Gas Executives' Forum
Experts discuss which strategies offer hope for cutting costs, creating a competitive edge, and meeting exploding demand. This article contains interviews with: Thomas J. Aruffo; Edward M. Kelly; and Michael Rutkowski and Chuck Beaver.
Gas.Com Inc? A Smokestack Industry Faces
the E-Future
Natural gas executives, according to analysts, are in a phase that Enron chairman Ken Lay described as the fifth of five stages of Internet awareness - beginning with ridicule and evolving to panic.
In late February, at Cambridge Energy Research Associates' annual conference in Houston, natural gas executives were openly concerned about being left behind by competitors who successfully adapt e-commerce to their businesses first. Industry analysts chalk up recent interest to several large e-commerce initiatives announced by energy companies last year.
For example, last year's rollout of EnronOnline, an Internet-based transaction system to buy from or sell to Enron energy-related products and other commodities, was an alarm that awakened many natural gas executives to the e-commerce revolution, say analysts. Furthermore, many big name oil majors such as ExxonMobil, Chevron, and Shell, and oil pipeline companies such as Colonial Pipeline, are developing vertical e-commerce markets and energy portals, each one a community of customers and suppliers brought together under one virtual roof.
Chances are where oil companies go, natural gas companies will follow, say experts. They say many of the commercial pipeline and exploration and production (E&P) e-commerce strategies adopted by oil majors can be easily adapted to natural gas. In the distribution sector, local distribution companies are weighing e-commerce options as they exit the merchant function and seek ways to cut costs as they become pipes companies.
Dean Liollio, president and chief operating officer at Entex - Reliant Energy's local gas distribution company - has another plan in mind. He intends to retain customers for a potential retail affiliate should competition heat up in Entex service territories of Texas, Louisiana, and Mississippi.
Customer retention in the future will depend on the proper combination of technology and human contact, according to Liollio.
"The key is using technologies such as e-commerce to enhance customer convenience and lower LDC operating costs, while maintaining human touch, with a storefront and a real person to talk to when a customer needs service or has a problem," he says.
"At the end of the day, LDCs that have this proper blend will develop customer appeal and be the supplier of choice."
To those ends, Reliant Energy in early March announced it had signed a three-year agreement with billserv.com Inc. to develop an electronic bill presentment and payment (EBP&P) system for the company's 1.6 million customers in the Houston area.
But beyond technology, Liollio believes it will be difficult for competitors to break past the strong relationship his company has built over the years with customers.
"In the natural gas business, we go into a customer's home. There is more emphasis on human touch. The customer is there and we interface with them. There is a certain comfort in knowing that your gas company employees are the people that have been taking care of my home, my needs and my wants for the last 60 years," he says.
As for their interactions with regulators, natural gas utilities are looking for ways to cut costs through investments in businesses that interface electronically with government regulators.
For example, Exelon Infrastructure Services, a subsidiary of PECO Energy, has invested in permitsNOW.com, developed by SoftComp. The portal provides the aggregated permits and licenses businesses, contractors, developers, and private citizens need to apply for approval for government-regulated activities and to request publicly available information.
John W. Webster III, chief executive officer at SoftComp, explains that as utilities undertake complex infrastructure construction projects such as laying pipeline or fiber-optic cable, wiring a sub-division, or building a power substation, they need various permits to secure rights of way, zoning, land use, construction, and other rights.
PermitsNOW.com fills the need for rapid turnaround in the permit application process, he says. Most permitting currently occurs at the local government level, says Webster, but some projects need review by state and federal agencies. The permitsNOW.com site now has no affiliation with any state or federal commission, but it was designed to facilitate interface with those bodies, according to Webster.
But even while gas executives seem long on enthusiasm for e-commerce, which is advancing as never before, few examples exist for adapting e-commerce strategies beyond well-known options for wholesale trading, customer relationship management, and retail EBP&P, such as GISBAgent, newly certified by the Gas Industry Standards Board.
Michael Rutkowski, senior manager of Arthur Andersen's energy industry business consulting practice, says most energy clients want his company to help them do what others do now, while at the same time devising an e-commerce strategy that will distinguish them from the competition.
But he warns that a heavy Web presence or flashy Internet site may not be necessary for all companies in supporting their overall strategies. For example, no-frills e-commerce sites for procurement or to share reliability standards on equipment monitoring can be an advantage because fewer graphics and less information to download means increased speed of use, says Rutkowski.
E-commerce isn't the only thing on the minds of gas executives.
The Federal Energy Regulatory Commission's rulings on short-term capacity auctions and the price competitiveness of liquefied natural gas imports are other hot issues gas executives are pondering. In this gas industry forum, top executives at local distribution companies, pipelines, and marketers, as well as consultants, share their insights on the issues.
