How oil companies use BI to maximize profits

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At 10:30 a.m., the EIA's website sees a storm of activity: 1,000 page views per second for 15 seconds, says Charlie Riner, a lead analyst for the site. Oil companies, commodities traders, analyst firms, and government agencies in the United States and other countries have written bots to collect the data. Then traffic ebbs.

Inventories are the most closely watched data in the industry, says Joanne Shore, a senior petroleum analyst at the EIA, the statistics keeper for the U.S. Department of Energy. "This is what moves markets when it comes out," Shore says. If, for example, U.S. supplies fall sharply from the week before, that can mean demand is rising and prices likely will, too. It's not only traders who want this data. Corporations such as Valero fold it into its analysis of inventories and market activity so that they always know their standing compared to rivals.

In the oil and gas business, you are what you own. The amount of crude waiting to be refined, or the already-processed liquid in storage tanks ready to be sold and delivered, represents much of a company's value at a given moment. As a refiner, Valero buys barrels of oil to heat and pressurize into other products, such as diesel fuel, asphalt and lubricants. The $95 billion downstream company owns 17 refineries that together can produce 3.1 million barrels of product per day.

But Valero doesn't sell that much in a given day so it must store finished goods until they're ready to be shipped to customers. The company tracks its own inventory movements the way a first-time mother studies her infant. How much of which products did we sell this morning? How about now? And now?

Market analysts run inventory reports "a few hundred times a day," says Kirk Hewitt, vice president of accounting processing optimization . As the cost of crude fluctuates during trading hours, Valero sales and marketing staff want frequent updates so they can sell products at the most profitable price and buy crude to feed their refineries at the best price.

"We're dealing with a commodity whose price changes every second," Hewitt explains. "So our margins change every minute. Our costs change every minute."

Companywide, Valero employees generate more than 20,000 reports per month. These range from gas station profit-and-loss statements to the status of payable invoices to telecommunications charges.

Valero uses WebFocus tools from Information Builders for nearly all its BI reporting, but not for inventory reporting, which has to be quick and dirty. For that, users query Valero's SAP Business Warehouse system, which collects operations data from the SAP R/3 system at Valero's refineries. Data includes items such as the volume of crude processed and the amount of products made from it. The information is presented in an Excel spreadsheet, he says, because "it's a fast way to get a snapshot."

Valero wants to make its BI faster overall. Now most reports use information from data warehouses populated each night with batch updates from SAP. But Hewitt says moving to a service-oriented architecture will enable more frequent updates, so the analysts can query more current data throughout the day. The company is working with SAP to implement SAP Exchange Infrastructure, or XI, to make that happen. Valero will still use WebFocus for what-if analysis and report presentation, he says.

Though the technology is changing, the purpose of the analysis isn't. Valero monitors the value of its inventory, along with sales and efficiency at its gas stations, to make adjustments to the price of its products as it watches demand and supply shift. Just because gas prices are soaring doesn't mean Valero has an easy ride. Aside from gasoline, the company makes asphalt, sulfur and other secondary products. These prices haven't increased as much as gasoline has, or in proportion to the rise in the cost of crude needed to make them. Valero has to balance its dependencies.

Data Analysis Can Help Cut Fuel Costs, Too UPS crunches information from its trucks to improve efficiency and save money

At UPS, there's data everywhere: on the packages, on the drivers carrying handhelds to record customer interactions, even inside those ubiquitous brown trucks. UPS vehicles contain a wealth of data drawn from more than 200 sources inside the trucks. And last year, the company found a way to cut its fuel costs, among other efficiencies, by putting this data together using telematics technology.

Telematics refers to systems used for transmitting data to and from vehicles. UPS's system uses off-the-shelf telematics software to help gather and compile the data from the trucks. Then, proprietary applications using in-house-developed algorithms allow UPS automotive and operations personnel to query and analyze the information.

In 2007, UPS piloted its telematics program on 334 delivery trucks in Georgia. Analysis of the data generated helped to cut the amount of time delivery trucks idled by 24 minutes per driver per day-for an estimated fuel savings of $188 per driver, per year. "That adds up to a lot of wasted fuel," says Jack Levis, a manager in UPS's industrial engineering group, "and a lot of carbons being emitted into air that don't need to be." UPS has more than 90,000 U.S. package drivers, so the potential savings could amount to millions.

In addition, many of the insights gained from the telematics system have been eye-opening and somewhat counterintuitive for the engineers in the automotive group. For example, UPS has typically scheduled fleet maintenance according to time-dependent factors. But engineers and other "data miners," as Levis calls them, discovered that UPS was replacing large components and parts on its delivery trucks when telematics showed that what actually needed to be replaced was just, say, an O-ring. "So rather than a thousand-dollar job, it was a $20 or $30 job," Levis says.

