Tag: oil and gas

OM in the News: Ships Turn Into Floating Storage Units

Shippers are warehousing fuel on the high seas as the coronavirus epidemic cuts China’s demand for fuel.

A new glut of oil and gas is emerging, floating at sea, as the coronavirus epidemic cuts China’s appetite for fuel and hampers work at Chinese ports. Dozens of ships are acting as floating storage vats for oil and liquefied natural gas because the owners of the fuel are unable to find buyers or places to store their cargo on land, according to The Wall Street Journal (March 4, 2020). Some 79 vessels are now storing crude oil at sea.

Traders. in the past decade, often loaded up ships with crude oil or gas with no immediate intention of moving the cargo around the world, seeking to profit by buying fuel on the cheap and locking in a higher price in the future. Such hedging made supertankers a modern version of an inventory warehouse. But the current situation is different for the 87 million barrels of crude stored on the high seas today. Rather than getting paid to store oil and gas in ships, many traders simply can’t find a home for their cargo. So storing oil at sea comes with costs for traders and owners.

A similar story is unfolding in the gas market: Eleven ships are currently storing LNG at sea.  Traders typically load up ships in the fall to take advantage of rising demand and higher gas prices when temperatures drop in December. Stored at minus-261 degrees, some LNG evaporates while at sea, which means owners are loath to store gas in vessels unless they can profit from it. “Everything that’s floating is probably distressed,” said an industry expert. “It’s something that’s trying to find a home. It’s floating until it can find storage.”

Classroom discussion questions:

  1. What are the pluses and minuses of this hedging?
  2. In Chapter 12 of your Heizer/Render/Munson OM text, we list the 4 functions of inventory. Which of these apply here?

OM in the News: The Automation of Oil Drilling

oil-rigs-2As the global oil industry begins to climb out of a collapse that took 440,000 jobs, anywhere from a 1/3 to 1/2 may never come back. “A combination of more efficient drilling rigs and increased automation is reducing the need for field hands,” writes Businessweek (Jan. 30-Feb. 5, 2017). 

Automation, of course, has revolutionized many industries, from auto manufacturing to food and clothing makers. Energy companies, which rely on large, complex equipment for drilling and maintaining oil wells, are particularly well-positioned to benefit. “It used to be you had a toolbox full of wrenches and tubing benders,” says one south Texas professor. “Now your main tool is a laptop.” During the boom, companies were too busy pumping oil and gas to worry about head count. The two-and-a-half-year downturn gave executives time to rethink the mix of human labor and automated machinery in the oil fields.

Nabors Industries, the world’s largest onshore driller, says it expects to cut the number of workers at each well site eventually to 5, from 20, by deploying more automated drilling rigs. Rigs have gotten so efficient that the U.S. oil industry needs only 1/2 as many workers as it did at the height of the shale boom in 2014 to suck the same amount of oil out of the ground.

The systems, that is all the processes involved in drilling and fracking a well, will be the key. That means an engineer can design an oil well at his desk. With the press of a button, an automated system would identify the equipment needed from a supplier, create a 3D model, send the details to the rig, and tell the rig to do the job.

Classroom discussion questions:

  1. Why the industry push for automation?
  2. What are the plusses and minuses for the U.S?

Teaching Tip: Examining Supply Chains

In Chapter 11, Figure 11.1, we present a Supply Chain with costs for beer. This figure provides an opportunity to discuss both the value added and the risks associated with each step in the supply chain. And, because students can often relate to the product, beer, the presentation encourages a discussion of not only the multiple tiers, but also the processing delays, logistics, storage, cooling, and where and how costs might be reduced in the supply chain.    Finding other examples of Supply /  Value Chains can be a challenge, but we found very timely and good examples (and perhaps almost as interesting as beer), by PetroStrategies, Inc. —  supply chains of the oil and gas industries.      

PetroStrategies shows both the Crude Oil Value Chain and the Natural Gas Value Chain. The great thing about their presentation is that in addition to the ‘chains’ being shown, so are estimates of Costs, Value (selling price at each stage), Gross Margins, Net Margins, and Percent of selling price for each component in the chain. 

Given the current interest in oil and gasoline prices, a lively discussion of costs and values in the supply chain from wellhead to gasoline pump should ensue. You might note that although the data is relatively recent (2007), gasoline costs are shown at $2.00 per gallon.

Discussion Questions:  

1.  Where are the risks in these supply chains?

2. What can be done to enhance supply and / or reduce the risks?

3. Have you any suggestions about what could be done to reduce costs in these supply chains?