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Preparing for Global Change in the PetroleumSupply Chain
Preparing for Global Change in the PetroleumSupply Chain
University of Nevada / COPPEAD Petroleum Executive Logistics Course
Houston, Texas
30 June 2005
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AgendaAgenda
About A.T. Kearney
Setting the stage oil is a complex global businessA look to the future
Petroleum supply chain value creation
About A.T. Kearney
Setting the stage oil is a complex global businessA look to the future
Petroleum supply chain value creation
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About A.T. KearneyAbout A.T. Kearney
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A.T. Kearney is one of the worlds leading
management consulting firms
A.T. Kearney is one of the worlds leading
management consulting firmsIndustry
Practices
Aerospaceand
Defence Automotive
Communicationsand
High TechnologyFinancial
Institutions
Pharmaceuticaland
HealthcareEnergy Transportationand
Utilities
ConsumerGoods
and Retail
Operations Supply Chain Next Generation
Manufacturing Operating Asset
Effectiveness
Strategy andOrganization
Technology Solutions
ServicePractices
Our global service and industry practicesenable tailored solutions to specific issuesOur global service and industry practicesenable tailored solutions to specific issues
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We use deep energy expertise to accelerate
and expand results for our clients
We use deep energy expertise to accelerate
and expand results for our clientsSelected Oil & Gas Clients
Over 100 professionals specializing in Oil,Gas, and ChemicalsGlobal practice: the group is managed as afully integrated practice with no geographicor sub-practice boundaries so as to providethe best mix of people for any givenengagementServes the world's leading clients in allmarketsCapabilities include:
Strategy Operations Strategy Technology Strategy and
Implementation eBusiness Strategy Merger Integration Benchmarking Restructuring Process and Organisation Redesign Procurement Effectiveness Next Generation Cost Reduction Sourcing Supply Chain Network rationalization Commercial Optimization / Logistics
Cost Reduction
Contractor Optimization Net Working Capital Reduction Capital Projects Management
Energy Practice
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Setting the stage oil is acomplex global businessSetting the stage oil is acomplex global business
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Proven Natural Gas Reserves by Country Top 20 (Trillion ft 3) - 2005
Proven Oil Reserves by Country Top 20 (Billion Barrels) - 2005
050
100150
200250300
S a u d i
A r a b i a
I r a n
I r a q
K u w a i t
U . A . E
V e n e z u e l a
R u s s i a
L i b y a
N i g e r i a
U n i t e d
S t a t e s
C h i n a
Q a t a r
M e x i c o
A l g e r i a
B r a z i l
K a z
a k h s t a n
N o r w a y
A z e r b a i j a n
O m a n
C a n a d a
Note: (1) Canadian Association of Petroleum Producers (CAPP) reports 4.3 billion barrels; considering Alberta Oil Sands (174.5Bn Barrels on 2004) total reserves amount to178.8 billion barrels
Sources: EIA (Energy Information Administration), CAPP
Reserves Much of the traditional oil
reserve base is located in the Middle East
Reserves Much of the traditional oil
reserve base is located in the Middle East
0300600900
1,2001,5001,800
R u s s i a
I r a n
Q a t a r
S a u d i A r a b i a
U . A . E
U n i t e d S t a t e s
N i g e r i a
A l g e r i a
V e n e z u e l a
I r a q
I n
d o n e s i a
M a l a y s i a
N o r w a y
T u r k m
e n i s t a n
U z b e k i s t a n
K a z a k h s t a n
N e t h e r l a n d s
E g y p t
C a n a d a
K u w a i t
C h i n a
( 1 )
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Supply The global crude oil production
totals to US$ 1.07 trillion
Supply The global crude oil production
totals to US$ 1.07 trillionCrude Oil Production in 2004 (1)Crude Oil Production in 2004 (1)
Key Producing RegionsWorld Production
299
245
97
301
128
AsiaAsiaPacificPacific
Europe &Europe &EurasiaEurasia
AmericasAmericas
AfricaAfrica
Middle East
USUS35%35%
Americas
MexicoMexico18%18%
VenezuelaVenezuela14%14%
CanadaCanada15%15%
OtherOther7%7%
BrazilBrazil7%7%
ArgentinaArgentina4%4%
US$ 1.07 trillionUS$ 1.07 trillion
MiddleMiddleEastEast
Europe & Eurasia
Saudi ArabiaSaudi Arabia43%43%
IranIran17%17%
OthersOthers11%11%
IraqIraq8%8%
UnitedUnitedArabianArabian
EmiratesEmirates11%11%
KuwaitKuwait10%10%
RussianRussianFederationFederation
53%53%
NorwayNorway18%18%
UnitedUnitedKingdomKingdom
12%12%
OtherOther10%10%
KazakhstanKazakhstan7%7%
Note: (1) Based on production volume times regional spot crude oil pricesSource: BP Statistical review of world energy 2005
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Supply Saudi Arabia, Russian Federation
and USA dominate crude oil production
Supply Saudi Arabia, Russian Federation
