Drilling Moore

    March 20, 2015 2:46 PM by Dr. Scott M. Shemwell

    Volume 4 Number 6

    The Wall Street Journal recently reported that Mark Hill, VP Sales, North America for Allegro Development (software firm) suggested that rapid reduction in the time and cost to drill and complete a well coupled with the increased volume of hydrocarbon recovered was the industry version of Moore’s Law.[i]

    Coined by Gordon Moore (former Intel CEO) circa 1970, it suggests that computer processing power will double every two years.[ii]  It was later revamped to read, “Double every 18 months.”[iii]

    Not as well known, Moore’s Second Law, aka Rock’s Law indicates that while the cost of a unit of computing power falls, the capital cost to the semiconductor manufacturer increases exponentially.  This stands to reason as these companies must invest in R&D, new facilities, workforce competencies, etc.[iv]

    So if the energy industry is now subject to Moore’s Law what does that mean?  If the (economic) marginal cost of drilling one foot or the marginal cost of producing one barrel of oil is falling in accordance with this model, then the capital required to enable these price points will be substantial.

    The semiconductor industry survives and thrives as their “chips” are now everywhere.  SEMI (global industry association) predicts that sales of semiconductor manufacturing equipment will increase from $31.8 billion (actual) in 2013 to $43.7 billion (forecast) in 2016.[v]

    One would expect that those making these levels of capital expenditures in semiconductor production are aggressively managing costs.  One way the sector manages costs is through automation.  For example, production is highly automated including the visual inspection process.[vi]

    In 1973 and 1979, OPEC as the global swing producer caused “oil shocks” as petroleum supplies were withheld from the market.[vii]  Beginning in late 2014, that same consortium, led by Saudi Arabia does not appear to be having the same success.[viii]

    The Mobility revolution is dramatically changing our world.  Legacy semiconductor and software sector economic actors are changing and new entrants abound.  These technologies are enabling the energy sector in new ways as well.

    In our 2004 Roadmap to Enterprise Optimization study, we paraphrased one senior executive’s comments, “The digital oil field is getting more digital and less oil.”[ix]  A decade later, this statement is confirmed.

    The semiconductor and its customer sector, hardware and software firms demand and pay high salaries for the managerial, technical and financial (among others) talent and it competes for these individuals at the global level.  The energy industry is similar.

    Both of these global sectors depend on talent and a high level of workforce competency.  As such, traditional approaches to cyclical downturns such as massive reductions in the workforce may not be the best approach.

    This is not to suggest that eliminating redundancies, reorganizing and restructuring are not appropriate tools, they are.  However, investment in Human Capital and the tools that enable the maximum return on investment from this capital are also appropriate.

    The demand for petroleum and derivative products is expected to grow dramatically (by volume) between today and 2040, largely driven by growth in population to approximately 9 billion people and their demands for increased standards of living.  Annual growth in oil is slightly less than one percent (.8%) and natural gas 1.6%.[x]  Supply growth is expected to be led by newer extraction technologies as well as deepwater, tight oil and natural gas liquids.[xi]

    For the energy extraction sector, Rock’s Law suggests that the capital investment necessary will be in new technologies and Human Capital.  Moreover, it is likely that Mobility and automation will play major roles in future industry funding models.

    The industry can also capitalize on knowledge other sectors have and will continue develop in Mobility and automation.  This should reduce the associated costs and risks and is similar to the approach being taken in the Culture of Safety, Human Factors and High Reliability.

    Inherent to all components of the Capital Expenditure Matrix is Human Capital.  It is this investment that will have the highest return.[xii]  Fundamentally, Human Capital is the 21st century equivalent of 20th century requirements for large industrial economies of scale.

    The industry may be undergoing a structural change.  Is Shale and its extraction methods the industry equivalent of the integrated circuit?  One suspects it might be.  If this hypothesis is correct, surviving firms will be making dramatic changes as predicted by Structural Dynamics.[xiii]

     

    What will your organization strategy be if oil prices do not return to previous levels?