The Utility Perspective - Interview With
Thomas J. Aruffo
What is the state of the natural gas industry as it relates to e-commerce?
When I look at information technology and look at spending on e-anything, whether it is infrastructure or dot.com ventures, our industry appears to be taking a lag strategy. We are not spending at the same levels as other information-intensive, e-centric businesses. We are a bit slower to get to this click-and-mortar world....
I can't give you the exact numbers, but for those leading-edge financial services heavily leveraged through the use of Internet or the e-domain, they are spending upwards of 20 to 30 percent in investments, when expressed as a percentage of total revenues, on information technology infrastructure and application.
When you look at what average natural gas or electric-combination utilities spend, it is somewhere in the neighborhood between 2.5 and 3.5 percent. So there is a huge gap there.
We do have the Enrons out there, we do have the Utility.coms, Energy.com, but we don't appear to have the right product mix and strategies that have really fundamentally shifted or changed the way we do business.
What e-commerce strategies will you implement at NiSource?
We are moving forward in a couple different sectors. We were one of the first to move trading in gas nomination processes out to the Web through our Energy Access System online product.
We have a focus at NiSource on full life-cycle customer relationship management. We are a development partner with Seibel Systems to take advantage of all of the sales channels that we have and all of the customer contacts that we have, and link those together.
For example, it allows us to surround many of our other stand-alone applications and provide Web-based interfaces to self-service information as well as proactive management of our customer acquisition, sales, marketing, cross-sale, up-sale, and service strategy. We will be rolling that out this year. Again, [we have set] aggressive timeframes around that and getting things out there in 30 to 60 to 90 days as opposed to multi-year engagements for major systems.
Is the natural gas industry's interest in e-commerce strategies greater than it has ever been?
Absolutely; I think we are in a transition period. I don't know whether it will be weeks, months or years, but all of our customers, whether they be on the business-to-business side or whether on the retail side, all of them experience participation in the e-economy now. So the expectations that they have for customer service, for supply-chain and vendor management is all being set in that e-environment.
Since we also participate in that, their expectations are that we would be able to do the same things and they would enjoy the same types of customer care as they enjoy in financial services or in some aggressive supply chain strategy.
[For example], as we have moved from a small regional to a super-regional operation, from Texas to Maine, we have to take full advantage of our skill. Part of that is to go out and implement an aggressive vendor management supply chain initiative, heavily dependent on the Internet and Intranet for connectivity linking us to some e-malls and buying opportunities. We are using Oracle as the backbone for that.
How much of this e-commerce strategy is designed for the regulated side vs. the unregulated side?
We have approached it as a whole at the holding company or enterprise level.
What e-commerce solutions could maximize the potential of fuel cells and microturbines?
We are 60 days away from moving out some energy portals where we become the aggregator of solutions and services and market access for fuel cells and distributed generation. We have gone as far as reserving our domain names and locking those down to be one of the premier sites of managing the market space and information around fuel cell solution services, as well as distributed generation.
NiSource has its own play in the research and development of hardware that allows fuel cells to move forward. Furthermore, we have even talked about moving fuel cell services over to online-auction capabilities.
How will LDCs fare in an e-commerce environment?
It depends [on whether they] maintain that link to the customer. NiSource is going to be a distribution company as well, and will try to preserve our links with our customers.
Self-service, bill presentment and payment, and energy management solutions, have been launched this year and will be in production in the next two months of what we have termed "an industrial gateway." Although our large commercial and industrial customers have choice today, we are able to come in and provide them with near real-time metering, demand management, and profiling, so that they can have more control across an entire enterprise, as opposed to just a local plant or a single building in operation.
It is one of those things that we can value-add to our customer in the hopes that we will retain that customer even when they are faced with choice.
The Outside View - Interview With Michael Rutkowski and Chuck Beaver
Is e-commerce a large-account solution?
It can be, depending on the strategy. Some of the things I can see utilities doing are for their very large, multi-site key accounts - steel mills or large industrial customers that may have several hundred meters. [An example of this strategy is] basically building them a customized customer interface where they can manage their entire customer billing information in one spot in addition to having a direct account rep.
I do see it as a way to enhance the customer relationship. Right now in the area of electronic bill presentment and payment, it's really not a cost-savings measure until X percent of utilities' customers adopt it and they can actually get rid of their paper process. [E-commerce] in the near term will be a customer-satisfaction tool.
What is your definition of e-commerce?
We usually call it e-business. The way we define it is improving the exchange of goods, information, or services through the use of network-enabled technologies to remove barriers of time, geography, and physical product form.
What are the biggest risks in adopting an e-commerce strategy?