and USA dominate crude oil productionRegional Crude Oil Production BreakdownRegional Crude Oil Production BreakdownKey Producing Countries 1)(US$ Billion)
130 129
110
5850 47 45 45
4335 33 30 28 27 25 23 22
1814 14 12 11 11 10 10 10
S a u
d i
A r a
b i a
U S A
R u s s
i a n
F e
d e r a t
i o n
M e x
i c o
N o r w
a y
C h i n a
I r a n
V e n e z u e
l a
C a n a
d a
U n i
t e d
K i n g d o m
N i g e r i a
U n i
t e d
A r a b
i a n
E m
i r a t e s
I r a q
K u w
a i t
A l g e r i a
B r a z i
l
I n d o n e s
i a
L i b
y a
O m
a n
A r g e n t
i n a
Q a t a r
M a
l a y s
i a
E g y p
t
I n d i a
K a z a
k h s t a n
A n g o
l a
80% of global market Middle EastAsia PacificAmericasAfricaEurope
50% of Global Market
Note: 1) Covering 90% of Entire Oil Production in 2004Source: BP, statistical review of world energy 2005 / A.T. Kearney Analysis
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Demand The global crude oil
consumption totals to US$ 1.11 trillion
Demand The global crude oil
consumption totals to US$ 1.11 trillionCrude Oil Consumption in 2004 1)Crude Oil Consumption in 2004 1)
Key Consuming RegionsWorld Consumption
445
280
288
65
37
AsiaAsia
PacificPacific
Europe &Europe &EurasiaEurasia
AmericasAmericas
AfricaAfricaMiddleMiddleEastEast
Americas Europe & EurasiaUS$ 1.11 trillionUS$ 1.11 trillion
USUS70%70%
OtherOther10%10%
CanadaCanada8%8%
BrazilBrazil6%6%
MexicoMexico6%6%
Asia Pacific
OtherOther46%46%
GermanyGermany13%13%
RussianRussianFederationFederation
13%13%
FranceFrance10%10%
ItalyItaly9%9%
United KingdomUnited Kingdom9%9%
ChinaChina29%29%
OtherOther23%23%
SouthSouthKoreaKorea10%10%
IndonesiaIndonesia5%5%
JapanJapan23%23%
IndiaIndia11%11%
AustraliaAustralia4%4%
Note: (1) Based on production volume times regional spot crude oil pricesSource: BP Statistical review of world energy 2005/ A.T. Kearney analysis
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Demand The USA, China, Japan are the
three dominant petroleum consumers
Demand The USA, China, Japan are the
three dominant petroleum consumersRegional Crude Oil Consumption BreakdownRegional Crude Oil Consumption BreakdownKey Consuming Countries 1)(US$ Billion)
311
8265
37 36 33 31 29 28 28 28 26 25 22 21 20 18 18 17 14 14 11 11 11 11
Middle EastAsia PacificAmericasAfricaEurope
Note: 1) Covering 85% of Entire Oil Production in 2004Source: BP, statistical review of world energy 2005/ A.T. Kearney Analysis
80% of global market50% of Global Market
U S A
C h i n a
J a p a n
G e r m a n y
R
u s s
i a n
F e d
e r a
t i o n
S o u
t h
K o r e a
C a n a
d a
I n d i a
F r a n c e
I t a
l y
B r a z i
l
M e x
i c o
U n
i t e
d
K i n g
d o m
S p a
i n
S a u
d i
A r a
b i a
O t h e r
A f r i c a
O t h e r
M i d d l e E a s
t
I n d o n e s
i a
N e
t h e r l a n
d s
B e l g i u m
&
L u x e m
b o u r g
A u s
t r a
l i a
T h a
i l a n
d
T a
i w a n
O t h e r
S .
&
C e n
t . A m e r i c a
I r a n
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Balance: Demand and supply are spatially
separate resulting in complex product flows
Balance: Demand and supply are spatially
separate resulting in complex product flows
AmericasProduction vs. Consumption
AfricaProduction vs. Consumption
Asia PacificProduction vs. Consumption
Middle EastProduction vs. Consumption
Europe & EurasiaProduction vs. Consumption
Regional Crude Oil Production and Consumption(Million Barrels per Day)Regional Crude Oil Production and Consumption(Million Barrels per Day)
21 20 21
29 29 30
2002 2003 2004
16 1718
20 20 20
2002 2003 2004
2123 25
5 5 5
2002 2003 2004
8 8 8
22 22 23
2002 2003 2004
8 8 9
3 3 3
2002 2003 2004
= Production
= Consumption
Source: BP, statistical review of world energy 2005
WorldwideComparison
74 77 8077 78
2002 2003 2004
81
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An imbalance between the supply and demand
for oil is driving recent price increases
An imbalance between the supply and demand
for oil is driving recent price increases
$0
$10
$20
$30
$40
$50
$60$70
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05
NYMEX Light Sweet Crude Oil PricesNYMEX Light Sweet Crude Oil Prices
Source: Energy Information Administration
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US Petroleum imports have increased
dramatically and are projected to continue
US Petroleum imports have increased
dramatically and are projected to continueUnited States Petroleum Supply, Consumption, and Imports, 1970-2025(Million Barrels Per Day)United States Petroleum Supply, Consumption, and Imports, 1970-2025(Million Barrels Per Day)
30
Domestic supply
Consumption
History Projections
Net imports
56%
68%
25
20
15
10
5
01970 1980 1990 2000 2010 2025
Source: Energy Information Agency
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Most nations grew US imports with major
share gains from Persian Gulf and Canada
Most nations grew US imports with major
share gains from Persian Gulf and CanadaUS Crude Oil Import SourcesUS Crude Oil Import Sources
Key Importing Countries - 2004Total = 12,264 kBPD
