Category Archives: Supply Chain

Shale Shakes Up Energy Sector

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shale oil industry

HOUSTON—In the words of the well-known rock group REM, “It’s the end of the world as we know it,” at least for the energy sector in the last decade, said Ross Payne, managing director of Wells Fargo Securities and keynote speaker at the IRMI Energy Risk and Insurance Conference here. Since 2009, production in the United States is up 72%, he said. “That’s a phenomenal increase, driven by shale production.”

The huge boon in shale production was the result of technology. “Just sticking one straw into shale was not going to be economic, butwhen you were able to take that drill bit and turn it horizontal, and go out one to two miles horizontally and pop a hole into the ground every hundred yards along that one or two miles, you got enough flow to make that economically an option,” he said. “That’s why, when we broke the technology on that, it did change the world as we know it.

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”

Looking at energy from 30,000 feet, he explained that, since the early ’90s, the energy sector has enjoyed “one way pricing,” which was brought about by constricted supplies. The only new technology before developments to extract shale came along was in the deep water offshore arena, “a brand new territory for drilling in the 1980s and ’90s.”

Adding to that was dramatic global growth and demand, primarily from the BRIC countries–Brazil, Russia, India and China–and geopolitical issues such as the Arab Spring and the Iraq war, Payne said.

With high prices, however, “you get substitutions and you get disrupters. Clearly shale has become a disrupter.” What kind of impact has shale had on the industry? “Just since 2011 to 2013, the Energy Information Administration (EIA) doubled their crude basin estimates to 95. There are now 41 countries out there with significant shale assets.

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Shale reserves increased 980% in that two year time frame. Currently in the United States, 42% of production is through shale, with crude production around 50%,” he said.

As technology continues to evolve, Payne said, “we are continuing to do a better job of pulling this gas and crude out at a lower price. We are going to get more prolific and drive down costs even further.” Meanwhile, other countries, including China and Russia, are doing the same.

“Shale is the future, it’s the future on a global basis as well,” he said. The country with the largest shale reserves, he noted, is Russia, with the United States in second place. “We’re obviously the largest producer of shale crude, and China is number three.

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On the natural gas side, China is number one and the U.S. is number four.”

But how long will crude prices stay low? “We think it’s going to be awhile,” Payne said. “Because of shale, prices will be capped. As prices start to come up, we will see a situation where rigs come back on line very quickly. We think that, as we get into the $65 to $70 per barrel range, a lot of rigs will come back on line,” he said. “At peak, we were at 1,610 crude rigs in the U.S., and if you have 1,610 rigs working in the fields primarily on shale, you will get 1 million barrels of growth year-over-year.” He also does not see prices going much above $80 because of the ability to turn these rigs so quickly, primarily in the U.S.

A poll among energy experts in the audience as to where prices will be by the end of 2015 reached a consensus of $55 to $60 per barrel. Asked whether he believes the Nixon-era ban on exporting oil will be lifted, Payne pointed out that a number of CEOs have been pushing for U.S. exports of crude. “I’m surprised that Obama let LNG [liquefied natural gas] exports materialize as quickly as he did,” he said, adding that the president has allowed for other similar exports as well. However, he warned, “Once we start to export, there could be a knee-jerk reaction from OPEC. We are going to be viewed as a competitor rather than a customer, and they may want to squelch that competitor a bit longer than people’s expectations. So I think there is a danger to doing that, but it could very well move forward.”

Risk Management and Business Continuity: Improving Business Resiliency

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Preparing for and responding to negative events, from the mundane to the catastrophic, from the predictable to the unforeseen, has become a fact of life for businesses and governments around the world. We don’t have to look any further than the seemingly daily reports of cyberattacks on governments, corporations and individuals to comprehend the severity of the problem.

Tackling these risks requires an integrated and holistic framework with the capability to identify, evaluate and adequately define responses to the circumstances. For more and more organizations, this means adapting an enterprise risk management (ERM) model. ERM seeks to identify all threats—including financial, strategic, personnel, market, technology, legal, compliance, geopolitical and environmental—that would adversely affect an organization. This holistic approach gives organizations a better framework for mitigating risk while advancing their goals and opportunities in the face of business threats. But in order to implement and continuously manage this enterprise-wide model there is a critical need for closer integration of two typically distinct roles within the organization—business continuity management (BCM) and risk management. Together, these two vital elements make up a robust ERM plan and have a tremendous impact on an organization’s ability to contend with interruptions to the execution of organizational activities.

Put in the simplest terms, risk management is concerned with minimizing the probability of and destruction caused by negative events. Operational risk management, as the name implies, must cope with interruptions at the operational level. Recognizing that there are inherent imperfections in systems, people, facilities and general operational functions, the essence of operational risk management is to negate or reduce the probability of an incident occurring. Focusing upon incident-specific, site-specific analysis of potential causes of interruptions, risk managers seek to preclude incidents from occurring. If elimination of the risk is not possible, the focus moves to minimizing the results of the negative event.

