¶ … oil and gas industry in Libya is also directly reliant on global prices that are based on supply and demand; and any revenues generated at a given point in time depend in large part on how effective the supply chain is in mitigating the high costs of production and transporting the final product to customers. The purpose of this study was to provide a comparison between an American oil industry firm, Mobil, the world's largest publicly traded international oil and gas company in the field of supply chain management in the United States from the perspective of the Toyota supply chain approach. This analysis will then be applied to a Libyan oil industry firm, Alwaha, to identify best practices for Alwaha in developing a more effective supply chain approach. To this end, a case study approach is used to compare these companies and practices, with the findings synthesized in the concluding chapter together with recommendations for Alwaha concerning its supply chain management practices.
TABLE of CONTENTS
CHAPTER 1: INTRODUCTION
Statement of the Problem
Purpose of Study
Importance of Study
Rationale of Study
Overview of Study
Definition of Key Terms
CHAPTER 2: REVIEW of RELATED LITERATURE
CHAPTER 3: METHODOLOGY
Description of the Study Approach
Data-gathering Method and Database of Study
Assumptions
Limitations
Scope
Delimitations
CHAPTER FOUR: DATA ANALYSIS
CHAPTER FIVE: SUMMARY, CONCLUSIONS and
RECOMMENDATIONS
Applied Logistics and Supply Chain Management
TABLE of CONTENTS
CHAPTER 1: INTRODUCTION
The petroleum industry stands at an important juncture in its developmental history today, with the increasing demand for fossil fuels continuing to create the need for new supplies while the threat of peak oil some time around the mid-21st century looming large on the horizon. While the quest for viable alternative energy sources continues, the global reliance on petroleum-based products will continue to grow for the foreseeable future. For example, according to a recent report from Tillerson, "Developing all our energy resources will also require us to find and produce more fossil fuels. Hydrocarbons currently provide the vast majority of the world's energy -- and due to their availability, their affordability and their versatility, they will continue to do so. Oil and natural gas alone are projected to supply nearly 60% of the world's energy needs for the next 25 years" (2009, p. 3). In this environment, identifying the most effective approaches to bringing product to market through informed supply chain management practices represents an important enterprise which forms the focus of this study as discussed further below.
Statement of the Problem
Global prices for oil and oil products are directly related to oil industry revenues, a process that is fueled by classic supply and demand forces (Nathan, 2008). Therefore, there is an overarching need for efficient supply chains to help offset the enormous costs that are associated with discovery, production and transportation of petroleum products to ensure as much profitability can be gained from the reserves that exist (Nathan, 2008). Across the board, more efficient supply chain management practices have become recognized as an important method to develop sustained competitive advantage for all successful industries and businesses (Nathan, 2008). The objective of every supply chain, including the global oil industry, is to maximize the overall value generated. The value a supply chain generates to an organization is the difference between what the final product is worth to the customer and the effort the supply chain expends in filling the customer's request. For most commercial supply chains, value will be strongly correlated with supply chain profitability, the difference between the revenue generated from the customer and the overall cost across the supply chain (Nathan, 2008).
The ongoing environmental carnage being caused by the Gulf Oil Leak is proof positive that the logistics involved in extracting and delivering oil and gas products to consumers is a daunting and potentially dangerous enterprise. Although researchers are scrambling to identify viable alternative energy sources to replace the global dependence on fossil fuels, it is reasonable to suggest that current levels of demand will continue to increase in the future based on growing demand in China, India, Brazil and other developing nations. In this environment, identifying the most effective logistical and supply chain management approaches in the oil and gas industry represents a timely and important enterprise.
Generally speaking, effective supply chain management seeks to integrate purchasing, materials management, quality management, demand management, distribution planning, and manufacturing planning in the most efficient manner possible (Baldwin, Camm, Cook & Moore, 2002). The effective management of a supply chain must also take into account where and how the products are sourced, delivered, and ultimately marketed to the consumer (Thierauf, 2001). In this regard, Thierauf (2001) advises that the main goal of effective supply chain management is "to supply high-quality, low-cost products with a fast turnaround time. Although this is applicable to many environments, it focuses more on distribution environments" (273). To achieve this level of integration requires a coordinated network that provides data-sharing and timely feedback to be communicated throughout a company's marketing, sales, purchasing, finance, manufacturing, distribution, and transportation divisions (Thierauf, 2001). Clearly, this level of integration has been facilitated by the introduction of computer-based applications for this purpose, but the Libyan oil and gas sector currently lacks the expertise and experience to apply these systems effectively (Ford, 2002).
Nevertheless, it is precisely this type of guidance that is needed to help the supply chain managers at the Libyan oil company, Alwaha, achieve their ambitious production goals. In this regard, Theirauf emphasizes that, "By achieving this kind of integration, a company can maximize its supply chain value with a lower landed cost of product from a vendor on one side of the supply chain and pass this value to the customer on the other side of the supply chain" (p. 274). The need for the supply chain to add value to any company's profitability is universal, but efficient supply chain operations demand carefully orchestrated methods whereby information is shared along the entire supply chain spectrum, a feature that may be particularly lacking in the Libyan oil and gas industry where years of state-control and international sanctions have adversely affected the ability of supply chain managers to keep abreast of changes and current best practices in their field. For example, international analysts at Oxford Economic Forecasting (2009) report that, "Following various terrorist incidents, the U.S. responded with air strikes against targets in Libya and imposed economic sanctions. After Libya was implicated in the bombing of the Pan Am flight over Lockerbie, UN sanctions were imposed in 1992 and Gaddafi's refusal to comply with UN Security Council resolutions led to Libya's political and economic isolation for most of the 1990s" (p. 2). It was during this period in particular that increasingly sophisticated information technologies became available to help supply chain managers in the oil and gas industry more efficiently operate their systems, and the industry continues to play "catch up" with the rest of the world today.
The oil and gas industry in Libya is also directly reliant on global prices that are based on supply and demand; and any revenues generated at a given point in time depend in large part on how effective the supply chain is in mitigating the high costs of production and transporting the final product to customers (Nathan, 2008). Not surprisingly, supply chain management has assumed a new level of importance in recent years as companies of all sizes seek to improve their competitive advantage in an increasingly globalized marketplace (Nathan, 2008). Indeed, Nathan emphasizes that, "Greater economic rewards can be gained only with well-integrated global oil supply chain management" (2008, p. 15).
The goal of all supply chains, then, including those used in the worldwide oil and gas industry, is to provide a maximum return on value. The value that can be realized through more effective supply chain management techniques can make the difference between being able to provide consumers with products and services at a competitive price or not. For the majority of commercial supply chains, the value thus realized will be strongly associated with how efficient the supply chain is in increasing the revenue generated from the customer and reducing the overall costs across the entire supply chain (Nathan, 2008).
Purpose of Study
The purpose of this study was to provide a comparison between an American oil industry firm, Mobil, the world's largest publicly traded international oil and gas company (About us, 2010), in the field of supply chain management in the United States from the perspective of the Toyota supply chain approach. This analysis was then applied to a Libyan oil industry firm, Alwaha, to identify best industry practices for Alwaha in developing a more effective supply chain approach.
Importance of Study
It is clear that the globalization of Japanese automobile makers has influenced considerable changes in the automobile industries in those countries that host Japanese investments in this sector. Moreover, even in Europe, where Japanese automobile investment has been limited in terms of capital flows, Japanese models of production influence European makers. A large body of literature has treated many different aspects of these influences on Asia, Europe and the United States (Busser & Sadoi, 2003). The importance of the study relates to the current trends taking place in Libya where aggressive steps have been taken in recent years to normalize relations with the international community. For example, Libya opened up its programs to develop weapons of mass destruction to international scrutiny and renounced terrorism as a political tool (Libya, 2010). Moreover, the country's political leadership has been equally forthcoming in its efforts to normalize their relations with Western nations since 2003 (Libya, 2010). More recently, Libya has been removed from the U.S. State Department's list of states that sponsor terrorism in 2006 and in 2008, Libya joined the United Nations as a nonpermanent member on the UN Security Council during the 2008-2009 term (Libya, 2010).
Other signs that clearly point to increasing normalization and trade between Libya and the West were seen in August 2008 when it signed a bilateral comprehensive claims settlement agreement with the United States and Libya has paid $1.5 billion to be distributed to national claimants in the United States for past injuries (Libya, 2010). Finally, as a clear indication that relations between Libya and the West in general and the United States in particular had normalized was the exchange of ambassadors in 2009, the first such diplomatic representation in each other's country since 1973 (Libya, 2010).
