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How oil companies use BI to maximize profits

Kim S. Nash | June 8, 2008
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.

For example, automakers continue to improve the fuel efficiency of their cars and light trucks, as well as to build electric-gas hybrids. By 2030, the average light-duty vehicle will get 27.9 miles per gallon, 40 percent more than in 2006, according to the EIA. A highly simplified analysis suggests that if people use less gasoline, gas prices should drop, which makes expensive drilling less profitable, Knapp explains.

Although demand for gas is growing in China and India, so far it's not enough to offset the expected drop in U.S. demand. New well and rig technologies could take some of the cost out of drilling, but no one knows exactly when or by how much. There is no shortage of data points; the value is in interpretation. "It's about filtering rather than finding a piece of information," he says. "Understanding what this whole pile of stuff can do for you is the key."

Adjusting to Change in Real Time

Every Wednesday morning, the shouts and hand gestures that make the Nymex trading floor in New York frantic begin to calm. Petroleum traders are waiting for the release of data from the U.S. Energy Information Administration (EIA) on countries' inventories of crude oil and gasoline, as well as world crude prices.

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?

 

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