For example, suppression systems reduce the risk of operational disruption caused by fire damage. Redundant equipment decreases the possibility of operational interruption resulting from machine breakdown and redundant communications help maintain connectivity. By analyzing past events and examining known hazards (defined flood plains, hurricane-prone areas, construction sites, earthquake areas and terrorism-prone areas) operational risk management seeks to avoid the occurrence of negative destructive events.

But creating strategies to minimize the probability that an event will impact an organization certainly will not prevent the incident from taking place. No degree of preparation can stop a tornado, tsunami or other massively destructive event.

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So understanding that every incident is not preventable, our other line of defense is to minimize the impact. That’s where BCM comes in. BCM is concerned with minimizing the impact upon the entity after an event occurs and restoring the organization to its normal operations and delivery of products and services as quickly and safely as possible. In short, BCM helps maintain the viability of an entity under duress.

Because it is event-neutral, BCM is able to categorize effects into four distinct categories:

  • Effects on facilities, making them inaccessible or unusable
  • Effects on operational capability, such as supply chain interruptions, processing errors or staff unavailability
  • Effects on technology
  • Effects on the organization itself, ranging from financial problems to intellectual property rights.

When an event inevitably does occur, the optimal goal is to make any business interruptions imperceptible to those outside the affected organization. Here’s an example of how risk management and business continuity management, working together, enabled an organization to achieve that goal:

One of the world’s most important foreign exchange dealers realized that, as an occupant of a high rise building, it could not control the consequences of all incidents that might impact its ability to service its customers, which were some of the largest financial institutions in the world. A review by the company’s risk manager determined that there was a likelihood of an interruption in service as a result of construction work in the surrounding area. To reduce the risk, it was recommended that they install redundant lines and route them through alternative conduits into the building. So they undertook building redundancy in their telecom network. In addition, the risk of server failure was similarly high and so mirroring was implemented to duplicate all transactions and ensure that no data would be lost in the event of a failure of the building’s infrastructure.

Despite all the precautions to reduce risk, what risk management couldn’t control was an East Coast blackout that terminated power to its operation.

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Recognizing the impact that a loss of power could have, including the loss of use of the facility, the business continuity professional determined that a robust contingency plan was required.

The business continuity plan included a strategy that automatically forwarded incoming calls to another facility outside the U.S. and also provided connectivity to its back-up technology center. When the blackout hit, the business continuity plan worked exactly as tested. Phones were switched, systems were accessible and, best of all, customers never knew the difference. The company was actually more prepared than many of its customers who failed to provide similar capabilities and had to cease trading.

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The combination of risk management and business continuity provides the level of resiliency that most organizations must achieve in light of the uncertainty that exists today. The blend will reduce uncertainty and promote a more stable operating environment.

Newer Tank Cars Were Used in Derailed Train

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Updated Wednesday, 9:00 a.m.

A train hauling North Dakota Bakken shale oil derailed on Monday in Lynchburg, West Virginia, igniting several tank cars, burning down a house and prompting the shut-down of water-treatment plants, authorities said. At least one tanker from the 109-car CSX train toppled into the Kanawha River south of Charleston and was leaking crude oil.

About, 2,400 residents around Adena Village, West Virginia, were evacuated as a precaution, the Charleston Gazette reported. Emergency shelters were set up at a local school and recreation center.

It was the second derailment in a year along the same CSX line, according to Reuters. A similar incident in Lynchburg, Virginia, last April involved a train that was also headed to Plains All American Pipelines LP’s oil depot in Yorktown, Virginia.

The train was hauling newer CPC 1232 model tank cars rather than older versions widely criticized for being prone to puncture. The recommended cars have safety features that include half-inch-thick steel shields on the sides to prevent splitting if they are overturned.

With production on the rise in North America, oil companies are increasingly challenged with finding ways to transport their product.

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Pipeline networks do not yet have the capacity or flexibility to handle the job, so oil companies have relied on railroads to fill the gap.

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In 2013, rail shipments of crude oil in the United States skyrocketed, with 400,000 carloads transported compared to 4,729 in 2006, according to the Association of American Railroads (AAR).

CSX said in a statement on Tuesday:

Overnight, CSX personnel and agencies continued their assessment of the derailment scene to verify the number of rail cars involved and the extent of the potential environmental impact. CSX estimates that approximately 25 tank cars derailed and 20 cars were involved in subsequent fires; the fires around the rail cars will be allowed to burn out. When safe to do so, CSX and its experts will begin transferring oil from the damaged cars to other tanks and those tanks subsequently removed from the site. Initial assessments have confirmed that several of the cars appear to be ruptured or leaking from valves.

No rail cars entered the Kanawha River in this incident.

CSX teams continue working to deploy environmental protective and monitoring measures on land, air and in the Kanawha River as well as a creek near the company’s tracks. The company also is in contact with public officials and investigative agencies to address their needs.