     

    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] Ridley, Matt. (2015, March 14-15). Fossil Fuels Will Save the World (Really). Wall Street Journal. p. C1.
    [ii] http://www.mooreslaw.org/
    [iii] http://en.wikipedia.org/wiki/Moore's_law
    [iv] Ibid.
    [v] http://www.semi.org/node/52451
    [vi] http://www.sciencedirect.com/science/article/pii/S0166361514001845
    [vii] http://chenry.webhost.utexas.edu/public_html/elephants/OilShock201979-Final.pdf
    [viii] https://consortiumnews.com/2015/01/13/behind-the-saudi-oil-price-gambit/
    [ix] Shemwell, Scott M. & Murphy, D. Paul. (2004, September). Roadmap to Enterprise Optimization: A Guide to the Impact of Information Driven Field Operations on the Petroleum Corporation. Authors.
    [x] http://cdn.exxonmobil.com/~/media/Reports/Outlook%20For%20Energy/2015/2015-Energy-Outlook-Presentation.pdf
    [xi] Ibid.
    [xii] Shemwell, Scott M. (2012, March 16). Millennials Arrive. Governing Energy. PennEnergy.
    [xiii] _______ (2015). Structural Dynamics: Foundation of Next Generation Management Science. Houston: RRI Publications. http://www.amazon.com/Structural-Dynamics-Foundation-Generation-Management-ebook/dp/B00U0JKMT0

     

     

    Cultural Collision

    March 3, 2015 2:58 PM by Dr. Scott M. Shemwell

    Volume 4 Number 5

    Energy industry pundits, including this one have extolled the aerospace safety culture as one to emulate.  It is true that the lessons learned from that sector as well as others can add value and perhaps prevent similar incidents by others.

    Many readers may be aware that on January 9, 2015, United Airlines sent a safety warning message to its more than 12,000 pilots.  The basic thrust of the message, “the common thread with all of these [incidents] is that they were preventable.” [i]

    According to the Wall Street Journal, United’s safety concerns are rooted in a number of internal matters.  Briefly, performance variables comprise both human interaction and technical flying skills.

    Behavioral

    Increased retirements as well as significant new hiring
    Lack of respect for the Captain’s authority
    Shorten Training
    Integration of cultures following the merger with Continental
    Asset class (air craft types) integration after merger

    The memo apparently states that these behavioral issues pose a, “significant risk to the operation.”  These safety issues are largely cultural in nature and reflect changing societal norms as well as the integration of two organizations with different cultures.

    Skills

    Inflight emergency evasion
    Landing with fuel reserves below minimum
    Improper landing and takeoff procedures[ii]

    It appears that United should be able to address these safety related issues in-house.  In other words, they do not depend on actions from government agencies, suppliers or customers to remedy the poor practices uncovered.

    Currently, the oil and gas industry is undergoing a structural transformation.  As discussed in a previous blog, the commodity price trading range is at a step level change downward and may stay there for a long time.[iii]

    This puts increasing pressure on already strained field operations.  Moreover, the workforce demographics are changing.  The long awaited Big Crew Change is well underway as well as the changing dynamics with the arrival of the millennials.[iv]

    We have previously addressed cultural differences between operators and their supply chain partners.[v]  The United memo points directly to cross-cultural cockpit management as a contributor to the corporation’s safety concerns.  This is an important lesson for an industry that is restructuring and greatly depends on its supply chain.

    Moreover, both the airline and energy sectors are highly regulated with a major focus on safety and there does not appear to be a track record whereby regulators have reduced scrutiny during economic downturns.  The more likely scenario is that the regulatory environment will remain strong and operations must adjust accordingly.

    The proactive approach that this airline’s leadership is taking is a ‘good practice’ that all industry economic actors should emulate and is in accordance with the first axiom of a Culture Safety—Leadership![vi]  Understanding and addressing cultural collisions can lessen the chance of an actual collision.
     

    How proactive is your organization’s leadership?