- When companies don't have a coordinated firm-wide approach and look at [e-commerce] as a series of point solutions, they are not going to get the promised returns because they may be focusing on the wrong places.
- There is this e-commerce, e-business hype out there and they may risk over-applying it if they don't have a process where they can evaluate the application across the corporation.
- [Energy companies] cannot view e-business as a panacea for a customer-satisfaction problem. It may be one component of the solution.
- The risk is your competitors will not only make their businesses better, faster, and cheaper, but also reinvent themselves using e-commerce technology.
What e-commerce strategies are available?
Procurement is the kind of no-brainer for e-business. Business-to-business transactions such as procurement of supplies, equipment, and managing inventory are just a few examples.
We are starting to see vertical marketplaces pop up such as Shell, [which] has all these suppliers and they are trying to exploit those relationships by managing that vertical marketplace. [Shell has partnered with Commerce One, which helps companies establish Internet portals, to host portals for others, and to develop comprehensive e-procurement plans.]
Chevron and Ariba [whose software helps companies track and manage supply purchases over the Internet and corporate Intranets] unveiled a Web site, Petrocosm Marketplace for energy-related goods. [The Petrocosm Marketplace procurement Web site will enable companies to buy and sell products and services in the oil and gas industry, ranging from pipes and valves to engineering and construction services.]
[Moreover], eNersection.com, an online Web-based service, will allow E&P oil and gas companies to purchase a wide range of products on the Internet.
What are the most promising e-commerce strategies?
There are probably some quick wins with e-procurement because efficiency gains in the procurement process are quickly realized. In general, it reduces the friction in the supply chain.
If you look at the vertical marketplaces, there is an opportunity there. I haven't seen anyone go after that market yet in energy as in other businesses. It hasn't really materialized. I think on the wholesale side, most of that is being done through intermediaries. They are basically running commodity markets for LDCs, utilities, and marketers.
Customer relationship management can be successful. That gets into the sophisticated portal idea for retail customers.
How can e-commerce help the gas industry be responsive to increased demand levels that may grow to 30 trillion cubic feet? Could e-commerce facilitate an hourly market for natural gas?
While revolutions are occurring in most industries, the energy industry has been slower to respond. A number of factors contribute to this, and for the Internet to really begin transforming the natural gas industry, many fundamental changes would need to occur. [Such] options assume a great deal of infrastructure change, the likes of which the industry continually resists.
Hourly scheduling assumes a seamless grid of nominations and confirmations have been accomplished, that can be transacted and scheduled in a few minutes every hour on a 24/7 basis. Hourly also assumes that transportation of gas, and the gas itself, has been nearly commoditized.
Let's address these [matters] backwards, since accomplishing the second one would force the existence of the first one.
The Internet is especially good at commoditizing things that might not be traded efficiently currently. Transportation capacity and the gas itself are good examples. While there are underlying physical and operational limitations against how completely similar you could consider all natural gas or transport capacity to be, you could still move these markets into a commodity model and substantially get away with it.
Using typical Internet exchange forum initiatives, you could develop a site where all the producers sought out all the end-users, and the price of gas immediately settles to market value without any influence of the inefficiencies of the traditional networks on which the price currently rides.
As is also typical with such an Internet influence, the middlemen's existence is immediately banished. This means all the marketers could go away, since they no longer have a function in a perfectly efficient Internet-based market. However, they are not going to go away without a serious fight! This is the most powerful segment in the industry.
[Moreover], the Gas Industry Standards Board's first goal was to head [toward an hourly market], to make the nominations and scheduling of transactions seamless to the point of enabling such a quick market. GISB's goal amounted to trying to streamline a vast enterprise supply chain. However, what GISB experienced is that the suppliers view each other as fierce competitors and were unable to work cooperatively. It is doubtful that any meaningful streamlining of the grid will take place until or unless the customer segment of the industry makes roaring sounds like what we've seen in other markets.
What would happen to pipeline transportation capacity if gas is further commoditized on the Internet?
If transportation capacity is further commoditized [from] its current state and across the whole pipeline grid, then the pipelines lose their monopoly status, and the price of their capacity is settled in the market by buyers and sellers only, eliminating pipelines as middlemen (along with their fees based on market inefficiencies).
They get relegated to bit players in the schema, only useful for physically moving gas. (However, the transportation of gas and transportation capacity are limited more by their physical connection to the pipe in the ground, which sours some of the commoditization efficiencies).
Nonetheless, this threatens a cherished role of the second-most powerful segment in the industry - that of the capacity market on the pipelines. They would fiercely resist a market scenario that relegated a return to a utility status, with no real need for contact with customers. This lack of contact with their customers would come about because the auction sites that conducted the gas trades would become the only interaction their former customers would need. This single site would then provide the necessary nomination information to all pipelines.
