Safety Revisited

    February 3, 2016 9:28 AM by Dr. Scott M. Shemwell

    Volume 5 Number 3—February 3, 2016

    I read a recent blog post that suggested the perhaps the oil and gas industry has gone too far in its safety driven actions.  The argument goes something like, perhaps the sector has over corrected post Macondo and value is not being derived from these efforts.

    While there are concerns over the cost of safety and the hubris that “it only happens to the other guy,” these concerns are misplaced.  One of the tenets of Operational Excellence is the so-called Safety Dividend.[i]

    We can represent the Safety Dividend set of all possible combinations of logical relationships in the finite collection of different safety variable sets.[ii]  For example, economic value from investments in safety are available from a number of different sources/processes.

    A Venn diagram (also known as a set diagram or logic diagram) is a diagram that shows all possible logical relations between a finite collection of different sets.  The Safety Dividend Venn Diagram as shown in the following figure.

    This figure reflects four major collections of sets defined as follows:

    • Fewer Normal Incidents—Included in this category are so-called “Slips Trips and Falls,” Lessons Learned from Near-Miss Reports, Unplanned Downtime, Equipment Failure, Fires et al.  Incidents of this nature can and do result in personnel deaths even though to the organization they may be considered Normal.

    For purposes of this model we re-define Perrow’s Normal Accident to exclude major catastrophic incident such as No Low Probability—High Impact Incidents (LP-HI).  Many often assume that since LP-HI are infrequent (arguably not the case) that risk models based on major incidents are not truly representations of daily operations.  Therefore, we place LP-HI incidents in a separate category than Perrow.[iii]

    • Better Social Relationships—As noted often in this series since its inception in 2012, local communities, states, federal and the international community in general are much less tolerant of Accidents and the impact on society and the Environment.  Significant investments are made assuring the “Privilege to Operate” is not put at risk and the company is a good “Corporate Citizen.”
    • Fewer Regulatory Fines—Regulatory fines are composed of three major costs; the fine itself, legal costs and the impact on the stakeholders’ perception of the firm.
    • No Low Probability—High Impact Incidents—This is the ultimate catastrophe such as a major blowout with high visibility.  An incident of this nature can and has resulted in the demise of many careers and organizations.  Black Swan events can be systemic in nature (see WSJ Black Monday, 1987).  This suggests that unless the organization has a sustained and robust Systemic Culture of Safety a higher level of LP-HI risk may exist than management believes.[iv]

    This all adds up to an impact on the equity of the firm.  In today’s volatile markets, fungible Capital is quick to ‘flee’ perceived higher risk situations.  In addition to a lower stock market price, access to debt markets may be curtailed or at least become more expensive.

    Therefore, it is easy to calculate the Safety Dividend as a function of Return on Capital Employed (ROCE).  ROCE is defined as ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed.[v]

    In an earlier blog, we developed our Convergence of Exponential model that Maximizes Capital Efficiency.[vi]  Most of the variables in that model are a function of ROCE.  Therefore, it follows that the Safety Dividend is a major contributor to equity performance.

    Previously we have reported that regulators have indicated that, “In this era of lower commodity price points, there is no relief on the requirement for safe and environmentally responsible operations.”[vii]  This directly infers that the “Privilege to Operate” is a function of the Safety Dividend as well.

    We all know that safety is the critical issue in field operations.  We also realize that in an environment with significant financial pressures on all aspects of all economic actors in the industry, pressure mounts to compromise certain processes and policies.  Usually, we ‘get away with it’ and nothing happens.

    But not always!  From small injuries or equipment failure to the unlikely but more likely than most believe disastrous LP-HI incident, all have measureable costs and impact on the value of the firm and its apply to do business.  Stakeholders of all types can be negatively impacted.

    What steps is your Firm taking to Maximize its Safety Dividend?

    About the Author

    Dr. Scott M. Shemwell has over 30 years technical and executive management experience primarily in the energy sector.  He is the author of five books and has written extensively about the field of operations management.  Shemwell is the Managing Director of The Rapid Response Institute, a firm that focuses on providing its customers with solutions enabling operations excellence and regulatory compliance management.  He has studied cultural interactions for more than 30 years--his dissertation; Cross Cultural Negotiations Between Japanese and American Businessmen: A Systems Analysis (Exploratory Study) is an early peer reviewed manuscript addressing the systemic structure of social relationships.

    End Notes

    [i]  Shemwell, Scott M. (2016, January 5). A Year for Strong Bond Governance? Governing Energy.

    [ii]  https://en.wikipedia.org/wiki/Venn_diagram  

    [iii]  http://www.jstor.org/stable/j.ctt7srgf

    [iv]  http://www.ce-conference.org/sites/default/files/smith_driscoll_kopp_bodai_-_modeling_extreme_risk.pdf

    [v]  http://www.investopedia.com/terms/r/roce.asp

    [vi]  Shemwell, Scott M. (2015, August 24). Technology Price Point Changes Everything. Governing Energy.

    [vii]  Shemwell, Scott M. (2015, July 20). Cultural Simulation. Governing Energy.