     

    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://www.wsj.com/articles/united-sent-safety-warning-to-pilots-1424900742
    [ii] http://www.upi.com/Top_News/US/2015/02/28/United-Airlines-warns-pilots-after-major-safety-events-and-near-misses/5881425121949/
    [iii] Shemwell, Scott M. (2015, January 22). Is it Different This Time? Governing Energy. PennEnergy.
    [iv] _______ (2013, Fall). Millennials Take On Our Increasingly Complex World. PennEnergy EnergyWorkforce. pp. 7-9.
    [v] _______ (2014, November 7). Agile, Resilient, Sustainable Ecosystem. Governing Energy. PennEnergy.
    [vi] http://www.therrinstitute.com/assets/cos-maturity-model---2d-edition---adobe-online.pdf

     

     

    Positively Negative

    February 20, 2015 1:23 PM by Dr. Scott M. Shemwell

    Volume 4 Number 4

    All of us are probably aware the people can become complacent in routine situations, no matter how fraught with risk it might be.  For instance, driving at higher than posted speeds on the Houston freeway system is routine—during the non-peak hours.  Indeed, driving significantly below “traffic” speed can have its own consequences.

    So we become complacent and commute in a relatively dangerous situation on a daily basis.  Usually, nothing happens and we arrive at our destination.

    Perhaps there is another perspective on this routine behavior.  In his book, Drift into Failure: From Hunting Broken Components to Understanding Complex Systems, the author Sidney Dekker refers to a construct, The Normalization of Deviance.”[i]

    Put forth by Diane Vaughan who argued that risk is continuously constructed and renegotiated.  In other words, potential dangers are acknowledged, rationalized and then accepted as the new normal.  Under apparently similar circumstances the behavior continues.[ii]  Each time the conduct is successful, the gap between the actual risk and the individual decision maker’s (or team) perspective of the risk growths.

    As this reinforcing behavior continues it is easy to see why the traffic speed ‘seems to’ continuously increase.  Accidents only happen to the other guy!

    One can posit that we are not simply complacent but are active participants in the often dramatic changes in the “apparent” risk profile of a given activity.  As the Type A individual is rewarded with each iteration; Atta Boy, bonus, promotion, etc. others may mimic this behavior.

    Moreover, the details that may cast doubt of the process viability often go unreported and perhaps unmeasured or even unknown.  Thus the organization’s culture becomes inherently, even latently less risk averse.

    Readers may note that this blog has refers to latent variables previously.  A Latent Variable is one that is not directly measureable but is inferred.  Its behavior can only be measure through the observation of linked variable(s).  The Structural Dynamics construct directly addresses how management can confront this quandary.[iii]

    Oil and gas operations are under tremendous cost and production pressure as of this writing.  The specter of lower, sustained crude pricing is real.  Natural gas commodity prices have been soft for years.

    The temptation of The Normalization of Deviance’s immediate rewards may induce organizations and even the industry to accommodate a level of risk that it does not believe it is accepting.  In this game of musical chairs, the music may stop on your watch.

    This New Normal may undo a lot of hard fought stakeholder value gains.  Guard against too much of a ‘can do’ attitude doing more with less.

     

    How does your organization assure individual and team behaviors are not changing your acceptable risk profile?

     

    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 four 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] Dekker, Sidney. (2011). Drift into Failure: From Hunting Broken Components to Understanding Complex Systems. Ashgate.
    [ii] Ibid.
    [iii] Shemwell, Scott M. (2012, June). Structural Dynamics: The Foundation of Next Generation Management Science—βeta Version of the Construct. Version 1.0. Author.