The importance of the study also relates to the fact that the economy of Libya is overwhelmingly reliant on revenues from the oil sector, account for fully 95% of the country's export earnings, as well as representing a quarter of Libya's GDP and 60% of its public sector wages (Libya, 2010). In fact, Libya is Africa's largest oil producer (Williams, 2009). According to a recent report from Petroleum Intelligence Weekly (2010), "Tracking down new oil and gas volumes likely to emerge from Libya and Algeria in the near future is tricky business: Big discoveries have been few in both countries, while in Libya, development work has advanced slowly under contracts renegotiated in 2007-09" (New flows hard to find in Libya, Algeria, 2010, para. 2). Despite these constraints, the oil industry in Libya is poised to take advantage of investments in exploration and development and has the natural resources to provide new production levels in the future. In this regard, analysts at Libya Onlne report, "Signs of life lurk, however. The U.S. partners at Libya's Waha concession, ConocoPhillips, Marathon and Hess, expect their Faregh Phase 2 project to yield 180 million cubic feet per day of gas for local use starting early next year, plus 15,000 barrels per day of liquids. Overall Waha oil output is set to rise to 400,000 b/d in 2011 after lingering for years at just over 350,000 b/d" (New flows hard to find in Libya, Algeria, 2010, para. 3). According to a recent press release from Al-Waha, "Faregh oil and gas field has recently become operational. This newest oil field is situated about 60 km to the south west of Gialo oil field. The Faregh field was first discovered in 1962 but because of the complex geological nature of the field and due to economic reasons, the field was left undeveloped by the company at that time. On the First of September 2003, completion of the first phase was celebrated. Faregh field development of phase II has already started. Basic and detailed engineering are in progress" (Recent achievements, 2010, para. 1).
There is also a glaring need for improved supply chain management practices throughout the country's oil and gas industry to help maximize the efficiency of these operations in order to provide a return on investment that can be used to help improve the quality of life for the average Libyan citizen. In the past, the majority of the revenues realized through Libya's oil and gas industry have been used to bolster the socialist government that was in place, allowing it to prosecute a campaign of terrorism that made it an international pariah. Over the past few years, though, the Libyan political leadership has made substantive progress in reversing these trends in an effort to rejoin the international community and regain access to the commercial trade that goes with it (Libya, 2010).
To help achieve its political and social reforms, the Libyan government has announced an ambitious program to almost double the country's oil production to 3 million barrels a day by 2012; however, the National Oil Corporation of Libya recently indicated that this target might have to be postponed to as late as 2017 unless and until improvements in technology and logistics can be effected (Libya, 2010). Other analysts also cite the Libyan government's ambitious oil production goals as being part of its overall efforts to attract increased foreign direct investment (FDI). For instance, analysts with Oxford Economic Forecasting report that, "The government is seeking greater FDI in oil and gas, hoping to raise oil production to 3 million barrels/day by 2013 from the current 1 .65 million barrels/day in order to fund its ambitious development plans" (Libya, 2009, p. 2). Moreover, these analysts believe that even with attempts to renegotiate production contracts with foreign firms, foreign oil companies will remain enthusiastic about the Libyan market as the "next big thing" in the region.
Clearly, the need for a set of best practices that can be applied to Libya's oil and gas industry is now and time is of the essence in helping the country achieve its goals of increasing oil production to help its nation's citizenry. According to analysts with the U.S. government, all signs point to continuing efforts on the part of the Libyan political leadership to sustain normalized relations with the West: "Libya faces a long road ahead in liberalizing the socialist-oriented economy, but initial steps - including applying for WTO membership, reducing some subsidies, and announcing plans for privatization - are laying the groundwork for a transition to a more market-based economy" (Libya, 2010, para. 3). The revenues generated by the Libyan oil and gas industry will also help fund the country's enormous investments in its tourism sector as part of an effort to diversify the nation's economy. According to a recent report from Williams (2009), "The blessings of a strong oil and gas industry -- Libya is North Africa's biggest oil exporter -- do confer some benefits to the tourism sector" (p. 39). This analyst suggests that these benefits are two-fold:
1. Given the vast revenues that accrue to the state from hydrocarbons, Libya can afford to build its tourism industry carefully; and,
2. Expatriates working in the oil and gas industry already represent a significant element of a growing domestic tourist sector, i.e. residents joining Libyans who take leisure time to explore the country's many attractions (Williams, 2009, p 39).
Pursuant to this overall national plan to increase its oil and gas production while simultaneously diversifying its economic base, the Libyan government has become absolutely enthusiastic about embracing expertise from the West in ways that represent a sea change in political views, but which also represent the focus of the study proposed herein, the conceptual framework of which is discussed further below.
Conceptual framework. The conceptual framework to be used in this analysis is that there is a best way of doing anything and that a set of best practices can be discerned from the methods being used by successful larger corporations that can be scaled to meet the needs of small- to medium-sized enterprises as well. This conceptual framework is congruent with a wide range of researchers who have used comparable approaches to identify a set of best practices for various industries and settings, including Kim (2000) who used both primary and secondary research to develop a set of best practices in building online communities. Likewise, Collet-Klingenberg (1998) used qualitative case study and quantitative methodologies to formulate a set of best practices for educators in transition classrooms, and Petr and Walter (2005) employed what they called a "best practices inquiry" that was based on primary sources as well as qualitative analysis. In addition, Baldwin, Camm, Cook and Moore (2002) provide a series of case studies of innovative commercial firms to develop a series of best purchasing and supply management practices. Likewise, Thierauf and Hoctor (2003) emphasize the major oil producers such as Mobil rely on identifying best practices to improve their competitive advantage, even if these best practices are identified in other industries. For instance, these authors note that, "An important way to judge the performance of a company is not only to compare it with other units within the company -- using KPIs and financial ratios (as noted above) -- but also with outsiders that represent the best industry practices. Commonly, this technique is called benchmarking where a company can take a look at its industry in order to get an idea of the product or service gap in meeting customer needs" (Thierauf & Hoctor, 2003, p. 277).
The conceptual framework used in this study therefore relates to identifying best industry practices developed by recognized industry leaders that can be used by Alwaha Oil to streamline its supply chain management practices. Clearly, it may not possible or even feasible to transfer best practices from one setting to another in a wholesale fashion, particularly when there are significant cross-cultural factors that must be considered, but it may be possible for Alwaha and similarly situated companies competing in the oil and gas industry to gain some valuable insights concerning what practices might be most suitable for their unique situations and take advantage of the hard-earned lessons gained from past experiences. For instance, benchmarking represents one such best industry practice that has built on the well established principle that in order to improve something, it must first be measured. In this regard, Thierauf and Hoctor cite Xerox's experiences with introduction of benchmarking practices into their own corporate structure based on effective Japanese models that have emerged during the late 20th century. For instance, these authors note that following Xerox's initial experiences with benchmarking, the company's leadership found the practice so useful they ordered it expanded to all of Xerox's cost centers and units (Thierauf & Hoctor, 2003).
Currently, there is another approach to traditional benchmarking practices that could serve as a model for companies such as Alwaha. In this alternative approach, companies identify problems or opportunities and then search for similarly situated companies that have developed effective solutions and then seek to learn from these operations (Thierauf & Hoctor, 2003). For example, Thierauf and Hoctor cite the case of Mobil Oil Corporation's effort to refine its supply chain operations based on best industry practices used by other company that may or may not be directly involved in the same type of commercial pursuits. In this regard, Thierauf and Hoctor emphasize that, "Rather than trying to copy the practices of other companies directly, they are looking for useful analogies, hoping thereby to generate creative ideas for their own operations. For example, when the Mobil Corporation wanted to remake its 8,000 service stations, it studied Home Depot to determine why the retail chain's customers were so loyal, and it studied the pit-stop crew for Team Penske race cars to learn about quick turnaround" (2003, p. 278). Certainly, it was not possible or feasible for Mobil to adopt these pit-stop crew turnaround practices in a wholesale fashion, but the practices did serve as the basis for innovative thinking that resulted in improvements in other supply chain areas at Mobil. According to Thierauf and Hoctor, "While service stations obviously could not replicate the tactics of the Penske crew, Mobil used this experience to generate creative thinking on the concept of minimal time in the pit. It was the experience that led to the introduction of the Speed Pass, Mobil's wave-it-at-the-gas-pump credit system. Similarly, other companies have tapped dissimilar businesses for quick insights and learning" (2003, p. 278).