Key Importing Countries - 1983Total = 5,051 kBPD
Mexico
Other
UnitedKingdom
Norway
Columbia
Canada
Venezuela
NigeriaSaudiArabia
IraqPersian Gulf(Remainder)
Iraq
Saudi
Arabia
Nigeria
Venezuela
CanadaColumbia
Mexico
UnitedKingdom
Norway
Persian Gulf(Remainder)
Other
Source: Energy Information Administration / A.T. Kearney Analysis
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In 1997 there were fifty refining & marketing
companies in the US
In 1997 there were fifty refining & marketing
companies in the US
0
500
1000
1500
2000
2500
V a l e r o
H u n t
G i a n t
W a i n c o
T i m
e
P a r a m o u
P r i d
e G
P l a c i d
C o a s t a l
P e t r o
S t a r
L i o n
U n i t e d
P e n n z o
i l
H o l l y
U l t r a m a r
T e s o r o
B H P
F a r m
l a n d
C e n e x
M u r p
h y
S i n c l a
i r
T o t a l
C r o w n
D i a m o n
d F i n a
M a p c o
C o a s t a l
L y o n
d e l
l
S o
l o m o n
P h i l l i p s
C l a r k
A s h
l a n
d
T e x a c o
U n o c a l
T o s c o
A r c o
D u p o n t
P D V
K o c h
B P
U S X
S t a r
S u n
M o b i l
A m o c o
E x x o n
C h e v r o n
S h e l
l0
500
1000
1500
2000
2500
V a l e r o
H u n t
G i a n t
W a i n c o
T i m
e
P a r a m o u
P r i d e G
P l a c i d
C o a s
t a l
P e t r o
S t a r
L i o n
U n i t e d
P e n n z o i
l
H o l l y
U l t r a m a r
T e s o r o
B H
P
F a r m
l a n d
C e n e x
M u r p
h y
S i n c l a i r
T o t a l
C r o w
n
D i a m o n d
F i n a
M a p c o
C o a s
t a l
L y o n
d e l
l
S o
l o m o n
P h i l l i p s
C l a r k
A s h
l a n d
T e x a c o
U n o c a l
T o s c o
A r c o
D u p o n t
P D
V
K o c h
B
P
U S
X
S t a r
S u n
M o b i l
A m o c o
E x x o n
C h e v r o n
S h e l
l
50 R&M CompaniesAverage Size = 302 kBPD
R e
f i n
i n g
C a p a c i t y
k B P D
1997 US Refining Capacity in kBPD1997 US Refining Capacity in kBPD
Source: Energy Information Agency
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and these companies traditionally
struggled to achieve strong returns
and these companies traditionally
struggled to achieve strong returns
-10%
-5%
0%5%
10%
15%
20%
25%
30%
35%
40%
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
R e t u r n o n
E q u
i t y
US Majors Independent Refiners S&P Nonenergy Industrials
Annual Return on Equity for PetroleumCompanies Relative to US IndustryAnnual Return on Equity for PetroleumCompanies Relative to US Industry
Source: Energy Information Agency
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Consolidation of majors and growth of
independents resulted in structural change
Consolidation of majors and growth of
independents resulted in structural change2004 US Refining Capacity in kBPD2004 US Refining Capacity in kBPD
0
500
1000
1500
2000
2500
P a r a m o u n
t
H u n
t
G W i l l i a m s
C a l u m e t
S u n c o r
A l o n
P e t r o S
t a r
U n i t e d
G i a n t
W e s
t e r n
H o l
l y
P e g a s u s
E r g o n
C
H S
F r o n
t i e r
M u r p h y
R o s e m o r e
S i n c l a i r
C h a l m e t
t e
T o t a l
L y o n
d e l l
D e e r P a r
k
T e s o r o
S h e l l
P
D V
M o t i v a
K o c
h
P r e m c o r
S u n o c o
M a r a t
h o n
C h e v r o n
V a l e r o B
P
E x x o n
C o n o c o
0
500
1000
1500
2000
2500
P a r a m o u n
t
H
u n t
G W i l l i a m s
C a l u m e t
S u n c o r
A
l o n
P e t r o
S t a r
U n i t e d
G i a n t
W e s
t e r n
H o l
l y
P e g a s u s
E r g o n
C H S
F r o n
t i e r
M u r p h y
R o s e m o r e
S i n c l a i r
C h a l m e t
t e
T o t a l
L y o n
d e l l
D e e r P a r
k
T e s o r o
S h e l l
P D V
M o t i v a
K o c
h
P r e m c o r
S u n o c o
M a r a t
h o n
C h e v r o n
V a l e r o B
P
E x x o n
C o n o c o
R e f i n
i n g
C a p a c
i t y k
B P D
Source: Energy Information Agency: January 1, 2005
Year 1997 2003 2004Number ofR&MCompanies
50 35 50+
AverageSize
302 485 335
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Capacity grew even though there were
substantial refinery closures
Capacity grew even though there were
substantial refinery closures
14,000
14,500
15,000
15,500
16,000
16,500
17,000
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
D i s t i l l a t i o n
C a p a c
i t y
( k B P D )
0
50
100
150
200
250
N u m
b e r o
f R e f i n e r
i e s
14,000
14,500
15,000
15,500
16,000
16,500
17,000
1 9 8 5
1 9 8 6
1 9 8 7
1 9 8 8
1 9 8 9
1 9 9 0
1 9 9 1
1 9 9 2
1 9 9 3
1 9 9 4
1 9 9 5
1 9 9 6
1 9 9 7
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
D i s t i l l a t i o n
C a p a c
i t y
( k B P D )
0
50
100
150
200
250
N u m
b e r o
f R e f i n e r
i e s
US Refining Count and Capacity TrendsUS Refining Count and Capacity Trends
Source: Energy Information Agency
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Until this last year, returns still did not
achieve the costs of capital
Until this last year, returns still did not
achieve the costs of capitalUS Refining & Marketing Returns on Invested Capital(1996-2002)US Refining & Marketing Returns on Invested Capital(1996-2002)
7.73%
6.94%
5.39%
Top 4 Next 5-12 All Other
7.73%
6.94%
5.39%
Top 4 Next 5-12 All Other