     

     

    Towards Zero

    February 4, 2015 1:33 PM by Dr. Scott M. Shemwell

    Volume 4 Number 3

    Mathematicians tell us that, “The distance between the curve and the asymptote tends to zero as they head to infinity.”[i]  From the ancient Greek, Zeno we learn the ‘dichotomy’ paradox—the repeated division into two leads to an infinite number of steps to cover a finite distance to which one can never arrive.[ii]

    In 1997, this author introduced the construct of the Expected Value of Marginal Information (EVMI), which was defined as the (Expected value of the best decision with new information obtained at no cost), minus the (Expected value of the best decision without new information).  Economist will know that this model has its roots in economic utility theory.[iii]

    Moreover, the late Nobel laureate R. H. Coase posited the hypothesis that the existence of the firm is justified when its internal set of transactions costs are less than the cost of using external resources.[iv]  In this model, costs are not just monetary but the total cost of doing business—those economic costs including opportunity cost.

    What do these axioms have in common?  In a word—zero!

    In our Fahrenheit world, we define zero degrees as the freezing point of water or 32 degrees.  Even on the Kelvin scale, absolute zero is defined as the degree where there is minimal particle movement—approximately minus 459.69 degrees Fahrenheit.[v]  True zero remains elusive.

    Therefore, we can expect that zero is an unobtainable value.  However, the above examples suggest:

    • In the physical and mathematical worlds systems tend towards a very small value
    • The expected value of new information has real value even when it is very small
    • Business models may drive transaction costs very low

    We raise these points, particularly the last two bullets to posit that in our physical and behavioral world the construct of zero is foundational.  Another example, in the era of the Internet and mobility devices we have grown used to free data and information.

    Organizations that continually focus on lowering costs are well positioned to assure sustained operations and profit in an era where transaction costs are trending toward zero.  By extension, this suggests that in our new economy, pricing power is limited and when strong it will not be sustainable.

    For most firms, a strategy to become and remain the economic low cost producer may be the best strategy.  We use the term economic to reflect the sum total of all costs, monetary and other including human costs.

    Low cost producers historically have focused on the small details of the business.  Much like High Reliability Organizations must focus on operational details.[vi]

    Today’s firms in the energy value chain are required to do both.  Successful ones will return shareholder value.  Others may face a more uncertain future.
     

    How well is your organization positioned to be the low cost producer?

     

    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 four 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://www.mathsisfun.com/algebra/asymptote.html
    [ii] http://plato.stanford.edu/entries/paradox-zeno/
    [iii] Shemwell, Scott M. (1997, September). The Economic Value of Timely Information and Knowledge, Key to Business Process Integration Across Boundaries in the Oil & Gas Extended Value Chain. Proceedings of the Gulf Publishing 3rd International Conference and Exhibition on Exploration & Production Information Management. Houston.  Reprinted with permission
    [iv] Shemwell, Scott M. (2002, February). Economic Theory Supports E-Business Model. Executive Briefing: Business Value from Technology.  Reprinted in Essays on Business and Information II: Maximizing Business Performance. New York: Xlibris.
    [v] http://dictionary.reference.com/browse/absolute+zero
    [vi] Shemwell, Scott M. (2014). Governing Energy: Organizational Governance—Issues of the 21st Century) 2012-2013 Edition. Houston: RRI Publications. pp. 34-35. http://www.amazon.com/dp/B00NB8C91Q

     

     

    Is it Different This Time?

    January 22, 2015 9:08 AM by Dr. Scott M. Shemwell

    Volume 4 Number 2

    There is a saying in Texas that goes something like, “This is not my first rodeo” meaning that we have been down this path before.  For those who have made their careers in the upstream oil and gas sector, riding a bull may be tamer than adjusting to the ups and now downs of the crude commodity price points.

    Industry response includes organizational restructuring, reduction in force, divestitures and acquisitions, office consolidation and so on.  Of course, these and other actions are currently underway.[i]

    Another refrain often heard in times of market chaos, “This time is different.”  Not surprisingly, this statement is routine overstated or even false.[ii]

    However, there is an argument emerging that perhaps this time, the crude oil market drivers may be different.  Pundits are positing that the North American shale oil revolution and its global potential are fundamentally new (different) economic drivers.[iii]  A corollary position is that major historic suppliers of crude oil have launched a price war in an attempt to defend market positions.[iv]

    If one assumes that these two premises are correct (over supply driven), sustainability and/or attaining the position of low cost producer will determine success.  Roughly, this argument goes that shale finding and production costs are higher.  If that is the case shale and perhaps other unconventional sources may fade in the face of determined market actors.

