How ETRM software can bring refinement to refining

The past four years have been a testing time for the oil and gas industry, as players large and small have struggled to adapt to wild price swings. While oil prices were high, the pressure was on maximizing production volumes at all costs, often at the expense of capital discipline and operational efficiency. Low prices brought with them pressures to focus on efficiency, to tighten control on capital and operational costs, and to seek out new market opportunities. A big step towards achieving these goals is to implement a cloud computing-based energy trading and risk management (ETRM) software system.

At all links in the value chain of the oil and gas industry, the philosopher Friedrich Nietzsche’s maxim that “what doesn’t kill me makes me stronger” has proved to be all too true. Producers and oilfield services companies are fitter than they were, able to generate healthy profits at much lower oil prices than before. In the downstream refining and trading sector, this has manifested as a quest to reduce break-even margin and thus boost resilience to adverse market conditions.

Goodbye spreadsheets …

Much of the refining capacity in North America has been around for a surprisingly long time. According to the Energy Information Administration (EIA), the last refinery with significant downstream unit capacity that was built in the U.S. — Marathon’s facility in Garyville, Louisiana — came on stream in 1977, more than 40 years ago.

Given the maturity of the industry and continuing advances in technology, it is not surprising that — despite various updates and modernization programs over the decades — there are plenty of opportunities to be exploited when it comes to streamlining operations, trading and business processes.

Many refineries in North America — especially in the United States — still use a variety of disparate, manual and spreadsheet-based in-house systems to manage supply chain functions, such as logistics, inventory, order processing and invoicing. Such systems may get the job done, but at what cost?

The drawbacks are several and severe. Manual and spreadsheet-based systems are susceptible to the introduction of errors and inaccuracies as they move from department to department. They tend to be time-consuming, with an impact on staff productivity and, therefore, costs. Information stored in multiple locations may not always be updated correctly. Deal capture can take much longer than when using a system built with that purpose in mind. A large refinery is likely to have hundreds of people employed on these tasks.

Meanwhile, enterprise resource planning (ERP) systems, while they may be superior to spreadsheets in many ways, are not generally designed for the trading of commodities whose prices change every few seconds.

A lack of integration and real-time market information makes it hard, if not impossible, to generate the market insight that a fully integrated holistic system can bring. This, in turn, impacts risk management and decision-making. All of the above drawbacks can be addressed by implementing a well-designed ETRM software system. Refineries that have done so have found that the return on investment can run into the millions of dollars each year.

… Hello to ‘a single source of truth’

Insightful decision-making matters more than ever, not only because of price trends but also because of the structural changes under way in crude oil refining. These include the phenomenal rise of shale oil production in North America over the past decade, the lifting of the crude oil export ban in the U.S. in 2015, and the decision of the International Maritime Organization to drastically reduce the sulfur content limits on shipping fuels from 2020. All of these developments bring challenges but also opportunities.

So what does an ETRM software system look like? And how should a refinery owner go about putting one in place?

The trend today is for an ETRM system to be cloud-based, removing worries about hardware investment and upgrading on the part of the users. A cloud-based ETRM delivers the same advanced capabilities as a traditional ETRM, in addition to scalability, speed, enterprise security and efficiencies. The cloud not only facilitates integration, it also provides a high level of resilience. Information needs to be entered or updated only once, and a well-designed system will provide real-time position reporting.

Critical to the management of costs is the automation of business processes, from front-office functions such as deal capture, through middle-office processes such as contract administration, to back-office functions such as accounts payable.

An ETRM system thus becomes “a single source of truth,” capable of providing market insight, managing counterparty trading and liquidity risks — given that commodity trading is a capital-intensive business, and liquidity is key — and keeping a close eye on costs and operational efficiency.