Therefore, the conceptual framework used in this study is based on this ability of companies of one type of gain important insights and valuable corporate knowledge from other companies that can be applied to their own unique circumstances. More importantly, perhaps, the political leadership and the oil and gas industry executives in Libya currently appear to be highly motivated to review such a set of best practices for their supply chain operations (Williams, 2009). The need for a modernized oil and gas supply chain infrastructure in Libya is clear. For example, Ford (2002) reports that, "The Libyan political leadership continues to encourage foreign investment in the oil and gas sector. However, efforts by the country to maintain and increase its share of the OPEC pie will require steady increases in production capacity over the coming decade" (p. 52). Achieving this level of production increase will require a concomitant improvement in Al-Waha Oil Company's supply chain management practices in line with current best practices, wherever they may be found. In this regard Min, Kim and Chen (2008) cite the recent trends that have been reshaping the business environment in which oil companies compete and note, "Ever-increasing competition and globalization has made it harder for individual firms to satisfy the needs of their demanding customers. Firms therefore look for ways to coordinate the flows of raw materials and finished goods efficiently and have become closely interdependent with supply chain partners" (p. 283). A clear indication of this business trend has been a corresponding relational paradigm shift that has included transactional to relational and dyadic to multiple interfirm networks; therefore, more effective supply chain management practices represent such a new paradigm, in which firms take a systems approach to managing a supply chain as a single entity rather than a set of fragments with the ultimate goal of synchronizing supply chain activities across partners to create more customer value than competing supply chains are capable of delivering (Min et al., 2008).
As noted above, the stated goal for the Libyan oil and gas industry is to almost double production within the next year-and-a-half, a goal that may not be achievable unless the Libyan oil and gas industry takes advantage of every opportunity to improve the efficiency of its operations, a harsh reality that has become abundantly apparent to the country's political leadership. For instance, Ford also notes that, "President Muammar Gadaffi now appears to recognize that foreign expertise and investment is required to make the most of Libya's underdeveloped fields and to boost exploration efforts" (p. 53). Taken together, the foregoing trends and issues suggest that the conceptual framework of identifying best practices in supply chain management wherever they can be found irrespective of the industry represents a viable approach to achieving the above-stated research purpose and formulating informed views concerning a current set of such practices that can applied to the unique business environment in which Al-Waha Oil Company competes today.
Rationale of Study
Even under optimum circumstances, the discovery, production and delivery of petroleum products is an enormously expensive undertaking, and the situation is no different in Libya today where opportunities for improvement exist in virtually every business sector. According to a recent report from Petroleum Intelligence Weekly (2010), "Tracking down new oil and gas volumes likely to emerge from Libya and Algeria in the near future is tricky business: Big discoveries have been few in both countries, while in Libya, development work has advanced slowly under contracts renegotiated in 2007-09" (New flows hard to find in Libya, Algeria, 2010, para. 2). Despite these constraints, the oil industry in Libya is poised to take advantage of investments in exploration and development and has the natural resources to provide new production levels in the future. In this regard, analysts at Libya Onlne report, "Signs of life lurk, however. The U.S. partners at Libya's Waha concession, ConocoPhillips, Marathon and Hess, expect their Faregh Phase 2 project to yield 180 million cubic feet per day of gas for local use starting early next year, plus 15,000 barrels per day of liquids. Overall Waha oil output is set to rise to 400,000 b/d in 2011 after lingering for years at just over 350,000 b/d" (New flows hard to find in Libya, Algeria, 2010, para. 3). Therefore, time is of the essence and the petroleum industry in Libya is currently faced with the need to take advantage of best industry practices wherever they may be found, making this investigation timely and relevant for a wide range of stakeholders.
Overview of Study
This study used a five-chapter format to achieve the above-stated research purpose. To this end, chapter one of the proposed study will be used to introduce the topics under consideration, provide a statement of the problem, the purpose and importance of the study, as well as its scope, rationale and definitions of key terms used. Chapter two of the study provides a critical review of the relevant and peer-reviewed literature concerning supply chain management practices and best industry practices, and chapter three describes more fully the study's methodology, together with a description of the study approach, the data-gathering method and the database of study consulted. Chapter four of the study consists of an analysis of the data developed during the research process and chapter five presents the study's conclusions, a summary of the research and salient recommendations.
Definition of Key Terms
Term
Definition
Alwaha or Waha
Al-Waha Oil Company
bbl/d
This abbreviation means "barrels per day," with reference to the rate of crude oil production.
Downstream
This term refers to the level of the petroleum supply chain that involves refining of crude oil into finished product, the storage of crude oil, and the distribution and marketing of crude oil to wholesalers and retailers (Page et al., 2009).
EOR
This acronym refers to Enhanced Oil Recovery methods that are use to extract additional oil from matured wells.
Midstream
This term refers to the production level of the petroleum supply chain that includes the transportation and trading of crude oil to refineries (Page et al., 2009).
OPEC
This acronym stands for the Organization of Petroleum Exporting Countries.
Upstream
This term refers to the level of the petroleum supply chain that includes the exploration, drilling, and production of crude oil (Page et al., 2009).
CHAPTER 2: REVIEW of RELATED LITERATURE
Chapter Introduction
This chapter provides a review of the relevant peer-reviewed, scholarly, governmental and organizational literature concerning supply chain management issues affecting the petroleum industry in general, as well as specific supply chain management practices based on the Toyota Production System and supply chain management practices as Mobil Oil. An overview of the oil industry in Libya today is followed by a brief summary of the literature review findings.
Supply Chain Management in the Petroleum Industry
Finding, extracting, processing and delivering petroleum products to market represents a costly but essential process in an energy-hungry world. Indeed, energy is the driving force behind global supply chains and a representative oil supply chain involves a number of actors, including the crude oil producer, the refiner, the transporter, the retailer and ultimately the consumer. At some stages of the supply chain, value added activities are involved. For instance, "The values (revenue opportunities) are added by processing and chemically changing the crude oil, which is called 'refining'" (Nathan, 2008, p. 15). The refining process typically produces a wide range of mainstream petroleum products from a 42-gallon barrel of crude oil (i.e., gasoline, fuel oil, aviation fuel, lubricants, etc.), but the process is only profitable if the supply chain is efficient (Nathan, 2008).
As illustrated in Figure 1 below, the global oil industry operates on three different levels:
1. Upstream: This level includes the exploration, drilling, and production of crude oil;
2. Midstream: This level includes the transportation and trading of crude oil to refineries;
3. Downstream: This level involves refining of crude oil into finished product, the storage of crude oil, and the distribution and marketing of crude oil to wholesalers and retailers.
These three foregoing levels comprise the primary segments of the global petroleum supply chain (Page et al., 2009).
Figure 1. Oil supply chain
Source: Source: www.dwasolutions.com/images/OilSupplyChain.jpg
The aggregate levels of oil production are based on global demand levels; however, the value chain illustrated in Figure 1 above is producer-driven (Page et al., 2009). Moreover, a number of firms competing in this value chain are vertically integrated and therefore enjoy control of each level in the petroleum supply chain. According to Page and his associates, "Integrated oil companies are the largest and most profitable companies in the industry, and outside of the United States they are either publicly or nationally owned. The largest oil company in the world, Saudi Aramco, is nationally owned and is Saudi Arabia's primary source of income" (2009, p. 3). There are currently six major publicly owned integrated public companies competing in the global petroleum market: ExxonMobil, Royal Dutch Shell, BP, Chevron, Total S.A., and ConocoPhillips; these corporations are known as the so-called "supermajors," and these six firms dominate the market (Page et al., 2009).
Table 2 below shows how the formation of the supermajors has taken place in recent years following major mergers that have introduced fundamental restructuring to the oil industry. As a result of these mergers, oil companies have been able to minimize expenses and achieve more competitive advantage while growing their share of the market (Page et al., 2009). In 2002, Phillips Petroleum merged with Conoco into the supermajor ConocoPhillips; this new incarnation has an estimated refining capacity of more than 2.5 million barrels per day making it the largest refiner in the United States (Page et al., 2009).
Moreover, there are also three other supermajors that have a significant market share in the refining process (Page et al., 2009) as shown in Table 2 below.
Table 2
Mergers Concentrate the U.S. Oil Refinery Industry: Changes in Control of Market Share 1993 to 2005
Company
Market Share
ConocoPhillips-Tosco-Burlington Resources
12.8%
Valero-Ultramar-Diamond Shamrock-Orion Refining-Premcor-TPI
12.6%
ExxonMobil-Chalmette
11.7%
Shell-Motiva-Equilon-Pennzoil-Quaker State-Deer Park
9.3%
BP
8.5%
Source: Page et al., 2009.
