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Solutions for Oil Supply Chain

November 9, 2009

We all know how vulnerable the oil industry supply chain can be and how it can have direct effect on the buying power of consumers. I have been doing some research lately on possible solutions and I’m impressed with the kind of programs Federal government and private sector has undertaken to address this issue.

Here is a summary of those possible solutions for making the Oil Supply Chain better with my comments:

  1. Federal government should start new fund to accelerate the development and deployment of Enhanced Oil Recovery (EOR) techniques. Typically, only about 10% of the oil in a reservoir flows “naturally” to the surface. Injections or re-injections of water and gases, typically referred to as “secondary recovery” (even though the methods are now typically employed from the beginning of drilling), can yield a further 20% to 40% of a site’s oil, but this still leaves nearly half of the theoretical total in the ground. Increasing demand for oil has ushered in a wave of more advanced technologies that can help to release the remaining oil and for that tertiary recovery/ EOR has to be utilized. Countries benefitting from this EOR program should have to contribute to this fund based on the usage and dollar amount criteria
  2. Federal Government should incentivize the ability of U.S. refineries to process a wider variety of crude stocks including heavy crude. Demand for lighter crude by these refineries has been outstripping supplies. At the same time, capacity to refine heavy crude has not kept pace with the heavy crude supply. Adding appropriate refining capacity for that would allow better use of heavy oil, not only in the U.S., but around the world especially in emerging markets.
  3. We need increased regulation for oil speculators. These are just an oil equivalent of the short sellers in the credit markets many times help responsible for market manipulation. While twenty years ago, 21 percent of oil contracts were purchased by speculators, today that number is estimated to be 66 per percent.
  4. Deals made in emerging markets are usually the result of relationships built on trust. Working overseas, in high growth and emerging markets, gives a greater understanding and insight into the practical aspects of doing business overseas.
  5. Lighten inventories. Running out of spare parts at rig sites is something companies go to extremes to avoid since downtime is too costly. As a result of that, the inventory for oil companies is in tens of millions of dollars in spare parts. By operating in a JIT environment as most manufacturing companies do through enhanced logistics, oil companies can lighten their large load of inventories that must be stocked on-site. Lighter inventories would also mean improved cash flow.

Finally, I understand that these solutions would not make our energy sector sustainable and we should move towards green initiatives. But I also think that until we have green energy projects sustaining all energy requirements, we need to improvise the Oil supply chain so businesses and people can thrive and don’t suffer in the immediate term.

Your comments and feedback are always appreciated.

4 Comments leave one →
  1. tim permalink
    November 10, 2009 9:10 AM

    hey Nitin, good post but I have disagree with a number of your points/assumptions:

    “Federal government should start new fund to accelerate the development and deployment of Enhanced Oil Recovery (EOR) techniques.”
    The federal government stops just short of allowing the country to be energy independent when it comes to oil simply by now allowing the exploration of local sources shown to be rich in resources. The Sierra club has successfully lobbied to keep the oil companies hamstrung in this area, and the result is more cost to extract oil from the regions that they’re limited to. Higher cost of extraction reduces the incentive to use local resources.

    “Federal Government should incentivize the ability of U.S. refineries to process a wider variety of crude stocks including heavy crude.”
    The federal government has been the stopgap in most all refining technology advancing including the construction of new facilities that could operate more efficiently. As anyone in operations knows, simply patching an old technology isn’t nearly as effective as a ground up engineered solution.

    “We need increased regulation for oil speculators.”
    Would you not then be for regulating all futures trading in the commodities space? The issue isn’t the “speculators” it’s the monopolization of the source via OPEC. If the the government would open more exploration/extraction locally we’d have less dependence on a single-source and have less of a bounce when OPEC changes it’s output quota. Futures trading in this space would become as organic as other commodities that aren’t held by a cartel.

    • November 10, 2009 9:26 AM

      Tim, thanks for your response and I agree with you mostly. Here is how I look at it:
      1. Feds should reduce severe regulations for these oil industries. That creates 2 problems. First, it creates huge barriers to entry. Secondly, it discourages innovation. If they do that problem 1 and 2 would be alleviated.
      2. Feds should increase access to U.S. oil reserves on the Outer Continental Shelf (OCS) and Alaska. We can have adequate environmental protection and increased oil supply at the same time.
      3. I believe if OPEC is already benefiting from speculations and controlling the supply, there has to be a restricted 2nd layer of speculations otherwise consumers (and free market) are always price takers. But if we had multiple sources and no monopoly then things would be different.

      • tim permalink
        November 10, 2009 9:52 AM

        You are correct. The issue really comes back to Congress—they talk out of both sides of their mouths when it comes to energy independence. They limit the oil companies to 70s technology and depleted geological sources, chastise them for the results, add insane tax variables, and act as innocent bystanders every time there’s a spike in oil prices. It’s shameless.

  2. November 10, 2009 10:16 AM

    Agreed Tim. The people in power have the whole concept of leadership wrong. Leadership is about doing the right thing and not pleasing everyone. Check out this video if you get a chance.

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