     

     

    Left Behind

    January 28, 2016 10:23 AM by Dr. Scott M. Shemwell

    Volume 5 Number 2—January 25, 2016

    With less than 11 months to go before the election of the next U.S. President, as well as all Members of the House of Representatives, a number of Senators and a host of other elected positions, the so called political silly season is on steroids! Much is made of outlier candidates on both sides of the political aisle.[i]

    While, as of this writing not a single vote has been cast there appears to be significant interest in “non-establishment” candidates. Whether this translates to votes or not, only time will tell.

    Most agree that the American electorate is frustrated to say the least. However, the so called establishment often sells the same political packages that were successful in the past—Conventional Wisdom.

    This column has posited a number of times that the times are changing. Schumpeter’s Creative Destruction hypothesizes that economic systems restructure themselves from within.[ii] Endogenous variables are often difficult to recognize. The preverbal forest for the trees; observers cannot distinguish these forces until they manifest themselves in a dramatic manner—Housing Crisis of 2007/9.[iii]

    One suspects that the sheer intensity of Creative Destruction alive in the American political process this year will have some or possibly a major effect even if conventional candidates are nominated by both political parties. At a minimum, discussions are focusing on uncomfortable political topics.

    However, politics is not the driver but it is a mirror of society. Therefore, business executives are well advised to candidly assess what this hyper-visible process is suggesting to the broader economy.

    Structural Dynamics suggests that economic actors are not the best judge of the impacts of endogenous components of an economic sector.[iv] These drivers are almost impossible to recognize using conventional econometric and/or financial modeling. This is the reason so many forecasts are frequently missed and often by a lot.

    The Custodians of the Status Que run the risk of being left behind.  Holding on to the past, whether a political campaign process or the implementation of new technology jeopardizes the very health of the economic entity (organization or society).

    Throughout most of this year Americans will see the Ying and Yang of the political winds. Regardless of the outcome in November, this society will have spoken its peace on a number of issues.

    One suspects that several, even many of these discussion points will impact on the global business community.  Regardless of the political winner, the days following the election will bear witness to many pundits evaluating voter’s rationale. In most cases these experts will be wrong.

    The latent variables at work are underlying and not easily visible; however, their effect can be very demonstrable.[v] Results can be cataclysmic such as a stock market crash and only in hindsight are these forces measurable.

    Those not recognizing these fundamental societal forces will be left behind. Their careers and organizations they lead may be left behind as well. This is a very high price for Custodians of the Status Que stakeholders to pay.

    What are you doing to assure that you and your organization are not left behind?

    About the Author

    Dr. Scott M. Shemwell has over 30 years technical and executive management experience primarily in the energy sector.  He is the author of five books and has written extensively about the field of operations management.  Shemwell is the Managing Director of The Rapid Response Institute, a firm that focuses on providing its customers with solutions enabling operations excellence and regulatory compliance management.  He has studied cultural interactions for more than 30 years--his dissertation; Cross Cultural Negotiations Between Japanese and American Businessmen: A Systems Analysis (Exploratory Study) is an early peer reviewed manuscript addressing the systemic structure of social relationships.

    End Notes

    [i]  http://dictionary.reference.com/browse/outlier

    [ii]  https://en.wikipedia.org/wiki/Creative_destruction

    [iii]  https://en.wikipedia.org/wiki/Subprime_mortgage_crisis

    [iv]  Shemwell, Scott M. (2015). Structural Dynamics: Foundation of Next Generation Management Science. Houston: RRI Publications. http://www.amazon.com/Structural-Dynamics-Foundation-Generation-Management-ebook/dp/B00U0JKMT0

    [v]  https://johngarger.com/articles/methodology/latent-constructs-in-social-science-research

    A Year for Strong Bond Governance?

    January 14, 2016 3:47 PM by Dr. Scott M. Shemwell

    Volume 5 Number 1—January 5, 2016

    This year begins the fifth calendar year for this blog—February 2, 2012 was the date of the first release.  Over the last four years we have attempted to address contemporary business issues of interest.  We expect to continue that approach moving forward.

    Our overriding focus has been on organizational governance and risk mitigation issues.  In 2014 book we first put forth the Strong Bond Governance business model—“the Culture of Safety started with an anchor at the Board of Directors level.”[i]  In this construct the commitment to safety is sacrosanct and indeed is the culture of the organization.

    Oil prices are expected to remain in the current trading range (perhaps even lower) for the foreseeable future.  Economic actors in the sector including operators, service and engineering firms as well as manufacturers have had to adjust to the realities of this part of the business cycle.  Operational Excellence is now the current watchword (Googling the term ‘Operational Excellence in Oil and Gas’ generates almost 1.2 million hits).

    In their 2012 article, Operational Excellence: The Key to Success for Oil and Gas, the authors state, “Indeed, companies in the oil and gas industry are looking to increase their bottom line by boosting their operating efficiency and reducing fixed cost.”[ii]  In 2010, McKinsey included Contractor Management and the concept of a “Safety Dividend” in their perspective on Operational Excellence.[iii]

    2015 witnessed the demise or near demise of firms with governance models focused only on near term profits during the rising commodity price portion of the business cycle.[iv]  This significant destruction of stakeholder value is repeated in every cycle.  Other storied brands may soon disappear as well, i.e., Baker Hughes.

    The 2010 McKinsey article discusses a number of things management should do to achieve Operational Excellence and yet a similar article this year would list many of the same issues to be addressed.  These include:

    · An inflated cost base
    · Maturity of oil producing basins
    · High maintenance costs (including downtime)
    · Contractor management