An independent IT analyst predicts the emergence of a new kind of service company: the AKD.

The oil and gas industry is evolving. Every 20 years or so, usually following periods of disruption, the petroleum industry seems to reinvent itself and define a new paradigm under which it will conduct business for the next few years (Figure 1). Forward-looking oil companies are trying to find methods to take advantage of the potential of the market and its sustained high prices for crude oil and natural gas. The emerging paradigm is one that emphasizes flexibility, accountability, productivity, technology and cost efficiency.
Challenges
The increase in the amount of data being acquired is straining the capacity of the existing paradigm, which has been allowed to deteriorate during the past 10 to 15 years. The computer infrastructure within the oil companies has been allowed to age beyond what is traditionally considered the useful life span of many of its component elements. At year-end 2000, nearly 70% of Unix hardware used in the exploration and production arena was at or near the end of its defined useful life span of 4 years. To bring this equipment up to standards, an investment of more than US$10 billion would be required, more than five times the current annual investment in new hardware. No oil company is willing to spend this kind of money, no matter how high prices and profits may be.
Thus, we are faced with an industry with fewer professional geoscientists and IT staff, yet a nearly unprecedented demand for production. We also are faced with a situation that demands ever-increasing levels of productivity from individual geoscientists in a race just to stay even. We are asking industry professionals to do more, yet it is an established fact that a substantial percentage of senior personnel will be retiring during the next 10 years. We are asking these individuals to be productive on old or outdated equipment running software that may or may not have been kept current.
How can an oil company take advantage of current price conditions, increase production, provide sustainable resources for future production, confront the problem of aging hardware, and deal with the ongoing attrition of the work force, all without breaking the bank?
The answer that emerges is outsourcing, but not the simple outsourcing we experienced in the 1980s and early 1990s. This time the business processes of oil and gas companies are being overhauled to work with fewer people, make more effective use of technology, extend business accountability throughout the industry, and move away from capital-intensive computing policies. In a few years, the oil industry as we know it may be replaced by a more streamlined and efficient industry based upon technology and services supplied through application service providers (ASPs) and enhanced outsourcing.
ASP: The new paradigm
A system that delivers state-of-the-art technology directly to those who need it while supporting the objectives of cost consciousness, accountability and efficiency set forth by management is required. The ASP model seems to fit the bill.
An ASP allows standardization of each software product on the system that runs it best. It reduces the number of systems to which the software must be ported and allows the developer to focus on making the single operating version the best it can be. This reduces cost, improves support and ensures that the end user always receives a current, best-of-breed product. Since the software is supported on the server of the developer's choice, all of the variations in individual devices that have been such an annoyance will essentially go away.
The ASP model also provides benefits for the end user. The company can reduce capital spending on software acquisition and the high-powered desktops and servers necessary to run applications. The useful life of desktop devices may be extended since they are mostly used like dumb terminals, accessing the software from the ASP server. This also means lower-cost PCs can replace higher-cost Unix machines for almost all applications. And existing Unix boxes can continue to be used long beyond their traditional useful life spans.
Measuring productivity
ASP makes an ideal vehicle for allocation of resources, measuring costs and productivity, and associating real costs with projects. Since the ASP model allows the end user to select the appropriate software for each task, use it and pay only for the time the software is actually used, it becomes simple to see which products are used most. By accumulating data on how long software is used vs. the amount of work that is accomplished, an index of productivity can be established for each user and each type of project.
New type of service company
The oil and gas industry's moving to an ASP-based model will spawn new business opportunities for ASP providers and an entirely new class of companies that provide infrastructure and extended services. For want of a better name, these new companies are referred to as A/K/DSPs - application, knowledge and data service providers - or AKD for short.
AKDs will be integrated outsourcing companies that provide the links for large and small software companies to offer their products and services. In addition, they will offer other business applications, networking, server systems, mass storage devices, connectivity to the software developers, links to data management providers, and all of the necessary expertise and structure that make ASP viable.
The past year has seen the emergence of specialist infrastructure providers, companies that specialize in creation, deployment, maintenance and support of the high-performance computing, server and networking resources that the new business paradigm requires. These firms are a logical outgrowth of the outsourcing movement, which is necessary if the new business paradigm is to succeed.
Infrastructure system and service providers focus on providing host computers and server systems, making them work and making them available when and where required. This focus makes it possible, in turn, for the ASP and AKD companies to focus upon those tasks and functions they perform well (software services, support, data management, archiving) without being distracted by infrastructure issues.
Linked by the Web
The industry is moving toward a world wherein each geoscientist will be networked into worldwide data access and remotely hosted processing. The same geoscientist also will be linked via the Internet to externally supported data server resources far more extensive than anything offered internally. The cost of each user's system will be relatively low since the dumb terminals need minimal local resources. The processing power and storage will exist on systems linked securely to the user via the Internet (Figure 2).
The advantages of the new outsource-oriented business paradigm are obvious: the best software and computing devices, supported by the best staff, with the best data available when and where it is needed. Oil companies can concentrate on finding and producing oil without the heavy capital expenditure for software and hardware or the ongoing expense of IT support staff inherent in the prior business model.
Most of the major software developers and many of the second-tier companies already are moving to offer their software through an ASP model using a variety of providers, both affiliated and third-party. Several have established companies or joint ventures to offer integrated facilities and services for ASP software, DSP data management and e-commerce.
On the oil company side, the major multinationals have led the way in accepting and applying ASP. This is somewhat unexpected. Many predicted smaller companies would move to ASP first in order to establish a competitive advantage over their larger brethren. However, the factors of obsolescence of equipment, loss of staff and a larger working budget have allowed larger companies to be the first to realize benefits from ASP. Smaller companies are following suit.
Megatrend
The factors of change have combined to create a megatrend that is rewriting the business of oil and gas companies. Throughout 2001, this trend should become even better defined and more obvious. The result will be oil and gas companies with relatively small budgets for the purchase or lease of software or hardware but with correspondingly large budgets for services and outsourcing. The tools they use will be selected from a range of those available, accessed via a the Internet, drawing upon data stored in in-house and in commercial data repositories, and paid for only as needed.
The software developers that survive will be those with sufficient flexibility to move quickly to implement ASP offerings.
By the end of 2001, AKD should be firmly established, allowing the oil industry to continue to flourish and to profit for the foreseeable future.

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