Approximately 100-125 residents of homes near the derailment site remain evacuated at this time. CSX is working with the Red Cross and other relief organizations to address residents’ needs, taking into account winter storm conditions. The company opened a Community Outreach Center Tuesday, February 17, at 8 a.m.; the center will remain open until every day 8 p.m. EST or later if needed. CSX has secured a number of hotel rooms for displaced residents and is assisting them in relocating from evacuation centers to the hotels.

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CSX said on Monday that it has removed the non-derailed cars from the scene of the derailment and efforts continue to re-rail the remaining cars. The company said it is cooperating fully with agencies in the investigation being led by the National Transportation Safety Board.

Fixing a Rotten Global Supply Chain

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Something’s rotten in the global supply chain—figuratively and literally, as Shanghai’s Dragon TV revealed in July about a major supplier of meat for the iconic restaurant brands KFC, Pizza Hut and McDonald’s. In recent years various supply chains brought to market, through respected public companies, adulterated products such as drug-infused toxic chickens and horsemeat posing as beef, as well as dangerous products such as salmonella-laced peanut butter and melamine-fortified pet food.

In addition to the restaurant, food retail and agribusiness sectors, problems originating in their supply chains have adversely affected the automotive, electronics, pharmaceutical and toy sectors. GM, for example, is now dealing with what appears to be a 10-year long supply chain problem that compromised product safety. The immediate costs of all this supply chain rot may include business interruption, product recalls and third-party liability claims, but strategic costs may extend to reputational harm, too. With the rise of investor activism, the worst recent additional costs may be the personal reputations of corporate directors and officers.

Three reasons explain the rising costs of supply chain issues. Stakeholders expect that companies know how the products they offer are made, by whom, and with what raw materials. These expectations are not limited to “conscientious capitalists” or NGOs. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, requires companies to disclose annually how they test for whether any minerals originating in the Democratic Republic of the Congo or an adjoining country are incorporated in products.

Another fact is that, as companies continue to grow around the world in an increasingly complex sourcing, manufacturing and distribution environment, insurers and their reinsurers are balking at accepting risk. A representative of Zurich, a major insurer of the global supply chain, explained that reinsurers were demanding more transparency into locations as a going-forward condition for blanket limits.

Then, intolerance for errors is growing. Stakeholders, many of whom now have near-instant awareness of errors and a front-row seat to global crises, are becoming less forgiving of companies being blindsided.

Only a short window of time now separates an adverse event from the onset of what the Financial Times once described as “the pile on of litigators, regulators, and…bloggers.” Enter now also activist investors. Despite ample public contrition, Target’s board sacked its CEO only 18 weeks after a supplier provided credit card scanners whose security had been compromised—a sacking that did not prevent activist investors from calling for a sacking of the board. And only 10 weeks after Duke Energy’s coal ash spill and its public contrition, activist investors demanded the heads of four Duke Energy directors.

The court of public opinion where liability insurance offers no solace has become the primary battleground, making directors and officers especially vulnerable. One investor told the New York Times his opening gambit with the C-suite: “We can make you famous, and not for the reason you want to be famous.” Rarely will a company’s C-suite suffer public opprobrium silently like Rolls-Royce’s after a catastrophic engine failure exposed a systemic safety issue in their supply chain.
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The company went radio silent for 10 weeks until it isolated and repaired the problem, whereupon the firm emerged publicly to announce a new large engine order. They used the third-party endorsement of a respected customer to help reassure stakeholders and restore their reputation.

It is high time that companies acquire visibility into their supply chains, and demand from them responsible behavior appropriate for the notably higher 21st century norms. They can begin by evaluating the effectiveness of field audits that evidence compliance. Although that approach is industry-standard, it is expensive and disruptive to their suppliers and expensive to administer. For the overwhelming majority of suppliers and vendors that are in compliance, these audits interfere with their operations and strain the supplier/company relationships. For the few that are non-compliant, infrequent audits are poor policing tools. When audits fail to uncover deviations, and a negative event occurs, social critics have unfairly accused companies of ineffective oversight and even willful failure.

New integrated information management solutions are far more effective. These will help companies find hints and clues of noncompliance in open communications that, aided by big data analytics, converge on apparent discrepancies between self-reporting and actual behaviors. These signatures of misbehavior will more quickly expose potential deviations from responsible behavior and enable corrective actions.

Companies can also reduce irresponsible behavior by making it harder for potentially deviant suppliers to rationalize such behavior and assuage their guilt. Insurances have become available that will objectively affirm the authenticity of a company’s values and neutralize rationalization that might lower the barriers to irresponsible behavior by some suppliers. Insurances can also increase the disincentives for irresponsible behavior in two fundamental ways. First, escalating the behavior into the criminal matter of insurance fraud is a far greater disincentive than a terminated contract. Second, by making insurance a condition of contracting, loss of insurance becomes an independent and non-judgmental basis for termination.

Companies cannot then be vilified for evading responsibility.

Companies that manage risks to their supply chains in a way that stakeholders can appreciate and value can transform risk management into a strategic advantage. These companies will emerge with reputations for being 21st century industry leaders in governance, management and control.