Source: Energy Information Administration
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The industry is now more efficient but
consolidation and cost focus will continue
The industry is now more efficient but
consolidation and cost focus will continueUS Refined Product Margins and Costs per Barrel ofPetroleum Product Sold(1981-2003)
US Refined Product Margins and Costs per Barrel ofPetroleum Product Sold(1981-2003)
(1) Gross Margins Decline Crude Cost Increase Product Prices Stagnant due to
Over Supply and Economy
(2) Operators Respond
(3) Net Margins Remain Low
Marginscontinue tostrengthen
through 2004/ 2005
Source: Energy Information Administration
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Declining crude quality drives costs and
capital and is forcing portfolio decisions
Declining crude quality drives costs and
capital and is forcing portfolio decisions
30.0
30.5
31.0
31.5
32.0
32.5
33.0
33.5
34.0
34.5
35.0
1 9 8 2
1 9 8 4
1 9 8 6
1 9 8 8
1 9 9 0
1 9 9 2
1 9 9 4
1 9 9 6
1 9 9 8
2 0 0 0
2 0 0 2
2 0 0 4
A P I G r a v i
t y , D
e g r e e s
0.85
0.97
1.09
1.21
1.33
1.45
S u
l f u r
C o n
t e n t ,
W t %
API Gravity Sulfur
30.0
30.5
31.031.5
32.0
32.5
33.0
33.5
34.0
34.5
35.0
1 9 8 2
1 9 8 4
1 9 8 6
1 9 8 8
1 9 9 0
1 9 9 2
1 9 9 4
1 9 9 6
1 9 9 8
2 0 0 0
2 0 0 2
2 0 0 4
A P I G r a v i
t y , D
e g r e e s
0.85
0.97
1.09
1.21
1.33
1.45
S u
l f u r
C o n
t e n t ,
W t %
API Gravity Sulfur
Source: Energy Information Administration
US Refining Crude Input Quality TrendsUS Refining Crude Input Quality Trends
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In supply, Kinder & others employ strategies
similar to the independents in refining
In supply, Kinder & others employ strategies
similar to the independents in refining
0 100 200 300 400 500
Point Agguello
Lakehead
ARCO
Chevron
SFPP
Amoco
Shell
Colonial
Exxon
BP
Net Income (millions)
0 100 200 300 400 500
Williams
Mars
Phillips
Koch
Colonial
Marathon
Kinder Morgan
ExxonMobil
BP
Shell
Net Income (millions)
1994 Top 10 Interstate Oil PipelineCompanies Net Income (millions)1994 Top 10 Interstate Oil PipelineCompanies Net Income (millions)
2002 Top 10 Interstate Oil PipelineCompanies Net Income (millions)2002 Top 10 Interstate Oil PipelineCompanies Net Income (millions)
There is an emerging trend toward common distribution assets industrypipelines, trucks and terminals in operations that are not differentiators
There is an emerging trend toward common distribution assets industrypipelines, trucks and terminals in operations that are not differentiatorsSource: Oil & Gas Journal Annual Pipeline Survey
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Technology has helped but the holy grail
of integrated information is not realized
Technology has helped but the holy grail
of integrated information is not realizedProven Technologies
SCADATelemetry
Linear Programming
Multiphase Flow ModelsOne call response
Vision for the Future
Demand drivenIntegrated real-timedemand, flow, stockinformation
Some progress Shell / i2 Aspentech
Real time damagemonitoring Satellite surveillance
Opportunity commonlybelieved to be $0.50/BBL
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US supply chain participants are beginning
to focus on customer profitability
US supply chain participants are beginning
to focus on customer profitability
-1.5 -0.3
82.11.3
6.5 89.9 89.5
-3.0-0.2-1.4-1.4
ProductRevenue
FreightRevenue
HedgingGains
TotalRevenue
ProductCost
Freightcost
TradeDiscounts
GrossMargin
SGA Costs Earlypayment
NetMargin
Sales Revenue = 83.4COGS 3 = 87.7
Customer Cost to Serve Analysis for LS No. 2Diesel - (cpg)Customer Cost to Serve Analysis for LS No. 2Diesel - (cpg)
Limited marketsegmentation
Over-servecustomers that dontvalue extras
Under-servecustomers that dovalue extras
Pricing optimizationshortfall
Limited marketsegmentation
Over-servecustomers that dontvalue extras
Under-servecustomers that dovalue extras
Pricing optimizationshortfall
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Finally, complexity remains an issue and
an opportunity
Finally, complexity remains an issue and
an opportunityCAFE standards
Regulatory requirements drive 15 different gasolineformulations
Few standards on operations
Few standards on blending
Limited information exchange standards
Complexity within the organization.people dont talk Marketing / Supply / Logistics
CAFE standards
Regulatory requirements drive 15 different gasolineformulations
Few standards on operations
Few standards on blending
Limited information exchange standards
Complexity within the organization.people dont talk Marketing / Supply / Logistics
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A look to the futureA look to the future
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The Global Business Policy Council
provides deep insight into future trends
The Global Business Policy Council
