Is A Complex Value Chain Squeezing Every Cent From A Barrel Of Oil?
At the outset of the American oil industry, Standard Oil founder John Rockefeller sought to lower the cost of transporting his product by buying timber acreage and building a barrel factory for what became the brands signature blue-painted barrels. He gained control of a crucial part of the supply chain and cut the cost of his barrels in half. It was a breakthrough in supply chain management, but it was also a simpler time when barrels were leaky but necessary. One of the earliest horse-drawn trucks used to supply gas stations with gasoline. This kind of ... [+] vehicle was used by the Standard Oil Company of California in 1908. Undated photograph. Bettmann Archive  Today, the oil transportation and refining sectors, like the upstream sector, are far more sophisticated as oil companies must meet various environmental standards while also competing for buyers and delivering accretive returns. Consumers are not merely end-users of a commodity. They are better informed buyers who are themselves seeking efficiencies and, increasingly, lower carbon intensity, in their energy choices. That shift turns Rockefellers approach on its head. While todays oil executives may have little interest in exerting total control over the value chain, they dont want to be controlled by exogenous supply chain dynamics either. The New Dynamic  U.S. exports of crude oil and liquefied natural gas in recent years changed global markets for those commodities by giving buyers more choices and intensifying price competition. Calculating arbitrage opportunities when buying and selling fuel is not a new practice for energy traders but todays regional markets have become more interconnected and thats increased trade flows and complexities. The industry has shifted from a focus on delivering large volumes to a nimble game of realizing margins across an increasingly integrated energy system. The pandemic laid this bare, accentuating the need for elasticity and resilience across the value chain. And the advancement of digital technologies has made it possible to successfully navigate the complexity of oil and gas value chain optimization (VCO). For market participants willing to restructure their businesses, a new breakthrough is possible: knocking down value chain silos. Traditionally, oil and gas executives  and traders  had separate reporting structures based on the institutional knowledge for their respective commodities, such as LNG, bunker fuel, jet fuel and so on. Breaking value chain silos and truly integrating across segments, at least virtually, is something that may have been tried in the past, often unsuccessfully, but advanced technologies have created opportunities to drive this approach to VCO. Tracking the Volatility  In this regard, independent trading companies and energy marketers have gained an edge by better managing the volatility in and across markets so they can quickly seize on supply-and-demand imbalances. Asia-bound LNG cargoes, for example, can be diverted to Europe, or vice versa, if benchmark prices flip. Spot cargoes are essentially waterborne storage containers  and storage and transportation are vital to meeting urgent supply needs. Historically, LNG sales were limited to long-term contracts but as spot markets emerged, and became more liquid and transparent, traders realized a VCO-enabled opportunity, particularly in volatile pricing cycles. This dynamic of leveraging storage was evidenced this past February, when a winter storm in Texas froze off some of the natural gas supply. Gas sellers with access to gas storage and pipelines prevailed while producers who couldnt provide supply to the market lost out. Arguably, but if you define luck as preparation meeting opportunity  and it was an extraordinary opportunity  comprehensive end-to-end value chain coverage and optimization capabilities helped with preparation. The reality is many of these companies are actually making more money from trading molecules than from producing molecules. This is because they trade many more times the volume of production, which is also facilitated by VCO. Moreover, we believe, alongside the energy system, energy metrics also are in flux and eventually may move toward a more standardized approach that involves measuring risk and reward per joule, especially as different sources and carriers of energy, such as hydrocarbon molecules, renewable electrons and hydrogen, compete across sectors and for end consumers. This will widen the application of an opportunity to be realized from advanced value chain optimization capabilities  and it may well mark a structural shift in value realization from production of energy to management and trading of molecules and electrons. Data-driven Decision-Making  For generations, the oil and gas industry relied on the deep expertise of its operational and commercial leaders to make decisions based on experience and instinct. Today, advanced technologies are able to process vast amounts of data in real-time, providing the precise and predictive information needed to make integrated business decisions in a way that was unthinkable in the past. For an industry that is increasingly dynamic and competitive, this path to data-driven business insights is becoming mandatory. Thats especially true as the energy transition creates new market instruments that can be traded, such as carbon credits. These elements of the value chain will not just be esoteric financial instruments to be traded by sophistical institutional players; they will increasingly provide consumers with transparency on the carbon intensity and climate impact of the energy they buy. Energy companies that are not taking advantage of digital insights to keep track of it all are missing real opportunities  and not always the ones that are most obvious. For example, Accenture estimates $4-5/bbl and $2-$3/bbl of margins trapped in the upstream and downstream sectors respectively, which is the modern equivalent of those old-timey, leaky wooden barrels. Nowadays, increasing complexities can be better managed with the following principles:   Step up the ability to quickly identify market changes to act ahead of others.  Enhance cross-functional communications to ensure market insights are effectively communicated to the right colleagues at the right time.  Coalesce around a shared understanding and objectives with integrated margins and aligned key performance indicators.  Simplify and integrate work processes with nimble teams to plan and execute while balancing risk and margins. With these foundational principles in place, energy companies should pursue value chain optimization along two interconnected dimensions: (a) dynamically rebalancing portfolios, hydrocarbon and non-hydrocarbon, to optimize inherent system optionality; and (b) integrating commercial and operational excellence to maximize margins. This optimization starts with visibility achieved through connecting data along the value chain and ultimately requires a revamp of decision-making rules and risk/reward envelopes. Modern-day Optimization  In the old days of oil and gas, most companies were vertically integrated with ownership of assets from the wellhead to the retail pump. Later, many companies disaggregated across the sectors  upstream, midstream, and downstream. But todays savvy players take an integrated approach to sales, trading and operational optimization without having to own all the assets along the value chain. These companies are constantly looking at where else they can connect through the system to make money. More likely, companies that do own a lot of oil and gas assets are studying how to profit by venturing into greener energy businesses, such as wind power and electric vehicle charging. Unlike Rockefeller, energy titans now have no interest in monopolies or other unwieldy business models. Instead, they want to be selective about touch points where they engage to maximize profits, using technological innovation to virtually integrate end-to-end. Integrating commercial and operational excellence will require massive data integration, AI capabilities, and a novel approach to decision rights and risks. The technologies available today allow those integrations to happen now. Today, its no longer about rolling out new barrels of oil but of squeezing all the value from them.