This is a fundamental part of the puzzle, since the pipeline differentiation we see today is mutually exclusive of a commoditized gas market (and, to a lesser extent, the capacity auction market). With pipeline differentiation no longer included in the gas "product" like it is today, the need for a customer to interact with the different pipelines vanishes, perhaps resulting in happy customers, but unhappy pipelines.
How do natural gas industry initiatives relate to other industries?
The Internet can easily enable exchanges on each pipeline so buyers and sellers of gas and capacity can trade and compete in a definable market space. However, this is short of the full empowerment other markets in other industries have achieved.
In other industries, the power of the consumer has been so vast (due to vast numbers) that the manufacturers or retailers had to cede control to the customer base. The newly empowered masses forced the changes in power and caused explosive growth on customer-driven Internet sites - most notably Amazon and E-bay.
The end-users, both wholesale and retail, are the weakest segments within the gas value chain. Wholesale end-users are small in number and therefore lack a power base.
The retail end-users, household customers, while large in numbers, are difficult to energize because buying utility services is not seen as exciting, glamorous, or even fun to do. Consumers are unlikely to initiate change for a service or adopt additional purchasing effort for a service or benefit that they view as transparent.
What are the most successful e-commerce strategies for the natural gas industry?
I'm not aware of any companies in the natural gas industry that have anything approaching a real e-commerce strategy. Most are busy trying desperately to not join the Internet revolution.
On the Physical Side: An Interview with Edward M. Kelly on Global Markets for Gas
Will overseas liquefied natural gas imports play a role in North American markets?
The need is there. The demand potential is real and the cost of supply has come down.
The amount of distressed methane [distributors] that would not have the market other than liquefied [natural gas] or [to] pipe to some difficult local market situations is growing. In addition, there are two written-down, inactive import and regasification facilities in North America, and the cost of liquefaction has come down. We are looking at an LNG value chain that is very competitive into the East Coast in the U.S. The range is in the low- to high-$2.00 range, [with] a flexible service capability.
I think there has been a lot of recent interest in LNG because of all of the pools of natural gas that don't have an alternative home and the cost reductions to the new technologies in building liquefaction and export facilities.
What are the risks for U.S. natural gas companies if a world market for natural gas emerges?
The risks are probably somewhat limited by the availability of import capacity....So we are really talking about an important marginal source of supply but not a source of supply that is likely to threaten the underlying price structure available to U.S. producers.
What will LNG mean for LDCs?
More LDCs will face the challenge and opportunity of what to do with their existing LNG liquefaction and regasification facilities - by that I mean the pipeline. Many LDCs have their own LNG facilities that liquefy, store and revaporize gas from the pipeline system.
The larger issue for LDCs is the value of those facilities in an increasingly competitive marketplace, and to have rights to that value. We are talking about two types of LNG and two types of uses that are possible.
In a conceptual free-market environment, if those facilities got their cost structure lowered, [they] could begin to compete for peaking services with LNG imports. There is a certain regasification capability, but over time, to be competitive is not likely.
The LNG imports have significant advantages in the economics. One, they are not liquefying pipeline gas as they are importing gas that was distressed from somewhere else in the world. They are importing at whatever the market price is. Second, the LDC book cost, on a per-BTU basis, on average, is higher than the import facilities that were built in the '70s.
What does world natural gas competition mean for pipelines, E&Ps, and marketers?
For marketers, the development of a worldwide market would open up a new level of opportunity for arbitrage and trade.
For pipeline companies, the development of a world market opens up challenges in terms of value of existing infrastructure. If there were a functional world market, [in] some areas of the world the value of existing infrastructure would be challenged.
For E&Ps, a world market for gas will have quicker monetization in gas reserves - in general, an opportunity where they have large associated gas reserves.
Is siting still an obstacle for LNG? What other hurdles exist?
Certainly in the U.S., environmental hurdles, siting hurdles, and community relations are not getting any easier. Opponents will use every argument against something, including the danger aspect. Environmental compliance and siting regulations have gotten more onerous.
How long before natural gas imports become competitive with U.S. natural gas?
It's there now. It is the reason for resumed and very active interest in activating two remaining LNG and port terminals.
What would a world market for natural gas do to prices?
In the U.S., [imports are] an important marginal source of supply. It would add a needed increment of service in the eastern seaboard, such as 2 bcf into a 60 bcf per [day market]. In terms of pricing, it might dampen volatility in certain East Coast markets. Most of the LNG would come to the U.S. from Latin America, Africa, and spot cargoes from the Middle East and Asia.
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