It’s time for energy companies to adopt cloud-based technologies

With all the price volatility and geopolitical risk coming out of the war in Ukraine, energy companies have a lot to keep track of.

There are also questions about next-generation fuels and long-term sustainability given the looming climate crisis.

All these create big-time headlines and attract investor attention.

But the industry is facing another challenge — one that doesn’t get talked about on CNBC or written about in the Journal. The computing platforms most businesses have run on are due for replacement with current-generation technology, and companies are going to need to transition to it soon.

The good news: The new technology has more capability than the older stuff it’s replacing and can help provide tools for industry leaders to face many of the challenges  grabbing headlines today.

Let’s first look at how we got where we are.

Remember the ’90s? Blockbuster Video, “Baywatch,” PalmPilots?

At the start of the decade, most oil and gas industry players operated on stand-alone custom software that didn’t necessarily do everything you’d want enterprise-level software to do: Sales data was typically on a separate program from billing and inventory, and the programs didn’t necessarily talk to each other. It was entirely possible that your inventory data wouldn’t be consistent with sales, and your accounting software wouldn’t produce reports that matched what another program said you’d shipped.

Then came the Y2K scare. In the latter years of the decade, the industry hurried to adopt new software platforms that could survive the projected computer apocalypse on New Year’s Eve, when the Millenium Bug was projected to cause bank computers to freeze up and airplanes to fall from the sky.

None of that happened, of course. But what did happen was the oil and gas industry by and large adopted Enterprise Resource Planning (ERP) software.

This was a big step forward for the industry: For the first time, companies could have one integrated platform that encompassed billing, accounts receivable, accounts payable, inventories, tax — every key piece of data an executive team would need to make strategic and tactical decisions about their business.

Fast-forward to today. It’s been nearly 25 years since the industry made the jump to ERP software, and those early programs are coming to the end of their functional life spans. It’s time to start thinking about replacing them. But when companies start speaking with software vendors, all they hear is talk of how it’s time to “move to the cloud.”

Move the what to the where, you say?

For all of us who haven’t spent the past decade working in the tech industry, here’s a quick primer on what “the cloud” is all about:

The textbook definition of cloud computing is computer resources provided on demand over a network. Instead of hosting all your company’s data on your own internal computer servers, you pay a cloud network provider (Microsoft Azure and Amazon Web Services are two major players in this space) to provide you with the computing power and storage capacity your business needs. They maintain massive “server farms” that store data and provide you with the computing power you need when you need it. Some companies refer to it as Internet as a Service, and it’s often billed like a subscription.

To a large oil and gas company — any enterprise, really — the No. 1 benefit of doing this is financial. Instead of buying and maintaining 30 or 40 huge computer servers on your own, you lease what you need from someone else.

This carries all the benefits of leasing vs. ownership on the PP&E line of your books. You don’t have huge upfront costs to acquire and expand your back-end computer hardware (and the backup system for it). You don’t have the cost of maintaining and updating what is ultimately a depreciating asset. You don’t have to pay for real estate to house your servers, or pay the bill for the air conditioning needed to keep them cool in the summer. You can repurpose your IT staff from making machines work better to helping make your people work better. Your IT budget becomes a predictable regular payment to a vendor, instead of huge periodic outlays for new equipment and licensing fees with fluctuating costs for upgrades.

There are operational benefits too.

For starters, scalability is easier when you’re in the cloud. You don’t have to go out shopping for additional servers every time you reach a growth milestone, then shop for the building, the infrastructure, and the software licenses you need to run it. Instead, you pick up your phone and tell your provider you need more capacity and bandwidth, they provide it and bill you for it, while you get to work on your next growth milestone.

As a result, it becomes easier to crunch really large amounts of data. Say you’re working on a potential acquisition. Your team is going to want to analyze massive amounts of data — production, transport, billings, payroll, taxes. If you’re running it on your own servers, you may or may not have enough capacity to generate the reports you need. If you’re running it in the cloud, it’s a simple thing to scale up your bandwidth, plus your ERP ensures you’ve got all the data in one place.

And with cloud-based computer platforms, it’s easier for your teams to work remotely. Your data is accessible from anywhere you have secure internet access. You no longer have to be in one of your buildings to access key reports. That’s a big deal, as we learned at the beginning of the COVID-19 pandemic.

Cloud-based applications also open the door to new cutting-edge technologies, like artificial intelligence, or predictive analytics.

For the first time, you can map out all the moving parts in a refinery and analyze your maintenance needs. You can look at a motor that’s currently getting inspected and maintained on a nine-month cycle, analyze actual usage data, and determine that maybe nine months is too long. You switch to a six-month maintenance cycle on the pump and extend its life span — and protect against unexpected failures. That creates new efficiencies and cost savings.

And there’s a tax compliance dimension. With a cloud-based ERP, you’re going to have more data integrity, which means more accuracy in calculating tax collection and remittance. It also simplifies some of your tax compliance operations: A new software update to capture one of the upcoming gas tax holidays, for example, is easier to implement to a platform based in the cloud than one custom-built for your company and installed on each of your servers.

So why should your energy company move your ERP to the cloud? Well for starters, there are all the benefits we discussed above: You save money, gain efficiencies, increase productivity and scalability, and allow for the adoption of new technologies.

And there’s the simple fact that you’re probably going to have to do it anyway. Software companies are moving their customers to the cloud, and at some point in the foreseeable future, they’re going to stop supporting legacy on-premises ERP platforms.

But that’s OK. There are so many benefits to moving to the cloud that this is one case where necessity is truly a virtue.

One other piece of good news: If you use Avalara to automate your excise tax compliance workflow, all Avalara products are built to integrate seamlessly with the ERP platforms you’re likely to pick. You can read more about how it works at avalara.com.