provides deep insight into future trendsThe Global Business Policy Council was formed over a decade agowith the objective of providing early warning against accelerating
shifts in economics, politics, technology, demographics, and culturethat are poised to shape and shake the global business environment
Membership in the Global Business Policy Council is limited to aselect group of corporate leaders (~50) and their companies joined bya small group of world-renowned policy makers, scholars, and otherthought leaders and their companies. Each year, these membershave three opportunities to gather for two-to-three days of intensediscussion and reflection on the forces shaping a volatile andcontinually changing global business environment
The Council produces a series of intellectual capital products thatprovide a broad range of insights on important global trends
The Global Business Policy Council was formed over a decade agowith the objective of providing early warning against accelerating
shifts in economics, politics, technology, demographics, and culturethat are poised to shape and shake the global business environment
Membership in the Global Business Policy Council is limited to aselect group of corporate leaders (~50) and their companies joined bya small group of world-renowned policy makers, scholars, and otherthought leaders and their companies. Each year, these membershave three opportunities to gather for two-to-three days of intensediscussion and reflection on the forces shaping a volatile andcontinually changing global business environment
The Council produces a series of intellectual capital products thatprovide a broad range of insights on important global trends
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Any increasing number of important risks
are affecting corporate operations
Any increasing number of important risks
are affecting corporate operationsMost Critical Risks to Firm Operations (2004)(% of Total Respondents)Most Critical Risks to Firm Operations (2004)(% of Total Respondents)
Traditional Risks
64% 60%51%
46%
30%28% 26% 26%
Government
Regulation / Legal Decisions
Country
Financial Risk
Currency /
Interest RateVolatility
Political and
SocialDisturbances
Corporate
GovernanceIssues
Theft of
IntellectualProperty
Terrorist
Attacks
Security
Threats toEmployees andAssets
Emerging Risks
Decrease of 7 16%From 2003
Increase of 4 11% From 2003
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Large firms often attribute earnings under-
performance to unexpected external events
Large firms often attribute earnings under-
performance to unexpected external eventsExternal Events Reported in 2003 AnnualReports of the Fortune 100External Events Reported in 2003 AnnualReports of the Fortune 100
43% of Fortune 100 companiesblamed unexpected external events forfailure to meet earnings expectations
43% BlameExternal
Events
Crisis in Latin America 20%
War in Iraq 12%
September 11 12%
Foreign Exchange Crisis 11%
Terrorism 9% (1)
Note: (1) Percentages do not add up due to multiple events reported by some companiesSources: A.T. Kearney analysis, company annual reports
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Over time, the impact of risks on large
corporations is clear
Over time, the impact of risks on large
corporations is clearChange in the Fortune 500Change in the Fortune 500
200270
333
500
Today1990s1980s1970s
Almost50% oforiginal
500gone
A thirdgone (1) 60% of
original
500gone
Note: (1) Bought out or no longer in businessSources: INSEAD, A.T. Kearney analysis
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To better understand risks, A.T. Kearney
focuses on the forces reshaping the world
To better understand risks, A.T. Kearney
focuses on the forces reshaping the world
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The implications for oil and gas supply
chains are immense
The implications for oil and gas supply
chains are immense
New ConsumersGlobalization
NaturalResources &Environment
Demographics
Regulation& Activism
Sourcing Labor Conditions Environment Privacy
Increasing segmentation
Shift of location of demand
Fundamental shift in customer demand and labor supply
Major growth outside US
New competitors
Potential supply disruptions
Wildcards
Technology &Innovation
Continuous opportunities/threats from new products, processes, technologies
Globalization / New Consumers
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New markets will arise almost everywhere New markets will arise almost everywhere
Source: World Bank, EIU, U.S. Census Bureau, A.T. Kearney analysis
India
ChinaJapan
SouthKorea
Taiwan
U.K.
Brazil
Mexico
Canada
Singapore
Hong Kong
NorthernAfrica
SouthAfrica
Russia
Philippines
AustraliaIndonesia
New Zealand
Pakistan
Iran
Turkey
Israel
East
Europe
Baltics
Scandinavia
Benelux
France
Spain
Italy
United States
Vietnam
68m 71m
145m
595m
82m
24m
33m 9m 9m
49m
39m
24m
30m
27m
19m
Germany
Malaysia
Upper IncomeUpper MiddleMiddle Income
how will you seize them?how will you seize them?