Figure 2. Respective Market Shares of Supermajors
Source: Based on tabular data in Page et al., 2009
In recent years, trends in the petroleum industry have shown oil companies taking part in mergers in an effort to increase their upstream levels rather than their downstream levels and these trends have affected the value-added phases of the supply chain. As a result, refining capacity has received less attention compared to exploration and production segments of the oil value chain (Page et al., 2009). As examples of these trends, Page and his colleagues cite the acquisition of Burlington Resources by ConocoPhillips in 2006, a move intended to increase the company's oil reserves. Likewise, Chevron, another supermajor, acquired Unocal Corp., another upstream producer, in an effort to replenish its dwindling reserve levels (Page et al., 2009). Industry analysts have found that spending on global upstream capital amounted to $277 billion in 2005 alone, representing an increase of almost one-third (31%) over 2004, with the majority of the extra investments being focused on exploration and development (Page et al., 2009).
Recent mergers have continued these trends as well. For example, an $88 billion merger in 1999 between Exxon and Mobil resulted in the new firm, ExxonMobil, becoming the largest publicly owned company in the petroleum industry (Page et al., 2009). According to these authorities, "As of April 2007, [ExxonMobil] has the highest revenue in comparison to the other supermajors and integrated, public companies. In addition, ExxonMobil has the highest net income in the industry. In 2006, ExxonMobil posted the largest annual profit in history ever earned by a U.S. company of $39.5 billion which surpassed its own previous record set in 2005" (Page et al., 2009, p. 4). The second runner-up in the industry in terms of revenue, Royal Dutch Shell, also enjoyed unprecedented profits during 2006 (Page et al., 2009).
Notwithstanding these recent trends in consolidation and integration throughout the industry that have proven highly effective, the growth -- and profitability -- of these supermajors is being increasingly challenged by national companies. In this regard, Page and his associates report that, "In the rankings of the top 20 oil companies in 2005, ExxonMobil was ranked second after Saudi Aramco, and there were four other nationally owned companies in Venezuela, Iran, Mexico, and China that were ranked in the top 10. It is also evident in this table that the national companies located in Saudi Arabia, Venezuela, Iran, Kuwait, and the UAE have access to significantly more oil reserves then any of the top ranked public companies" (2009, p. 4). While a number of dynamic forces can affect the profitability of oil producers during different economic periods, some static features cannot be changed and these are the types of competitive advantages being enjoyed by the national companies compared to the supermajors. For instance, Page et al. note that, "Saudi Aramco has reserves equivalent to over twenty times those of ExxonMobil. This gives the national companies a competitive advantage because they are able to extract oil from conventional sources. The supermajors now have to develop new technology and turn to expensive sources of oil supply where extraction is more difficult" (2009, p. 4). Although ExxonMobil possess the largest refining capacity as well as the largest product sales compared to all the other top-ranked companies in the petroleum industry, these trends will clearly have a significant effect on the long-term profitability of these enterprises (Page et al., 2009). This means that companies competing in the oil industry must gain competitive advantage wherever it can be found, including a more efficient supply chain as exemplified by Toyota's approach which is discussed further below.
Supply Chain Management at Toyota
Supply chain management experienced some fundamental changes during the latter half of the 20th century that would have a profound effect on management practices that continue to the present. These changes became especially pronounced during the 1970s, when Japanese manufacturers in general and automobile companies such as Toyota in particular, deployed assembly lines that were capable of manufacturing multiple models of automobiles and trucks on the same assembly line in a process that became known as the "Toyota System" (Cortada, 2004, p. 97). Some of the distinguishing characteristics of the Toyota System included the following:
1. The process for changing dies (the molds that bend sheets of metal into body parts) also was altered;
2. Workers were given more responsibility in controlling the rate of production, even the authority to stop a production line; and,
3. Workers were organized into teams to improve throughput efficiencies (Cortada, 2004, p. 97).
Thereafter, Toyota as well as other Japanese companies began integrating their suppliers into the production process by assigning them schedules for manufacturing and corresponding materials requirements, requiring suppliers to deliver only the parts that were needed for a specific production run (such as the number of windshields that would be required for a single day's production of a given vehicle model). According to Cortada, "That change alone increasingly shifted inventory control responsibilities away from the production center and put it more on the shoulders of the parts suppliers. It also called for a larger sharing of inventory and production planning data with other companies and other plants. In turn, that meant new software applications were needed to replace more traditional inventory control systems" (2004, p. 97).
The Toyota System gained momentum during the 1980s when innovations in technology, especially in computer- and later, Web-based applications, helped facilitate the concept even further. For instance, Cortada reports that:
During the 1980s, all kinds of new technologies were embedded in this approach, such as scanners to read United Parcel Service (UPS) labels, personal computers, and a variety of sensors. By the late 1980s, this approach was being implemented in all American manufacturing industries, especially in the Automotive Industry, where joint partnerships and partial ownership of Japanese firms were created to share expertise. By the 1990s, Japanese inventory control practices had resulted in an expansion in knowledge about supply chain management (Cortada, 2004, p. 97)
Based on the solid successes being enjoyed by the Japanese in the use of the Toyota System, companies in the West increasingly began to examine the approach to see what it could offer them. In this regard, Busser and Sadoi (2003) report that, "The well-known MIT study 'The Machine That Changed the World' stressed that the Toyota-style 'lean production system' was superior to any other production system in the industry. The overriding sentiment in the automobile sector was that it was hard to fight the Japanese competitors, and a supposedly Japanese model of production became the standard" (p. 1). The innovative techniques pioneered the way for other companies in the United States and elsewhere to implement similar methods in their other supply chain management operations, with mixed results but with Toyota consistently being cited as the source of their success -- or failure. Indeed, Larson, Poist and Halldorsson (2007) emphasize that, "It can be argued that a great deal of supply chain management practice today appears to be nothing more than an attempt to replicate, in a variety of product and service supply chains, the approach to external resource management originally pioneered by Toyota" (p. 1).
The primary motivation for evaluating the Toyota System or any other alternative that stands to produce improvements in supply chain management is the need to reduce or even eliminate all waste from the system because waste detracts from all resources and does not add any value to the system (Tersine, 2004). According to Tersine, "Generally, waste is anything that does not add value from the customer's perspective or consumes more time than is necessary. Reducing waste can improve customer service using fewer resources. It can improve the top line (increase sales) along with the bottom line (raise profits). Anytime revenues can be increased and costs reduced simultaneously there is a positive compounding effect on performance" (2004, p. 16).
In fact, this focus on eliminating waste and adding value wherever possible was part and parcel of the original Toyota System. According to Tersine, "While working at Toyota, Taiichi Ohno identified two kinds of activities: value-adding activities and non-value-added activities. Activities that do not add any value are simply waste and should become targets for elimination" (2004, p. 16). From this perspective, waste falls into one of seven categories:
1. Waste of overproduction (unnecessary work) -- cease producing above needs and building excess inventories.
2. Waste of waiting (delays) -- eliminate idle time by balancing the workload.
3. Waste in transportation -- plan workplace layout and flow without unnecessary materials handling.
4. Waste of processing -- reduce faulty work methods and procedures so flow times are faster.
5. Waste of inventory -- eliminate the excess investment of stockpiling extra inventory.
6. Waste of movement -- reduce wasted motions of human efforts.
7. Waste of rejects (unsatisfactory work) -- implement fail-safe procedures and quality mechanisms to deal with defect prevention/detection/correction (Tersine, 2004, p. 17).