    The counter position emerging is that shale and even production of heavy Canadian crude are actually the low cost producers.  While still in flux, it is becoming increasingly apparent that shale oil production cost may be significant lower than previously believed.[v]

    Perhaps even less understood is the position Canadian heavy oil producers have that they can operate profitably at much lower prices.  At a high level, this extraction process has a high capital cost (CAPEX) similar to building a downstream refinery (new ones have not been built in years but they are constantly upgraded) which is a process manufacturing facility.

    Existing heavy oil process manufacturing capital investments are already sunk cost—new ones on hold.  Moreover, these facilities can have decade’s long production life with current cost around $35 per barrel or even less.[vi]  This mirrors downstream production where cost management is a Key Performance Indicator.

    Additionally, engineering and service contract prices are falling in response to market realities.  Finally, technology is credited with playing a significant role in the low breakeven price.[vii]

    Previous oil bust cycles are usually followed by market recovery.  However, if the true industry production cost for unconventional crude is below $35 per barrel on a sustainable basis, then it may be different this time.

    There is a contrarian perspective to these hypotheses—this is just another cycle driven by over production and “this too will pass.”[viii]  Time is the only variable that will determine whether there is a fundamental change in global crude markets or if this is simply one more boom—bust cycle.

    However, successful economic actors will not depend on the old oilman’s prayer, “Lord, give me one more boom and I promise not to screw it up this time.’’  Those that help themselves will take charge and position their organizations accordingly.

    There has been a discussion for at least a decade or two that the great promise of Integrated Operations, aka Digital Oilfield was the evolution of the oilfield from one of a historic mineral extraction, high-risk set of activities to one of the field as a factory.[ix]  In other words, process manufacturing.

    Global oil and gas markets are susceptible to more diverse, complex and integrated variables including geopolitical risks than addressed herein.  However, if unconventional operators are the low cost producers, then the market game has fundamentally changed.

    How is your company positioned if it really is different this time?

    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 four 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://www.ogfj.com/articles/2014/12/bp-to-spend-1b-on-restructuring-and-job-layoffs.html
    [ii] http://www.nber.org/papers/w13882
    [iii] http://www.voxeu.org/article/shale-oil-and-gasoline-prices
    [iv] http://www.marketwatch.com/story/can-saudis-beat-north-dakota-in-an-oil-price-war-2014-10-08
    [v] http://en.wikipedia.org/wiki/Oil_shale_economics
    [vi] http://www.wsj.com/articles/as-oil-slips-below-50-canada-digs-in-for-long-haul-1421114641
    [vii] http://www.cnbc.com/id/102234051
    [viii] http://oilprice.com/Interviews/The-Real-Cause-Of-Low-Oil-Prices-Interview-With-Arthur-Berman.html
    [ix] http://www.energistics.org/Assets/nov04ammsshemwell.pdf

    Reaffirmation

    January 2, 2015 10:57 AM by Dr. Scott M. Shemwell

    Volume 4 Number 1

    At the start of every new year many make so called New Year’s Resolutions.  Losing weight, exercise more, stop smoking, be a better person are some of the more common and oft repeated declarations.

    Over the next few weeks, we will all be bombarded with weight loss and gym/exercise advertisements.  This process begins every January and since advertisers are not in the habit of spending significant dollars year after year on pitches that do not work, one would surmise they are effective.  This implies that a large number of consumers desire such products and services.

    Behavioral economics suggests that the rational economic actor may not be as lucid in his or her decision making process as once accepted.[i]  Societal pressures, organizational culture and other more emotional factors often cloud human decisions.[ii]  Could this be a root cause driving a high rate of resolution failure?[iii]

    How many of you work for organizations that issue New Year’s resolutions?  One suspects the number is low.  Why wouldn’t a collection of humans make the same pledges individuals typically aspire to?