Thailand
Ireland
Natural Resources & Environment
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The key conventional energy resources will
face challenges after 2020
The key conventional energy resources will
face challenges after 2020Energy Resources ConstraintsEnergy Resources Constraints
Technology improvements couldTechnology improvements couldretard the oil scarcityretard the oil scarcity
ConventionalConventionalenergyenergy
resourcesresources
OilOil
The future of the nuclear energyThe future of the nuclear energysupply depends on technology andsupply depends on technology andregulatory advancesregulatory advances
High resource uncertainty as gas isHigh resource uncertainty as gas islikely to be more scarce than oillikely to be more scarce than oil
Resources will focus on limitedResources will focus on limitedcountries driven by distance fromcountries driven by distance fromthe marketthe market
Gas
Nuclear power
Gas
Nuclear Power
Coal
Competition with food and leisureCompetition with food and leisurefor land usefor land use
Prices will further be reduced, newPrices will further be reduced, newforms of energy storage requiredforms of energy storage required
RenewableRenewableresourcesresources
Biofuels
Solar, wind & water
19901990 20002000 20102010 20202020 20302030 20402040
Source: A.T. Kearney; Shell Study 2050
Technology & Innovation
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The race for the future energy technologies
is still open
The race for the future energy technologies
is still openCommercial introduction ofnew primary energy takes~ 25 years to obtain 1% ofglobal market
Future energy resourceswill focus on low emissions
but several issues have stillto be solved Nanotechnology:
hydrogen/ energy storage
costs efficiency
Solar energy Government efforts and
interests
Commercial introduction ofnew primary energy takes
~ 25 years to obtain 1% ofglobal market
Future energy resourceswill focus on low emissions
but several issues have stillto be solved Nanotechnology:
hydrogen/ energy storage
costs efficiency
Solar energy Government efforts and
interests
New TechnologiesNew Technologies
18001800 18501850 19001900 19501950 20002000
Energy Technology DiscontinuitiesEnergy Technology Discontinuities
Wood,wind,water,
ani-mals
Steam engine,coal
Electric
dynamo,coal
Internalcom-
bustionengine, oil
Nu-clear
power1970-1990
CCGTgas1)>1990
Solarenergy ?
Fuel Cellhydrogen?
1) Combined cycle gas turbineSource: A.T. Kearney; Shell Study 2050
Technology & Innovation
l ll ll f
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Fuel Cells will create significant
opportunities when commercialized
Fuel Cells will create significant
opportunities when commercializedFuel Cell Market Scenario 2015Fuel Cell Market Scenario 2015
0
5000
10000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Market volume 1)(US$ millions)
Portable
Stationary
Mobile
PrototypePrototypephasephase
Commercialphase
Mobile
Portable
Stationary
Passengercars
Other cars &vehiclesBattery
replacement
Generators
Commercial/industrial
Residential
Expected Market Share in 2015
2-10%
(of new car registrations)
10%
30%
1) Market covers only Fuel Cells, excl. revenues from new fuelsSource: A.T. Kearne anal sis
Prototype phasePrototype phase
PrototypePrototypephasephase
PrototypePrototypephasephase
Launch
LaunchCommercial phase
Launch
Launch
Commercial phase
Launch
Launch
Commercial
phase
B e s t C a s e
B e s t C a s e S c e n a r i o s S c e n a r i o s
Natural Resources & Environment
l d b f
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Supply disruptions may occur because of
disruption at a transit chokepoint
Supply disruptions may occur because of
disruption at a transit chokepointSupply Chokepoint Oil & Gas:Supply Chokepoint Oil & Gas:
Potential TransitChokepoint
Politically Unstable
Country With OilOr Gas Resources
Regulation & Activism
d l b h llA d l b h ill
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A deregulatory era may be over how will
you manage governments visible hand?
A deregulatory era may be over how will
you manage governments visible hand?
Powerful Forces Push New Constraints
The growing crisis of corporate credibility
Mingling of science and ethics including human cloning
and ongoing biotechnology developments
63% of US citizens believe corporations are too powerful (1)
Powerful Forces Push New Constraints
The growing crisis of corporate credibility
Mingling of science and ethics including human cloningand ongoing biotechnology developments
63% of US citizens believe corporations are too powerful (1)
(1) Source: The Arlington Institute
Gl b l B i P li C il iGl b l B i P li C il i
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Global Business Policy Council executives
recently identified three future scenarios
Global Business Policy Council executives
recently identified three future scenariosCircle the Wagons suggests the US becomesisolationist
Patchwork World the US remains engaged in worldaffairs, but with limited friends
Open Society combines multilateral problem solvingwith global open markets
Circle the Wagons suggests the US becomesisolationist
Patchwork World the US remains engaged in worldaffairs, but with limited friends
Open Society combines multilateral problem solvingwith global open markets
Ci l h W h USCi l th W t th US
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Circle the Wagons suggests the US
becomes isolationist
Circle the Wagons suggests the US
becomes isolationist
US isolated and focused inward Europe seeks to rival US power and/orcreate Fortress Europe
Emergence of Teenage Drivers as rising,unstable China and India flex their musclesInternational Organizations are ineffective
USA
Hotspots
FriendsAlliesRivalsAdversaries
PoliticalWaterOil
TransitDemographic
P t h k W ld US i dP t h k W ld US i g g d
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Patchwork World US remains engaged
in world affairs, but with limited friends
Patchwork World US remains engaged
in world affairs, but with limited friends
Resembles 2004US engages on issues of national interestMixed EU-US relationship with bothcooperation and tensions
Most conflicts remain localizedInternational Organizations remain activebut weak
USA
Hotspots
FriendsAlliesRivalsAdversaries
PoliticalWaterOil
TransitDemographic
O S i t bi ltil t lOpen Society combines multilateral
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Open Society combines multilateral
problem solving with global open markets
Open Society combines multilateral
problem solving with global open markets
Emphasis on multilateral problem solvingGlobal problems moderated by action
Resumption of robust global growth andstabilityCoalitions counter terror and local conflict
USA
Hotspots
FriendsAlliesRivalsAdversaries
PoliticalWaterOil
TransitDemographic
Wild Cards could shock the globalWild Cards could shock the global
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Wild Cards could shock the global
operating environment what is your risk?
