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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.

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.

 

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