Consequently, from this perspective, waste in the supply chain represents any type of activity that requires time, resources, and/or space but fails to address internal or external customer needs (Tersine, 2004). In sum, waste is "anything other than the minimum amount of time, material, equipment, information, and space essential to add value to the product. Excess inventory, setup, rework, moving, handling, inspecting, expediting, prioritizing, and queue time can be considered waste" (Tersine, 2004, p. 17). In addition, waste is self-replicating: "Waste tends to proliferate and generate ancillary or secondary support wastes. It acts like weeds in a garden -- if not removed, waste thrives and multiplies, eventually crowding out operational effectiveness (Tersine, 2004, p. 16). The elimination of waste from the supply chain and the introduction of value-added activities in their stead just make good business sense, of course, but the process is typically complex and any changes must be carefully aligned with the corporate goal of waste elimination and the addition of value-added activities in a coordinated fashion. Because these types of initiatives are usually required to be implemented without disrupting existing operations, the coordination of these changes will inevitably involve other actors in the supply chain. This intersection of supply chain activities can then serve as the basis for yet another evaluation of whether waste exists and opportunities for incorporating value-added activities exist. This process is an essential element of the current best industry practices for streamlining supply chains. As Tersine points out:
Valueless activities not only consume resources that can be better utilized to create value, they also waste time. Scrap, re-work, repair, additional inspection, expediting, prioritizing, and crisis problem solving are wasteful practices that elevate costs. Some non-value-added activities may be necessary to support value-added activities, but they should be performed in a manner that does not inhibit operational flow nor encumber more than minimal resources. Increasingly, firms are outsourcing parts and services previously provided internally in order to reallocate resources around core competencies. (2004, p. 16)
The increasingly popular lean production and lean thinking approach is based on the Toyota System; this extension focuses on eliminating waste from a production system (Lowson, 2002). According to Lowson, "The lean operations strategy uses less of everything - half the human effort in the factory, half the manufacturing space, half the investment in tools, half the engineering hours to develop a new product in half the time. Also, it requires keeping far less than half the inventory on site, and results in many fewer defects, and produces a greater and ever growing variety of products" (2002, p. 78). Indeed, some proponents of the Toyota System-based lean production and thinking approach suggest that it represents a universal best industry practice that can be "applied equally in every industry across the globe" (Lowson, 2002, p. al. 1990). As noted throughout the literature on best industry practices, though, there are few if any "one-size-fits-all" approaches that can be applied across the board, and this constraint is emphasized by Lowson as well: "Unfortunately, such naivety has attracted many critics who point to its failure to recognize the contingency or context-specific factors of each organizational situation, its linear assumptions, and generalized, stereotypical, homogeneous ideas. Nevertheless, the approach does have its advantages in high volume, mass production markets. Its utility for more complex, flexible and fast moving markets populated by small- to medium-sized enterprises has to be doubted" (2002, p. 78).
Furthermore, some authorities suggest that it is possible to take the lean thinking approach too far in ways that hamper overall growth and agility. For instance, according to Hochman and Cerere (2006), "Lean thinking has evolved and continues to capture new converts. Experienced practitioners have come to the startling realization that they've 'leaned out' the supply network agility that they now need to be responsive to -- and even shape -- demand in today's highly volatile markets" (p. 2). Certainly, just because some companies have failed to reap the numerous benefits that can accrue to the use of the Toyota System does not mean that it is unworthy of evaluation for best practices; however, it does mean that the tenets of lean thinking and lean production must be deployed in thoughtful ways that take advantage of these benefits while minimizing the nonvalue-added activities that are involved in the supply chain. In this regard, Hochman and Cerere make this point by asking, "Does this mean it's time to abandon lean thinking, just when it appears to be on the cusp of mass adoption?," and then answering, "Of course not" (2006, p. 2). The final point made above is also included by Hochman and Cerere in their assertion that, "It is time to augment lean thinking with a proactive approach to confront the real-world tradeoffs inherent in extended global supply networks, building on lean principles to power the transformation to more profitable demand-driven strategies" (2006, p. 2).
Fortunately, there are some general best practices available concerning how to identify non-value added activities that can be used by Al-Waha and similarly situated enterprises to improve their supply chain management practices. A general approach to process improvement typically involves a number of complex tasks, though, and implementation of the redesigned process is an ongoing process that remains subject to continuous improvement (Donovan, 2006). In addition, there is a need for continuous performance measurement to ensure that additional opportunities for improvement are identified (Donovan, 2006). The process of value-stream mapping evaluates the process as it currently exists with a view to determining what nonvalue-added activities exist along the supply chain, including those involving information and material queues, bottlenecks, and other potential constraints to productivity (Donovan, 2006). Depending on the circumstances, companies have a wide range of well-established tools available to conduct this initial evaluation; the most critical part of the analysis, though, is developing timely and accurate answers to questions such as:
1. Which steps in the process add real value and which do not?
2. Where are the queues and bottlenecks in the process?
3. What does each step in the process cost?
4. What is the cost of the total process?
5. In deciding on a process redesign, which business improvement objectives should drive the redesign choice?
6. If the process being value-stream mapped is a part of the supply chain, which parts of it need to be redesigned to improve supply chain management effectiveness?
7. How can material, information, and workflows be more effectively integrated to improve the process in the "will be" process redesign? Example: Order-to-Delivery a process redesign team assigned to analyze the company's order-to-delivery process would answer the above questions in order to determine which parts of the process -- which tasks and activities, functions, and sub-processes -- have created unacceptable performance for the company (Donovan, 2006, p. 10).
Some representative the questions that should be answered by the responsible team include the following:
1. What are the opportunities to significantly reduce cycle time? Which activities, sub-processes, and functions are responsible for excessive cycle time and why?
2. Where can improvements be made in the quality of information, the speed at which it moves through the process, and the effectiveness with which it is used? Which activities, sub-processes, and functions are performance barriers? How? Why?
3. What policies, procedures, practices, and information systems are in need of change to improve the process?
4. How are they impairing the process at present and how specifically do they need to be changed?
5. If an important goal is to shift to lean manufacturing from traditional batch production to improve the flow of the order-to-delivery process, how can this best be achieved? (Donovan, 2006, pp. 6-7).
Following the foregoing value-stream mapping evaluation, redesign teams should examine the "big picture" to determine where these different processes intersect within the organization and with other actors in the supply chain and assess whether these structures are optimal for satisfying internal and external customer requirements (Donovan, 2006). Some of these wasteful activities may be common sense-type opportunities for improvement, including reducing bureaucracy to a minimum and taking advantage of any information technology solutions that can facilitate the exchange of information. In this regard, Donovan notes that, "Reducing paperwork, cutting out unnecessary hand-offs, eliminating excessive special order expediting -- these are all examples of modest benefits that can be achieved very quickly. Given a little more time, you can achieve more dramatic reductions in order-to-delivery cycle time. You can also institute strategic sourcing to reduce costs" (2006, p. 7).
As a best industry practice, this general evaluation process used to achieve leaner supply chains is illustrated in Figure 3 below.
Figure 3. A Lean Supply Chain
Source: Donovan, 2006
Clearly, there are a number of best industry practices available that can be used to identify opportunities for improving a company's supply chain management practice, but an overarching feature that quickly emerges from the research is the need to carefully tailor these practices to the company's unique circumstances, which will include both internal (i.e., corporate culture, level of in-house management expertise, corporate vision, etc.) and external (i.e., economic conditions, level of political stability/instability, cross-cultural issues, etc.) factors, among others. While it is apparent that it is unlikely that any other company, even one competing in the automobile industry, could implement Toyota's supply chain management practices across the board without any fine tuning to take their unique circumstances into account, it is also apparent that some of the factors that appear to contribute to the company's success with its supply chain management practices bear further scrutiny to identify potential best practices for Al-Waha Oil Company. In the case of Toyota, these factors may include the manner in which Toyota and its leadership go about forging strategic relationships and partnerships with its primary trading partners, including the social aspects that are involved which are discussed further below.
In the context of supply chain relationships, companies currently may be highly engaged in a given supply chain for a variety of reasons, including motivation, arousal, and interest; in addition, companies along the entire chain may be actively involved with the supply chain's rituals, discussions, and decision making (Min et al., 2008). These activities serve to reinforce and support closer relationships between the supply chain players in ways that can lead to the mutual identification of opportunities for improvement. In this regard, Min et al. note that, "Such enduring involvement creates both emotional and cognitive interpersonal and interfirm bonds. Specifically, supply chain involvement may include rituals (e.g., developers' conference, sales convention, supplier network meeting, dealer association conference), discussions (e.g., technical support forum, supplier/distributor advisory council), or collaboration projects (e.g., new product development teams, supplier quality control teams)" (2008, p. 37). As an example, Min and his colleagues cite Rockwell Collins, a manufacturer competing in the avionics industry, and the company's supply chain partners (i.e., distributors, mechanical suppliers, direct and indirect materials suppliers); this company routinely conducts a "Supplier Alliance Advisory Council" meetings that are used to evaluate current market environments and supply chain performance (Min et al., 2008).
Likewise, DaimlerChrysler employ the company's "Quality Engineering Center (QEC)" in ways that are intended to facilitate supply chain-wide problem solving efforts, including the coordination resolution of supply chain constraints using collaboration and expertise from all supply chain partners (Min et al., 2008). According to these authorities, "These firms' long-term involvement with the supply chain helps them assess their emotional and rational process ownership and colleagueship within that supply chain, as well as the long-term profitability attributable to supply chain management. Such ongoing interest in and motivation toward a particular managed supply chain is more likely to lead a firm to establish and maintain supply chain identity salience" (Min et al., 2008, p. 37).