Wild Cards could shock the global
operating environment what is your risk?
Country
Disintegration
WarErupts
New
Mercantilism
Terrorist
Resurgence
HackerHell
QuantumLeap
Global
Epidemic
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Petroleum supply chainvalue creationPetroleum supply chainvalue creation
The Petroleum supply chain is truly globalThe Petroleum supply chain is truly global
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The Petroleum supply chain is truly global
with some of the largest complexities
The Petroleum supply chain is truly global
with some of the largest complexities
Africa Bonny Forcados
Asia Alif Belida Hydra
Australia Cossack Gippsland Kutubu...
Latin America Leona Isthmus Medanito
Middle East Saudi Iranian Iraqi
North America Alaska North Slope West Texas Inter. Hibernia
North Sea Brent Blend Danish North Sea Liverpool Bay
Refining &Conversion
ProductMix
OutboundTransport
Bulk Distr.Terminals
Markets /Retail Outlets
CrudeSources
InboundTransport
Asia Refinery
Asia Refinery
Europe Refinery
Asia Refinery
Asia Refinery
Asia Refinery
Europe Refinery
Africa Refinery
Asia Refinery
Asia Refinery
LPG Butane Premium
Gasoline Mid Grade
Gasoline Regular
Gasoline Military Jet Fuel Commercial Jet
Fuel Heater Oil Low sulfur
diesel High sulfur
diesel Aromatics
and otherChemicalFeedstocks
Asphalt Coke Sulfur
Others
Ship Pipeline Barge Rail Truck
Pipeline Barge Rail Truck
MarketCenters
Industrial Users Petrochemical Construction Electricity Others
Retail Outlets
U.S. Refinery
U.S. Refinery
U.S. Refinery
U.S. Refinery
U.S. Refinery
U.S. Refinery
U.S. Refinery
Europe Refinery
Asia Refinery
Asia Refinery
US supply chain infrastructure is one of theUS supply chain infrastructure is one of the
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US supply chain infrastructure is one of the
most complex systems in the world
US supply chain infrastructure is one of the
most complex systems in the world
US Petroleum Supply Chain Selected Physical Statistics(Latest Available Estimates)
Refining Pipelines Terminals
Barge (Excludes Ocean Tankers) Truck RailLiquid carriers 3,614Throughput (kBPD) 4,180
Petroleum Tank Trucks (thousands) 170.4Throughput (kBPD) 600
Number of Tank Cars (thousands) 3,411Throughput (kBPD) 300
Number 144Capacity (kBPD) 16,761Throughput (kBPD) 14,926Utilization (%) 89
Crude stocks (mBBL) 294
Total Miles ~190,000 Crude trunk line ~55,000 Crude gathering line ~40,000 Refined Product ~95,000
Throughput (kBPD) 25,000Crude + Product
Number 1,612Total storage capacity (mBBL) 700Typical stocks (mBBL) 237Utilization (%) 34
Source: Energy Information Administration / Association of Oil Pipelines / BP Statistical
Petroleum enters and leaves the US supplyPetroleum enters and leaves the US supply
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Petroleum enters and leaves the US supply
chain at many locations
Petroleum enters and leaves the US supply
chain at many locationsUS Petroleum Oil Flow - Supply Chain Energy Balance - 2000(Quadrillion Btu)US Petroleum Oil Flow - Supply Chain Energy Balance - 2000(Quadrillion Btu)
Source: Energy Information Agency
Supply chain is a substantial portion of theSupply chain is a substantial portion of the
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Supply chain is a substantial portion of the
downstream sector controllable costs
Supply chain is a substantial portion of the
downstream sector controllable costs
$1.56 $0.48
$0.68
$0.20
$0.20$0.00
$0.20
$0.40
$0.60$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
R e t a
i l P r i c e
T a x e s
C
r u d e C o s
t s
R e
f i n i n g
C o s
t s &
P r o
f i t s
D
i s t r i b u t i o n
/
M a r
k e t i n g
C o s
t s &
P r o
f i t s
Cost Contribution to US Retail Gasoline Prices - 2003Cost Contribution to US Retail Gasoline Prices - 2003
Roughly Equivalent
Source:Energy Information Administration / Department of Energy / A.T. Kearney Analysis
Executive expectation of supply chain as aExecutive expectation of supply chain as a
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Executive expectation of supply chain as a
source of value creation is rising rapidly
Executive expectation of supply chain as a
source of value creation is rising rapidlyImportance of Procurement in Company Efforts(Average Responses from 2004 CEO Survey)Importance of Procurement in Company Efforts(Average Responses from 2004 CEO Survey)
1 = Low
4 = High
2.6
1.8
3.4
2.8
3.7
3.5
Cost Reduction Efforts Delivering Value Beyond Cost
PastCurrentFuture
Integrating and making our value chain more effective
Create value through effective innovation with key suppliers
CEOs priorities:
A T Kearney has identified four key leversA.T. Kearney has identified four key levers
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A.T. Kearney has identified four key levers
for supply chain value creation
A.T. Kearney has identified four key levers
for supply chain value creation
I n n o v a t i o n
a n d G r o w t h
V a l u e
C h a i n
O p t i m i z a
t i o nA d v a n c
e d
C o s t M a n a g e m e n t
R i s k
M a n
a g e m
e n t /
S u p p l y
C o n t i
n u i t y
ValueCreation
Increasing customer demands and reducedIncreasing customer demands and reduced
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Increasing customer demands and reduced
product cycle times have necessitated anincreased commitment to innovation
Increasing customer demands and reduced
product cycle times have necessitated anincreased commitment to innovation
Why Are Companies Focusing On It?