    Perhaps it is good many firms do not acknowledge such goals since the resolution success rate less than 10 percent.[iv]  However, one can argue that the Chairman’s annual Letter to the Shareholders is such an affirmation of the firm’s values and goals for the new fiscal year.

    The challenge of behavioral change is well documented.[v]  Not surprising, without ongoing stimulus our good intentions of January fall by the wayside.  Whether driven by an individual’s wish to improve their life or an organization’s desire to pursue a new direction, a continuous energy source is necessary to sustain behavioral change.[vi]

    Reflection on our past efforts coupled with renewed energy to attain new or even previous goals is a worthy effort.  January 1 marks the annual milestone in continuing journeys.  A periodic review and course correction, if necessary is not only appropriate but is required by the fiduciary responsibility to ourselves as well as our organization.
     

    How does your management energize the reaffirmation process?
     

    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 four 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://financial-dictionary.thefreedictionary.com/Rational+economic+man
    [ii] http://en.wikipedia.org/wiki/Behavioral_economics
    [iii] http://www.statisticbrain.com/new-years-resolution-statistics/
    [iv] Ibid.
    [v] http://www.goodreads.com/author/show/476541.Dutch_Holland
    [vi] Shemwell, Scott M. (2012, June). Structural Dynamics: The Foundation of Next Generation Management Science—βeta Version of the Construct. Version 1.0. Author.

     

     

    2008—Redux

    December 18, 2014 1:52 PM by Dr. Scott M. Shemwell

    Volume 3 Number 24

    World petroleum markets have undergone commodity price shocks since these goods were first brought to market in quantity over one hundred and fifty years ago.[i]  As part of the global recession of 2008, the price of oil fell from approximately $145 per barrel to about $40 before the end of that market-rattling year.[ii]  A similar process is unfolding during the last quarter of 2014.

    In the summer of 2014, West Texas Intermediate (WTI) crude oil traded at over $105 per barrel.  As late as October it was above $90.  By December, it hovered in the high $50’s per barrel.[iii]

    To some observers, this is a manipulated market and to others it is supply and demand driven.  Regardless of the drivers, those economic actors in the market must deal with high volatility from time to time.

    A rapidly falling market presents operations with significant challenges.  The common mantra, “do more with less” can become gospel.  How this message is delivered and subsequently implemented can be the difference between possibly a bad year and a terrible, career and/or company ending year.

    Nothing changes in a down market except the commodity price point.  Safety, the environment, performance requirements, regulations, etc. remain the same.  However, managerial actions must change and decisions taken reflect the market realities.

    Originally published in 2004, the decline curve graphic suggests that to remain profitable as a field ages, the costs of operations must decrease faster than the rate of production decline.[iv]  A dramatic, quick reduction in commodity price points essentially has the same economic effect of the field.

    The focus on that study was the emerging (at the time) digital oilfield.  However, modern producers use a basket of technologies to drive their business models.

    Technology does make a difference.  The perceived market glut is partly due to the use of technologies of all kinds including information technology.  Enabling process change improved efficiencies and safer operations are well documented and have offered those organizations using them with a “healthy buffer against failing prices.”[v]

    Organizational Agility, Resilience and Sustainability are the hallmark of well-managed oil and gas operators and their energy services and manufacturing supply chain partners.  Rapidly responding to changing environments, whether market driven or in retort to an incident are the normal response of High Reliability Organizations.  The protection of shareholder value demands no less.

    As with any market downturn there will be winners and losers.  Mergers and bankruptcies, a level of unemployment and local recessions are likely.  Agile and resilient firms are best positioned for survival when the bust part of the business cycle is deep and fast.

    Finally, as the saying goes, “we’ll be back.”  ExxonMobil recently forecasts 35% higher global demand by 2040.  The demographics of an expanding global population and desire for increased standards of living throughout all economies are substantial economic drivers.[vi]

    Yet one wonders, how many more boom-bust cycles will there be before then?  Expect them and plan accordingly.
     