With respect to membership visibility, when individuals are visibly affiliated with an organization through activities such as a public organizational role or a public knowledge of organizational membership, their identity salience toward the organization becomes activated (Min et al., 2008). According to these authorities, "For example, membership visibility activates a person's social identification salience with an art museum. In a supply chain context, global companies have long used membership visibility with their supply chain partners, as when IBM designates a set of dealers as its 'business partners' and coordinates its marketing efforts within the business partner network. Toyota also promotes its supplier network, ToyotaSupplier.com in North America, to facilitate a strong sense of identity salience" (Min et al., 2008, p. 37). Taken together, the Toyota Production System and its ancillary lean supply chain management practices provide a solid foundation for a set of best industry practices for companies such as Al-Waha which may be searching for opportunities for improving their own practices, but some on-point guidance is also available from companies competing in the petroleum industry such as Mobil Oil Company, which is discussed further below.
ExxonMobil Oil Company
Today, ExxonMobil (hereinafter alternatively "Mobil" or "the company") is currently the world's largest publicly traded international oil and gas company. The company holds an industry-leading inventory of global oil and gas resources and is the world's largest refiner and marketer of petroleum products (Abous us, 2010). The company's supply chain ranges the entire spectrum of activities involved in the exploration, production, transportation, and sale of crude oil and natural gas (ExxonMobil, 2011). In addition, the company is actively engaged in the manufacture, transportation, and sale of petroleum-based products, including petrochemicals, olefins, aromatics, polyethylene and polypropylene plastics, and other specialty products (ExxonMobil, 2011). Beyond the foregoing interests, the company also has interests in electric power generation facilities (ExxonMobil, 2011).
The company operated 16,587 gross and 13,737 net operated wells at year-end 2009, with operations mostly in the United States, Canada, Europe, Africa, the Asia Pacific, the Middle East, Russia/Caspian region, and South America (ExxonMobil, 2011). The company was established in 1870 and is currently headquartered Irving, Texas (ExxonMobile, 2011). In addition, the company's chemical division ranks among the world's largest as well, but the corporate literature is quick to point out that, "We are also a technology company, applying science and innovation to find better, safer and cleaner ways to deliver the energy the world needs" (About us, 2010, para. 2).
In response to the trends discussed at length above, Mobil's supply chain management needs have been fundamentally altered in recent years. For instance, from a production standpoint, the company continues to expand its operations into uncharted territories, a process that is expensive and in which national companies enjoy a competitive advantage by virtue of their proximity to the reserves. In this regard, Pinder and Slack (2004) note that, "Many of the known offshore fields are in what are now considered relatively shallow regions. Taking 300 meters of water as the division between shallow and deep water, the industry journal Offshore currently estimates that 80 per cent of oil and gas reserves are shallow-water deposits. Even so, as the most recent World Deepwater Report highlights, the attractions of moving into deeper waters are very clear" (p. 167). In fact, Mobil may experience a five- or six-fold increase in its deep-water production in the near future; however, these gains can be achieved only if appropriate technologies and extraction methods are available, because these efforts involve activity that extends out into depths 2,500 meters or more (Pinder & Slack, 2004).
Like Toyota, Mobil has a longstanding presence in the Middle East. For example, Mobil's South Hook LNG Terminal is situated at the end of an integrated supply chain that delivers liquefied natural gas (LNG) from Qatar's North field, approximately 6,000 miles to the coast of Wales (From Qatar to Wales, 2010). This impressive delivery feat is part of the country's efforts to expand Qatar's operations into global markets, a process that has transformed Wales into a new energy center for the entire United Kingdom (From Qatar to Wales, 2010). One of the most impressive initiatives taken by the company in recent years is its collaborative initiative with its partner Qatar Petroleum to deploy new LNG tankers that can transport up to 80% more cargo than current conventional-size ships; in addition, these new vessels are far more energy efficient than conventional tankers (Tillerson, 2009).
The company also maintains an efficient, integrated supply chain throughout its far-flung global facilities that coordinates regional supply with regional demand and that cost efficiencies are realized wherever possible (Tillerson, 2009) in the same fashion as are achieved using the process improvement and waste-eliminating steps described above. In fact, the company uses a "value creation matrix" to evaluate all phases of its supply chain operations to ensure that wasteful activities are targeted for mitigation and opportunities for improvement are acted upon wherever possible (National content, 2008). Finally, the company is actively engaged in the exploration, extraction and production of petroleum-based products from the oil fields of Libya, and these issues are discussed further below.
Overview of Oil Industry in Libya Today
Much has changed for Libya over the past decade or so. For instance, following its announcement in December 2003 that it had agreed to reveal and end its programs to develop weapons of mass destruction and to renounce terrorism, Libya has made significant strides in normalizing relations with Western nations and the international community (Libya, 2010). The country has received various Western European leaders as well as many working-level and commercial delegations, and the nation's leader, Col. Muammar Abu Minyar al-Qadhafi has made his first trip to Western Europe in 15 years when he traveled to Brussels in April 2004 (Libya, 2010). Other signs that the political environment is changing in substantive ways can be discerned from the fact that the United States lift Libya's designation as a state sponsor of terrorism in June 2006 and a year and a half later, Libya assumed a nonpermanent seat on the UN Security Council for the 2008-09 term in January 2008 (Libya, 2010). In mid-2008, Libya and the United States entered into a bilateral comprehensive claims settlement agreement to compensate claimants in both countries who allege injury or death at the hands of the other country, including the LaBelle disco bombing, the Lockerbie bombing, and the UTA 772 bombing (Libya, 2010).
In addition, in late 2008, the U.S. government was awarded $1.5 billion as a result of the agreement to distribute to U.S. national claimants, and as a result effectively normalized bilateral relationship between Libya and America (Libya, 2010). As another sign of normalization, Libya and the U.S. exchanged ambassadors in January 2009, the first such exchange of diplomats since 1973 (Libya, 2010). Other signs of Libya's increasing widespread acceptance and integration back into the international community took place in February 2009, when Qadhafi took over the chairmanship of the African Union for the 2009-2010 term and a Libyan assumed the year-long presidency of UN General Assembly in September 2009 (Libya, 2010).
Like many countries in the Middle East/North Africa (MENA) region, the Libyan economy is heavily dependent on the oil sector for much of its revenues; in fact, the oil sector accounts for fully 95% of export earnings, 25% of GDP, and 60% of public sector wages (Libya, 2010). The Libyan economy has not been as resilient as some other oil-producing countries in the MENA region, and the ongoing Great Recession has been tough on the economic development initiatives throughout the country (Libya, 2010). Despite these developmental constraints, Libya still enjoys one of the highest per capita GDPs in Africa, due in large part to these oil-based revenues and a relatively small population; however, the general population in Libya has not shared in these oil revenues to any substantive extent (Libya, 2010). Nevertheless, long-term developmental initiatives stand to benefit the average Libyan citizen in the future, provided the country can manage its existing resources effectively during this critical period in its history. To this end, U.S. government analysts report that, "Libyan officials in the past five years have made progress on economic reforms as part of a broader campaign to reintegrate the country into the international fold. This effort picked up steam after UN sanctions were lifted in September 2003 and as Libya announced in December 2003 that it would abandon programs to build weapons of mass destruction" (Libya, 2010, p. 3). The diplomatic moves had an enormous effect on the Libyan oil and gas industry, and beginning in early 2004 and continuing until all sanctions against Libya were lifted by mid-2006, a period in which Libya attracted increased levels of foreign direct investment, particularly in the petroleum sector (Libya, 2010). Some of the more salient issues currently affecting the Libyan oil and gas industry include the following:
1. Libyan oil and gas licensing rounds continue to draw high international interest; the National Oil Corporation (NOC) set a goal of nearly doubling oil production to 3 million bbl/day by 2012.
2. In November 2009, the NOC announced that that target may slip to as late as 2017. Libya faces a long road ahead in liberalizing the socialist-oriented economy, but initial steps - including applying for WTO membership, reducing some subsidies, and announcing plans for privatization - are laying the groundwork for a transition to a more market-based economy.
3. The non-oil manufacturing and construction sectors, which account for more than 20% of GDP, have expanded from processing mostly agricultural products to include the production of petrochemicals, iron, steel, and aluminum.
4. Climatic conditions and poor soils severely limit agricultural output, and Libya imports about 75% of its food. Libya's primary agricultural water source remains the Great Manmade River Project, but significant resources are being invested in desalinization research to meet growing water demands (Libya, 2010).