Customers look for innovation that cutsthrough the clutter and creates demand,not just satisfies it
Long-term profitable growth triggerssuperior share price performance
The pace of innovation in manyindustries has increased and become adifferentiating factor for successfulcompanies
I n n o v a t i o n
a n d G r o w t h
V a l u
e C h a
i n
O p t i m
i z a t i o
nA d v a n c e d
C o s t M a n a g e m e n t
R i s k M a n
a g e m
e n t /
S u p p l y
C o n t i
n u i t y
ValueCreation
As companies focus on their coreAs companies focus on their core
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As companies focus on their core
competencies, the importance of using thevalue chain as effectively rises
p
competencies, the importance of using thevalue chain as effectively rises
Why Are Companies Focusing On It?
Concentrating on activities that makebest use of company assets helps fuelgrowth without investing capital
Best-in-class capabilities are oftenavailable from other partners in the valuechain
I n n o v a t i o n
a n d G r o w t h
V a l u
e C h a
i n
O p t i m
i z a t i o
nA d v a n c e d
C o s t M a n a g e m e n t
R i s k M a n
a g e m
e n t /
S u p p l y
C o n t i
n u i t y
ValueCreation
Leaders are moving beyond basic savings /Leaders are moving beyond basic savings /
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g y g
efficiency approaches to more advancedconcepts
g y g
efficiency approaches to more advancedconcepts
Why Are Companies Focusing On It?
Basic approaches have yielded majorbenefits but additional gains will belimited unless tactics are changed
Advanced cost management approachesprovide an opportunity to improve overallvalue
I n n o v a t i o n
a n d G r o w t h
V a l u
e C h a
i n
O p t i m
i z a t i o
nA d v a n c e d
C o s t M a n a g e m e n t
R i s k M a n
a g e m
e n t /
S u p p l y
C o n t i
n u i t y
ValueCreation
Many efforts to improve supply chainMany efforts to improve supply chain
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y p pp y
efficiency have also increased supply chainrisks
y p pp y
efficiency have also increased supply chainrisks
Why Are Companies Focusing On It?
Several measures which have improvedefficiency have also increased supplyrisks
Supplier consolidation Global sourcing JIT and Lean Manufacturing
Supply risk management is an importantpart of an enterprises overall risk
management strategy
I n n o v a t i o n
a n d G r o w t h
V a l u
e C h a
i n
O p t i m
i z a t i o
nA d v a n c e d
C o s t M a n a g e m e n t
R i s k M a n
a g e m
e n t /
S u p p l y
C o n t i
n u i t y
ValueCreation
Supply chains able to create value exhibitSupply chains able to create value exhibit
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pp y
common characteristics
pp y
common characteristicsInternal Capabilities of Supply Chains Capableof Delivering Value Beyond Cost ControlInternal Capabilities of Supply Chains Capableof Delivering Value Beyond Cost Control
Are You Ready To Deliver Value?
The Supply Chain is involved in setting company strategy
Our company systematically applies advanced cost managementstrategies across our spend base
We understand our supply risks and have mitigation strategies inplace for all major spend categories
Our organization is continuously developing and strengthening theskills required to successfully apply advanced techniques
The Supply Chain fosters cross-functional teaming throughout thecompany
We have a comprehensive management plan to attract and retain thebest talent
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In summaryIn summary
Petroleum supply chains must anticipate andPetroleum supply chains must anticipate and
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pp y p
adapt to the coming changeadapt to the coming changeOver the last 20 years, refiners consolidated inefficient and excesscapacity and are beginning to make gains in business returns
Consolidation of distribution assets is just beginningEnormous amounts of infrastructure and capital are invested in thefixed asset base particularly in the US
These investments are at risk from changing conditions Crude quality Shifting demographic and economic centers China and India Potentially disruptive technologies
Petroleum supply chains that employ leading practices can anticipatethese changes, capture additional value and thrive well into the future
Over the last 20 years, refiners consolidated inefficient and excesscapacity and are beginning to make gains in business returns
Consolidation of distribution assets is just beginningEnormous amounts of infrastructure and capital are invested in thefixed asset base particularly in the US
These investments are at risk from changing conditions Crude quality Shifting demographic and economic centers China and India Potentially disruptive technologies
Petroleum supply chains that employ leading practices can anticipatethese changes, capture additional value and thrive well into the future
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Preparing for Global Change in the PetroleumSupply ChainPreparing for Global Change in the PetroleumSupply Chain
University of Nevada / COPPEAD Petroleum Executive Logistics Course
Houston, Texas
30 June 2005