At over $60 per barrel crude oil prices may be around their highest level ever but the industry’s supply chain is still muddling through with the aid of faxes, phone calls and guesswork.
But there are signs that some of the world’s biggest oil companies are beginning to invest their windfallprofits in cost reduction projects in readiness for an inevitable downturn.
TNK-BP, Russia’s third largest oil company is in the process of putting in the industry’s first end-to-end supply chain management system from specialist software company OILspace in the hope of eventually saving more than 50 cents on the cost of handling a barrel of oil.
In need of an overhaul
Oil company supply chain management systems, which lag those in other process industries such as chemicals and steel, are badly in need of an overhaul. The industry is dotted with silos of information locked in systems that can’t be readily integrated, with the result that oil and gas companies involved in processing and distribution find it difficult to get a clear picture of what is going on in their supply chains.
Supply chain management systems need to cover the inbound logistics involved in extracting refining, storing and transporting crude oil. They must determine how a shipment is to be used and answer questions about where it is to be stored, which tanks to fill first, what was in those tanks before, and whether the new shipment can be mixed with earlier shipments.
But it is in outbound logistics – distribution – where the biggest savings and efficiency gains are to be had. Refineries represent multi-billion dollar investments and are constant flow operations. One day’s lost production can cost millions of dollars. On-site storage tanks are of necessarily limited capacity so it is imperative that everything produced is shipped immediately. Quantities range from 5,000 to 20,000 tons moving by pipeline, road and rail tankers or being shipped to ports for transport by sea.
Efforts in the past to establish standardised systems have come to nothing, stymied by company rivalry and the complexity of the oil business. It doesn’t help that the industry is on a high – why bother to save a few cents off distribution costs when the money is rolling in?
But it is the peculiar nature of the oil industry that accounts for the lag in applying supply chain automation. For example, supplies can be created to fill demand by quickly blending products, making the industry extremely dynamic – too fast for most planning systems.
Trading is the lifeblood of the oil business and the cause of a great deal of volatility. Each barrel of oil is traded five times on average as it moves through the supply chain. At the moment hedge funds are scrambling to get into oil, but many investors are basing their decisions on inappropriate predictive computer models creating further price swings. It is not surprising that the knee-jerk reaction of many companies is to trade their way out of supply chain foul ups.
So when a tanker arrives at a refinery loaded with crude oil that the facility has no need of the response is to offer the cargo at a discounted price rather than to develop a system to prevent the tanker setting out with unwanted supplies in the first place.
A US skew
The needs of the US oil industry have also tended to skew supply chain automation. For instance, most bulk oil in North America is carried by pipe. Systems for optimising pipe operations are well established and work effectively. But the rest of the world mostly relies on trains to transport supplies and there is a dearth of software to manage the logistics of rail systems. When IT is applied the results can be surprising.
In one case, an African rail distribution network was having difficulties shifting its oil. Once the problem was subjected to computer analysis, the operator was advised to reduce the number of cars it used, because it was the empty cars that were clogging up the system.
‘The devil is in the detail because you have many modes of primary distribution each is a different problem to crack mathematically,’ says Steve Hughes, president of OILspace.
Hughes cites two reasons why there is now a much better chance of improving the efficiency of the oil industry supply chain. First is the availability of technology that is capable of delivering a far greater degree of integration.
Second, there is a far better understanding of how product blends and the physical movement of oil work, and therefore a better chance of squeezing more value out of these activities.