There's more to learn as operations analysts comb through the data looking for other efficiency patterns and safety trends. For instance, UPS delivery personnel may be driving unnecessary miles on their routes. "We've just scratched the surface on finding things," says Levis. ( Read an expanded version of this story.)

-Thomas Wailgum

Managing X-Factors

Financial markets often move on fear and uncertainty. The problem is, no one can predict which direction commodity prices will go in or how much they will gain or lose.

On April 21, news spread that unidentified attackers had punctured a Japanese oil tanker with rockets while the ship was sailing to Saudi Arabia. That same day, Royal Dutch Shell announced that African militia fighters, protesting corporate oil activity on the Niger Delta, had damaged a pipeline in Nigeria. Worried about oil supplies, traders pushed oil to $117 per barrel, setting a new record.

Then there are less-violent but no less-volatile events. Hurricanes such as Rita and Katrina in 2005, say, or refinery explosions. Downtime at even one major refinery from a fire or explosion can drag down earnings at that company and affect the rest of the industry for years. Literally.

BP, the $21 billion British oil company, has paid in financial terms and human lives. In 2005, explosions and fire at BP's refinery in Texas City, Texas, killed 15 people and hurt 170 others. The refinery, which by itself makes about 2.5 percent of all the gasoline sold in the United States, had to be partially closed. Then it suffered damage from Rita and Katrina later that year and didn't reopen completely until this past February. BP's profits in the U.S. have dropped, in part because of the Texas City disaster, from $12.6 billion the year the refinery blew up to $7.4 billion last year, according to BP's latest annual report.

Chevron, meanwhile, noted in its annual report that although product margins for the oil industry were generally higher for 2007, profit margins on Chevron's refined products "were negatively affected by planned and unplanned downtime at its three largest U.S. refineries." Because of the problems, Chevron's U.S. refineries ran at 85 percent capacity for crude oil distillation in 2007, down from 99 percent in 2006. Chevron's U.S. downstream profits dipped to $966 million from $1.9 billion in 2006.

Smith, the EDS consultant, says competitors should have BI in place to assess an event like BP's Texas City disaster or Chevron's partial shutdowns immediately. "If I'm Shell, I should understand what's the opportunity" to fill gas orders that BP and Chevron might not be able to, he says.

The Federal Reserve Bank of Dallas has developed a model to forecast the price of gasoline that accounts for surprise events. Stephen Brown, director of energy economics and microeconomic policy analysis there, uses a combination of Excel and EViews, a Microsoft Windows-based application designed to perform regression analysis. EViews comes from Quantitative Micro Software, a privately held company in Irvine, Calif. Unlike most BI tools, EViews was designed specifically for analyzing time-series data. Advanced regression analysis capabilities aren't usually part of mainstream BI tools, although SAS and SPSS offer some. Universities sometimes provide such tools (for free, even), including Pennsylvania State University's EasyReg and University of Minnesota's Arc Software.

First, Brown assumes that a certain number of unpredictable events will happen in a given year. For example, some refineries will shut down for some period because of fires or hurricane damage. Brown looks at refinery histories to calculate an average outage, then sets his model to account for it. "We have said that all these unusual events that have occurred in past are going to occur on average in the future as they have in the past," he explains.

What Brown's model can't account for is politics. There's no way to calculate an average impact of country leaders acting erratic-something the $214 billion Chevron must deal with. About 26 percent of its proven oil reserves are in Kazakhstan, the company says. Kazakhstan isn't the most stable of countries. It broke off from Russia in 1991 and is now ruled by a president granted lifetime powers and immunity from criminal prosecution.

Chevron does not comment on the security of company personnel or operations, according to a spokesman, Sean Comey. However, in its latest annual report, Chevron lists the Kazakhstan operation under the warning "Political instability could harm Chevron's business."

From Wildcat to Datacrat

No one argues that oil isn't one heck of a lucrative industry. And all those profits don't come from good business intelligence practices alone. But it's a powerful notion to run a company with the mind-set that virtually every employee is a data analyst.

"Engineers and geoscientists and everyone have been taught BI from the start," says Lensing, the Hess CIO. Give people in any industry access to information along with tools to interpret the past, model the future and imagine different paths between the two, he says, and they can change the trajectory of companies.

This story, "How oil companies use BI to maximize profits" was originally published by CIO.


Copyright © 2008 IDG Communications, Inc.

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