As noted above, in spite of the political and social progress that has taken place in the country in recent years, Libya's economy remains heavily reliant on oil exports and its economic developmental initiatives require significant levels of energy as well (Libya analysis brief, 2010). According to the World Bank's analysis of Libya, the country's petroleum exports account for almost all of the total merchandize exports and the revenues generated by the Libyan oil and natural gas sectors are responsible for more than 50% of the country's gross domestic product. Following the lifting of sanctions against Libya during the period described above (2003-2006), multinational oil companies have accelerated exploration efforts for oil and natural gas in Libya and a growing number of enterprises have also resorted to enhanced oil recovery (EOR) methods to increase production at established and aging oil fields (Libya analysis brief, 2010). By 2013, Libya expects to see oil production capacity increase by 40% from 1.8 million barrels per day (bbl/d) to 3 million bbl/d (Libya analysis brief, 2010).
Like Saudi Arabia in the Middle East, in Africa, Libya has the largest proven oil reserves. e country hopes to increase oil production capacity through increasing exploration and enhanced oil recovery projects. As a member of the Organization of Petroleum Exporting Countries (OPEC), Libya's reserves place it as the OPEC member in Africa with the largest proven oil reserves, followed by Nigeria and Algeria (see Figure 4 below). According to the U.S. government Department of Energy, as of January 2007, Libya had total proven oil reserves of 41.5 billion barrels, an increase from 39.1 billion barrels in 2006 (Libya analysis brief, 2010). The vast majority (approximately 80%) of the proven oil reserves in Libya are situated in the Sirte basin, a region that accounts for 90% of Libya's oil output (Libya analysis brief, 2010). Industry experts emphasize that much of Libya remains "highly unexplored" and only about one-quarter of the country's oil-producing regions are currently covered by exploration agreements with multinational oil companies (Libya analysis brief, 2010). According to these analysts, "The under-exploration of Libya reflects the impact of former sanctions and also stringent fiscal terms imposed by Libya on foreign oil companies" (Libya analysis brief, 2010, p. 3).
Figure 4. Top Five Proven African Oil Reserve Holders as of 2007
Source: Libyan analysis brief, 2010, p. 4
Based on their projections, the Libyan National Oil Company (NOC) expects to increase oil production from 1.80 million bbl/d in 2006 to 2 million bbl/d by 2008 and to 3 million bbl/d by 2010-2013; however, achieving these projected production goals is dependent on NOC's ability to finance its share of development costs. In this regard, U.S. energy analysts report that, "Future foreign investment into the oil sector is likely, especially with the improved investment climate that stems from the United Nations and United States lifting sanctions" (Libyan analysis brief, 2010, p. 4). During the period in which UN and U.S. sanctions were in place, developmental initiatives, including EOR, were stagnated but the situation is far different doay. As these analysts conclude, "Previously, sanctions had caused delays in a number of field development and EOR projects and had deterred foreign capital investment. Overall, Libya is considered a highly attractive oil province due to its low cost of oil recovery (as low as $1 per barrel at some fields), the high quality of its oil, and its proximity to European markets" (Libyan analysis brief, 2010, p. 5).
As can be readily discerned from Figure 5 below, oil production levels in Libya have experienced a series of fits and starts during the period in which sanctions were in place compared to their lifting beginning in 2002-2004 through 2006 as the infrastructure was revitalized through foreign investment and joint efforts between the NOC and multinationals, the country's net exports and concomitant levels of domestic consumption continue to increase as well.
Figure 5. Libya's Oil Production and Consumption Levels: 1986-2006
Source: Libya analysis brief, 2010
Based on 2006 domestic consumption levels of 284,000 bbl/d, Libya had approximate net exports (including all liquids) of 1.525 million bbl/d; the overwhelming majority of oil exports from Libya are marketed to European countries including Italy (495,000 bbl/d), Germany (253,000 bbl/d), Spain (113,000) bbl/d and France (87,000 bbl/d) as shown in Figure 6 below.
Figure 6. Primary European Destinations for Libyan Oil Exports (bbl/d) as of 2006
Following the lifting of sanctions against Libya in 2004, there was a dramatic spike in the amount of oil exported to the United States. According to U.S. energy analyst, "The United States imported an average of 85,500 bbl/d of total Libyan oil exports in 2006, up from 56,000 bbl/d of oil imports in 2005" (Libyan analysis brief, 2010, p. 5) as shown in Figure 7 below.
Figure 7. International Destinations for Libyan Oil Exports and Respective Percentages
Source: Libyan analysis brief, 2010
For supply chain management purposes, it is significant to note that Libyan oil is typically light (e.g., high API gravity) and sweet (e.g., low sulfur content); however, oil produced in Libya can also be waxy and thick, with nine different export grades reflecting these differences currently being used (Libya analysis brief, 2010). The majority of Libyan oil is marketed on a term basis, including:
1. Libya's Oilinvest marketing network in Europe;
2. Companies like Agip, OMV, Repsol YPF, Tupras, CEPSA, and Total; and,
3. Small volumes to Asian and South African companies (Libya analysis brief, 2010).
Taken together, it is clear that Libya enjoys a number of advantages in the global oil industry today, particularly the country's geographic proximity to European markets as well as its access to global shipping lanes that facilitate exports. Realizing the full potential of these resources will require a careful assessment of what industry practices have proven effective in the Libyan oil industry in the past together with an evaluation of current best industry practices to determine where improvements in the country supply chain infrastructure can be made. To this end, an overview of the current developmental initiatives underway in Libya is presented in Table 3 below.
Table 3
Current Oil and Gas Industry Developmental Initiatives in Libya
Developmental Initiative
Description/Implications
Field Development and Exploration
With state-operated oil fields undergoing a 7-8% natural decline rate, Libya's challenge is maintaining production at mature fields, while finding new oil and developing new discoveries. In November 2005, Repsol YPF (operator) announced that it had discovered a significant new oil deposit of light, sweet crude that extends over two licenses in the Murzuq Basin. Industry experts believe the discovery to be one of the biggest made in Libya for several years. The discovery is partly located in license NC-186, which currently produces around 60,000 bbl/d. Production on the license is expected to increase over the next 4-year period (2007-2011) by 100,000 -- 150,000 bbl/d as oil from the discovery comes online. Repsol YPF is joined by a consortium of partners that includes OMV, Total and Norsk Hydro.
Also located in Murzuq Basin is Eni's Elephant field. In October 1997, an international consortium led by British company Lasmo, along with Eni and a group of five South Korean companies, announced that it had discovered large recoverable crude reserves (around 700 million barrels) at the NC-174 Block, 465 miles south of Tripoli. Lasmo, which was purchased by Eni in 2001, estimated that production from the field would cost around $1 per barrel. Elephant began production in February 2004 at around 10,000 bbl/d. In 2006, Eni indicated that Elephant was producing at around 125,000 bbl/d, and the company was hoping to see the field reach full capacity of 150,000 bbl/d by 2008.
On the exploration side, BP is spending $1.3bn to scour 14,000 sq km of Libyan desert (about the size of Kuwait) and 30,000sq km offshore for untapped oil. If successful, the venture could mean billions more for the British company whose assets were nationalised 33 years earlier by the Qaddafi regime. "From an exploration standpoint, I couldn't be in a better place," said Hugh McDowell, president and general manager of BP Exploration Libya Ltd. "There's a lot of hope that we can take Libya to the next level. We'd be happy either way -- whether we find oil or gas -- because that would put Libya in a strategic position to supply gas to Europe." McDowell confirmed BP Libya currently has 70 employees, and will probably have 120 by the time it starts drilling in 2011. "BP was here back in the late 1960s. We discovered the largest fields in the country," he said. "After being absent for a long time -- more than 30 years -- we came back at the end of 2007 and have been on the ground since early last year, carrying out exploration. So far, we've invested only lo% of that $1.3bn, with the lion's share to come over the next seven years." Likewise, in July, U.S. oil giant ExxonMobil announced it had begun drilling its first deepwater exploration well, code-named A1-20/3, in the offshore Sirte Basin.
Downstream, there is great interest in petrochemicals, refineries and service stations. In April 2007, NOC and Dow Chemical announced the formation of a venture to operate and expand the Ras Lanuf petrochemical complex just east of the Essider oil terminal. That venture, whose dollar value hasn't been released, gives the largest U.S. chemical company easier access to European markets and provides it with cheaper feedstocks, helping Dow compete in polyethylene production against other Middle Eastern chemical producers.
The industry, though, is said to suffer significant infrastructure problems. Libya's refining capacity has remained relatively constant at around 380,000 bpd -- only a fraction of its daily production levels of 1.8m bpd. Dr. Shokri Ghanem, chairman of the state-run National Oil Corporation, said in early 2007 that Libya would have to invest $9 billion in refineries, petrochemical plants and fertilizer factories in order to fix the most urgent problems. Other NOC sources quoted by local media said the actual costs may be double that, though specific details of timing and possible foreign involvement in that sector have not been announced.