    What is your organization’s Rapid Response Management plan?


    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 four 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://en.wikipedia.org/wiki/History_of_the_petroleum_industry_in_the_United_States
    [ii] http://www.rff.org/Publications/WPC/Pages/The-2008-Oil-Price-Shock-Markets-or-Mayhem.aspx
    [iii] http://www.businessinsider.com/oil-prices-drop-december-10-2014-12
    [iv] Shemwell, Scott M. & Murphy, D. Paul. (2004, September). Roadmap to Enterprise Optimization: A Guide to the Impact of Information Driven Field Operations on the Petroleum Corporation. Strategic Decision Sciences. Authors. P. 110.
    [v] http://www.houstonchronicle.com/business/energy/article/As-oil-prices-fall-companies-produce-more-for-5923956.php#/0
    [vi] http://www.ogj.com/articles/2014/12/exxonmobil-forecasts-35-higher-world-energy-demand-by-2040.html?cmpid=EnlDailyDecember102014

     

     

    Requisite Variety

    December 11, 2014 12:27 PM by Dr. Scott M. Shemwell

    Volume 3 Number 23

    Readers of this blog may recall that we have put forth the Relationships, Behavior and Conditions model as a construct to enable the energy industry to achieve a Culture of Safety.  This is a dynamic systems model of complex interactions.  In this edition, we will extend this discussion further.

    Collective human experience has shown over millennia that the more complex the system, the more difficult it is to understand the relationships and their behaviors.  Therefore, as system density increases, it acquires greater variety, that is systemic behavior becomes more uncertain.[i]

    In 1952, W. Ross Ashby first described requisite variety.  This axiom states that, “R’s capacity as a regulator cannot exceed R’s capacity as a channel of communication.”  In other words, ex(T)ernal (D)isturbances to the system that go unregulated may drive system (E)ssential variables outside appropriate limits.  Communications between these variables are represented in the arrows (→) in the graphic. [ii]

    In non-technical terms, “the variety in the control system must be equal to or larger than the variety of the perturbations in order to achieve control.”[iii]  Similar to Game Theory, a table of possible outcomes or payoff matrix can be either Good or Bad.[iv]

    It is not our intention to drift too far into Behavior Economics or Cybernetics (control and communications).  The point is that the complex human and machine systems that govern high tech field operations cannot be properly controlled if we do not understand them and have the appropriate level of control systems in place—“it is necessary to have such a number of actions that is equal to the number of system’s states.”[v]

    Operations Management Systems (OMS) should consider this established principle to assure appropriate system controls are in place and functioning properly.  This is the essence of Strong Bond Governance model put forth for managing critical infrastructure such as energy operations.[vi]

    Does your organization’s system regulation have requisite variety?

    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 four 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://stpk.cs.rtu.lv/sites/all/files/stpk/lecture6_2010.pdf
    [ii] http://www.panarchy.org/ashby/variety.1956.html
    [iii] http://www.wyrdology.com/mind/creativity/variety.html
    [iv] http://pcp.vub.ac.be/Books/AshbyReqVar.pdf
    [v] http://stpk.cs.rtu.lv/sites/all/files/stpk/lecture6_2010.pdf
    [vi] Holland, Winford “Dutch” E. and Shemwell, Scott M. (2014). Implementing a Culture of Safety: A Roadmap to Performance-Based Compliance. New York: Xlibris.

     

     

    Becoming a Part of Speech—Pluses & Minus

    November 25, 2014 10:12 AM by Dr. Scott M. Shemwell

    Volume 3 Number 22

    Conventional marketing wisdom suggests that becoming a verb can be a very good thing.  “Google it,” is an oft repeated statement when searching for information on almost any subject.  Becoming a household name is generally viewed as a good thing.  However, becoming a generic term may “mean losing the legal power of a trademark.”[i]

    It can be argued that the power of the verb is greater than the marketing power of a trademark.  The market dominance of a genericised trademark such as Xerox as the decade’s long term for photo copying probably sold more copy machines than strict trademark legal defense ever would.[ii]

    As a general rule, this author believes that when the company or a product becomes part of the vernacular the benefits outweigh the drawbacks.  Aggressive trademark defense may actually detract from the brand in this case.

