions and structure within the industry and the need for sweeping cultural and organizational change necessary to employ e-commerce opportunities.  Additionally, the industry has been challenged in attracting IT talent to implement e-commerce business solutions due to the competitive marketplace coupled with the specter of recent layoffs throughout the industry. 

The Reality of Electronic Intermediaries in the Oil Industry Today

 Even with the above obstacles, business-to-business e-commerce providers are proliferating throughout the oil industry.  For purposes of analysis, the e-commerce players in the oil industry can be segmented into three categories:

- Procurement and related services providers
- Trading exchange providers
- Workflow, process and knowledge management providers

Procurement and Related Service Providers

These are the companies that provide e-commerce solutions to purchase the equipment, talent, maps, technology, etc., necessary to operate in the oil industry.   According to industry analysts there are currently more than 40 online procurement trading exchanges dealing with hydrocarbon (both upstream and downstream operations) with additional exchanges entering the market at a rapid clip.  Analysts predict acquisition or failure for all but a few of these players, with just one dominant exchange and potentially two competitors remaining after the inevitable shake-out.  The players include: 

Trading Exchange Providers

These companies provide a platform for the exchange of oil and oil-related products and services.  Some of the major participants in this category are existing oil companies who have parlayed recent efforts to streamline and integrate existing business operations into a new line of business.  This is particularly true for Chevron which re-engineered and integrated its internal business processes and has launched a petroleum-industry exchange.  The roster of players includes:

Workflow, Process and Knowledge Management Providers

Perhaps the least straight-forward of the categories but certainly very promising, this category includes providers who deliver products and services specifically designed to add value to the refined products segment of the market.  This segment of the market is highly fragmented with many buyers and sellers.  Providers in this space offer products and services which improve internal logistics management as well as streamline the price discovery and procurement process. 

We focus on two companies operating in this space: DownstreamEnergy and Petrolsoft   Please click here for a closer analysis of these two companies.