“Demand Destruction”, “Oil Processing Won’t Be Back”, “Exports Stagnant”, “Record Quarterly Losses”, “Capital Budgets Slashed” and “Refinery Permanently Closed” are all part of the current torrent of brutal oil and gas headlines. Situations like this are not the first time that the industry has been faced with such a dire reality. Looking to the future, it appears that tremendous change and transformation in the industry is not just a possibility but a certain reality. Given the current and future prospects, what are the right actions to take today that will lead to sustainable and predictable profitability?
Action, Not Reaction – Based On First Principles
Albert Einstein, the mind behind the Theories of General and Special Relativity, said, “Nothing happens until something moves. When something vibrates, the electrons of the entire universe resonate with it. Everything is connected.” Embedded in this quote are two important concepts where the answer to sustainable and predictable profitability lie. The first concept is that you need to have a definitive action plan that will make “something move”. Be the action and not the reaction in the equation. The second concept is illustrated in the physics or first principles. First principles, in the words of Aristotle, are “the basis from which a thing is known” and are the foundation from which an effective action plan is built for success. This first principles action plan must focus on the solution’s function and not simply the form because the desired outcome is based in action that produces the desired results of profitable business decisions.
While the most effective action plan is holistic, multi-disciplined, and focuses on the collective value that each of these integrated actions can provide, the emphasis here will be solely on the hydrocarbon supply chain (HSC).
Value Spaces In The Hydrocarbon Supply Chain
The hydrocarbon supply chain is comprehensive, complex, and competitive as illustrated in Figure 1. It is comprehensive in its scope and reach, complex with all the different functions and goals and competitive, both externally, from a market perspective, and internally due to the differing functions and goals. The only element of the three that can be effectively addressed is competition and only at the internal level. Every HSC is unique and therefore the size of the value spaces around each component is dependent upon the specific circumstances. The ultimate action plan related to capturing greater value from the HSC is to develop a first principles understanding of were these value spaces exist at each HSC component and build a system from there that harmonizes the various goals into a singular goal of value capture from the whole versus the individual parts.
Understanding each element of the HSC by its value space and function is the first step in maximizing enterprise value capture. The value spaces and functions for the ten basic elements of the HSC are summarized below:
- Trading – Product exchange for alternatives to production;
- Planning – Identifying decision drivers through optimization including crude selection, operating conditions, stream dispositions, product blending and demand allocations;
- Scheduling – Translating the planning decision drivers into a feasible and achievable set of execution instructions while minimizing logistics cost;
- Engineering – Providing rigorous, technical process insight and direction that informs operations and planning and scheduling modelling requirements;
- Operations/Reliability/Maintenance – Executing safe, reliable and optimized production and providing current information that enables well informed plans and schedules;
- Logistics – Delivering products to their final destinations efficiently and by the lowest practical cost.
- Distribution – Placing product in quantity into the highest margin markets;
- Production Accounting – Managing oil loss and providing quality reconciled “actual” data;
- Data Management – Providing a unified quality data for performance analysis;
- Performance Analysis – Providing measurement and visualization capabilities that facilitate collaborative enterprise optimization and management of past, present and predicted performance.
It is also important to realize that the corollary to the first principles value space for each of these supply chain elements is that each space that allows for value capture can also be a source of value leakage due to inefficient, isolated, and internally competitive practices and processes. All of these value spaces and functions are summarized in the table below along with their respective functional application focus and time horizon over which they function.
Success Demands Supply Chain Action, Agility and Visibility
Success during the current turbulent times is possible but demands a disciplined first principles-based application of a definitive action plan with a harmonized focus to efficiently capture the value presented in the HSC. This action plan needs to not only focus on the immediate circumstances but also be constructed as the foundation for maturing and expanding the value spaces of the hydrocarbon supply chain into the future where greater agility and discipline to sustain success will be demanded. Finally, the central pivot from which success emanates is the ability to visualize and collaboratively optimize the entire system rather than individual parts for the greatest affect.
Your First “Move”
Becht has a wealth of knowledge and experience through a team of 1,500 industry leaders and Subject Matter Experts in every area related to the hydrocarbon supply chain and is eager to help you succeed and reduce your time to realized benefit.
The Strategic Business Planning group assists clients in the review or improvement of supply chain tools like LP and Scheduling / Blending models, supply chain work process improvements, identifying and implementing asset improvement opportunities, and understanding risk impacts and economic and technical viability in volatile markets.
Becht also provides a full lineup of services and resources in Process Technology, Mechanical Engineering, Reliability as well as a complete offering of Plant Services.
Becht is ready to help you “make something happen”. For more information, please contact us by clicking the link below:
In future installments of this series, Becht will focus in detail on specific supply chain elements and applications for increasing value capture and expanding your value space.
- Supply Chain Models: Complexity versus Quality
- Constraints: Are You Seeing The Full Potential?
- What Are You Measuring Against?
- Decide Before It Happens: Integrated Risk Mitigated Scheduling
- Supply Chain Optimization Is People Too