    However, there is a dark side.  The World War II Norwegian politician who collaborated with the Nazis, Vidkum Quisling became a part of speech.  Quisling, the noun is now often used to describe someone as a traitor or collaborator.  The verb form of the word is to quisle.[iii]

    Most recently, an American economist has joined the club or rogues.[iv]  Following the release of several videos, it did not take long for the slang to begin.  More than just an attempt at humor, his revelations cast serious doubt on major political figures and their motives.  Like all political red meat, expect more to come.

    According to the news, he is losing major contacts and it is likely that his reputation and ability to obtain future consulting are probably compromised.  Moreover, as with the positive power of “Google it,” “Grubered” will probably stick with less desire effects for this professor.[v]

    The genericisation of a product or brand can have sustained benefits even when society in general grammatically tramples intellectual property.  The opposite sustains and often ridicules individuals and brands.  Mr. Quisling has been dead since 1945, and many using the term in contemporary times may not even know that the word quisling is an individual’s family name.

    How does your company protect its Brand?


    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 four 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://www.fastcompany.com/3004901/google-what-it-means-when-brand-becomes-verb
    [ii] http://en.wikipedia.org/wiki/Generic_trademark
    [iii] http://en.wikipedia.org/wiki/Quisling
    [iv] http://www.politico.com/story/2014/11/obamacare-jonathan-gruber-architect-112886.html
    [v] Ibid.

     

     

    Agile, Resilient, Sustainable Ecosystem

    November 7, 2014 9:53 AM by Dr. Scott M. Shemwell

    Volume 3 Number 21

    High Reliability Management (HRM) places a premium on resiliency, the ability to recover in times of adversity.  This can be a challenge for any individual organization; however, the upstream petroleum sector requires an extensive supply chain.  Resilience is by definition is exogenous in this and other critical sectors.

    Industry executives and regulatory agencies have understood this exposure.  They are explicitly demanding that contractors of all sizes meet new safety, environmental and performance metrics.  Moreover, both parties recognize that the Tier 2 and their contractors and suppliers may be the weakest link in the supply chain.

    The concept of a supply chain visualizes a linear and hierarchy model of the industrial age of the 19th century and earlier.  Raw materials are transported to factories and finished goods such as an automobile are the output into the marketing and sales cycle.

    Linear models such as Just-in-Time (JIT) manufacturing are still prevalent and have their strengths and weaknesses.[i]  In 2011, the Great Tohoku Earthquake and Tsunami severely affected the global automobile manufacturing sector.[ii]  The agility and resilience of that industry was tested on a global scale.

    All supplier Tiers were negatively impacted for weeks, especially for Japanese automobile manufacturers and their suppliers from the affected areas.  US based automakers were less affected initially, due to long logistics tail of products in route to the United States.  As after any major incident, that industry needed to make adjustments including expanding geographical diversity of key components.[iii]

    One could argue that this wake-up call extended JIT into a global ecosystem for the industry or more correctly, a set of ecosystems as each automobile manufacturer establish their own.  In this model, Tier 1, 2, and 3 suppliers may find themselves part of several ecosystems.  Moreover, governments are ecosystem partners with strong concerns about employment as well as tax revenue.

    The current upstream offshore wake-up call rang in 2010.[iv]  The response over the last four plus years has been expansive and global; however, there is still much to accomplish to create a Culture of Safety across the sector.

    This author has put forth the Relationships, Behaviors, and Conditions (RBC) model as one approach towards managing this change.  We have argued that this multi-dimensional methodology mitigates systemic risk, including from the supply chain.[v]

    Agility and resilience are behaviors.  One can also view sustainability as a situation or condition.  The resulting set of relationships is not just aligned with a Culture of Safety, it is engrained as the foundation of a high reliable and safe sector.

    Supply chains ar