While McDowell declined to get into politics, he did say one of the biggest issues confronting Libya is the development of oil as a national industry. "For 30 years, they really struggled to get training and international support," he said. "During that time, the oil and gas industry moved into a different world, and health and safety became a huge factor. There's a great need to develop manpower." To that end, BP has made a $50 million commitment to help NOC develop its personnel through training and education. "This is a very large project for BP. We're in exploration, so the future's ahead of us," said the oilman, who worked in Azerbaijan before coming to Libya. "It's a bit like the countries of the former Soviet Union -- off-limits for a long time, and now we're back. But we have to go through the exploration side of it first. There are no guarantees here" (quoted in Luxner, 2009, at p. 47).
Refining and Downstream
Libya's refining sector needs upgrading after years of sanctions. According to OGJ, Libya has five domestic refineries, with a combined capacity of 378,000 bbl/d. Libya's refineries include: 1) the Ras Lanuf export refinery, completed in 1984 and located on the Gulf of Sirte, with a crude oil refining capacity of 220,000 bbl/d; 2) the Az Zawiya refinery, completed in 1974 and located in northwestern Libya, with crude processing capacity of 120,000 bbl/d; 3) the Tobruk refinery, with crude capacity of 20,000 bbl/d; 4) Brega, the oldest refinery in Libya, located near Tobruk with crude capacity of 10,000 bbl/d; and 5) Sarir, a topping facility with 8,000 bbl/d of capacity.
Libya's refining sector reportedly was impacted by UN sanctions, specifically UN Resolution 883 of November 11, 1993, which banned Libya from importing refinery equipment. Libya is seeking a comprehensive upgrade to its entire refining system, with a particular aim of increasing output of gasoline and other light products (i.e. jet fuel). As of early June 2007, NOC was evaluating investment proposals for upgrading the Ras Lanuf refinery. Total cost of the upgrade is estimated at $2 billion. NOC is also expected to re-tender an engineering, procurement and construction contract for upgrading the Az Zawiya refinery. In addition to refinery upgrades, Tamoil Africa and Occidental Petroleum Corporation reportedly have plans to build new refineries near Melitah.
Overseas Investment
In addition to its domestic refineries, Libya has operations in Europe through its overseas oil retail arm, Tamoil. Through Tamoil, Libya is a direct producer and distributor of refined products in Italy, Germany, Switzerland, and Egypt. Tamoil Italia, based in Milan, controls about 7.5% of Italy's retail market for oil products and lubricants, which are distributed through 3,000 Tamoil service stations. Libya's ability to increase the supply of oil products to European markets has been constrained by the fact that Libya's refineries are in need of upgrading, specifically in order to meet stricter EU environmental standards in place since 1996. In June 2007, United States-based Colony Capital reached an agreement to take over 65% of Tamoil, while the Libyan government will retain 35%. Libya will continue to control Tamoil Africa, which operates retail stations in Egypt and Burkina Faso among other African nations.
Sector Organization
Libya's oil industry is run by the state-owned National Oil Corporation (NOC), along with smaller subsidiary companies, which combined account for around half of the country's oil output. Of NOC's subsidiaries, the largest oil producer is the Waha Oil Company (WOC), followed by the Arabian Gulf Oil Company (Agoco), Zueitina Oil Company (ZOC), and Sirte Oil Company (SOC). In addition to NOC's subsidiaries, several international oil companies are engaged in exploration and production in Libya including Repsol YPF (Spain), Eni (Italy), OMV (Austria), and Total (France).
United States-based oil companies, after the lifting of sanctions in 2004, were allowed back into Libya. In September 2003 the UN Security Council officially lifted its sanctions over Libya. On February 26, 2004, following a declaration by Libya that it would abandon its weapons of mass destruction (WMD) programs and comply with the Nuclear Non-Proliferation Treaty (NNPT), the United States rescinded a ban on travel to Libya and authorized U.S. oil companies with pre-sanctions holdings in Libya to negotiate on their return to the country if and when the United States lifted economic sanctions. On April 23, 2004, the United States eased its economic sanctions against Libya, and the White House issued a press release stating that: "U.S. companies will be able to buy or invest in Libyan oil and products. U.S. commercial banks and other financial service providers will be able to participate in and support these transactions." On the same day, Libya's NOC announced its first shipment of oil to the United States in over 20 years. On June 28, 2004, the United States and Libya formally resumed diplomatic relations, severed since May 1981. Finally, on September 20, 2004, President Bush signed Executive Order 12543, lifting most remaining U.S. sanctions against Libya and paving the way for U.S. oil companies to try to secure contracts or revive previous contracts for tapping Libya's oil reserves. The Order also revoked any restrictions on importation of oil products refined in Libya, and unblocked certain assets.
Licensing Rounds
On January 30, 2005, Libya held its first round of oil and natural gas exploration leases since the United States ended sanctions against the country. In October 2005, Libya held a second bidding round under EPSA IV, with 51 companies taking part and nearly $500 million worth of new investment flowing into the country as a result. In December 2006, Libya held its third bidding round; however, production-sharing agreements (PSAs) awarded in the round were still being signed by NOC as of April 2007. Industry experts noted that the third round attracted smaller players, including ones from Russia, as opposed to larger international oil companies (IOCs), which participated in the previous two rounds. In July 2007, Libya plans to announce its fourth round, which is likely to focus on natural gas assets.
Winners of Libyan exploration acreage are determined largely based on how high a share of production a company is willing to offer NOC. Whichever companies offer NOC the greatest share of profits is likely to win. In addition, oilfield developers initially bear 100% of costs (exploration, appraisal, training) for a minimum of 5 years, while NOC retains exclusive ownership. Also included in Libyan licensing rounds is open competitive bidding and transparency, joint development and marketing of non-associated natural gas discoveries, standardized terms for exploration and production, and non-recoverable bonuses.
Natural Gas
Libyan natural gas production and exports are increasing, with the opening of the "Greenstream" pipeline to Europe in late 2004. Expansion of natural gas production remains a high priority for Libya for two main reasons. Libya aims to use natural gas instead of oil domestically for power generation, freeing up more oil for export. Second, Libya has vast natural gas reserves and is looking to increase its natural gas exports, particularly to Europe. Libya's proven natural gas reserves as of January 1, 2007 were estimated at 52.7 trillion cubic feet (Tcf ) by OGJ. Some Libyan experts believe, with more exploration, reserves may reach possibly 70-100 Tcf. Major producing fields include Attahadi, Defa-Waha, Hatiba, Zelten, Sahl, and Assumud. To expand its natural gas production, marketing, and distribution, Libya is looking to foreign participation and investment.
Liquefied Natural Gas (LNG)
In 1971, Libya became the second country in the world (after Algeria in 1964) to export liquefied natural gas (LNG). Since then, Libya's LNG exports have remained low, largely due to technical limitations which do not allow Libya to extract liquefied petroleum gas (LPG) from the natural gas. Libya's LNG plant, at Marsa El Brega, was built in the late 1960s by Esso and has a nominal capacity of about 125 Bcf per year. However, U.S. sanctions prevented Libya from obtaining needed equipment to separate out LPG from the natural gas, thereby limiting the plant's output to about 15% of nameplate capacity, all of which is exported to Spain (Enagas).
Since sanctions have been lifted, companies are looking to invest in Libyan LNG projects. In May 2005, Shell agreed to a final deal with NOC to develop Libyan oil and gas resources, including LNG export facilities. The deal came after lengthy negotiations on the terms of a March 2004 framework agreement. Reportedly, Shell is aiming to upgrade and expand Marsa El Brega and possibly build a new LNG export facility as well at a cost of $105-$450 million. In addition to Shell, other companies like Repsol YPF are also interested in developing Libya's LNG export potential.
Production
Libya's natural gas production has grown substantially in the last few years. According to EIA, Libya produced 399 billion cubic feet (Bcf) in 2005, while consuming 206 Bcf. In 2006, IHS Energy reported Libya produced 985 Bcf of natural gas, more than two times the amount produced in 2005. Of the 985 Bcf, 474 Bcf was export to Italy and Spain, 385 Bcf was used in oilfield recovery projects, and the remaining 146 Bcf was used in the generation of electricity in Libya.
Pipeline projects
In 1997, Tunisia and Libya agreed to set up a joint venture in order to build a natural gas pipeline from the Melitah area in Libya to the southern Tunisian city and industrial zone of Gabes. As of November 2006, the joint venture was in the preparation phase for issuing a tender for an engineering, procurement and construction contract to build the pipeline. Construction on the pipeline is estimated to take 18 months, and the pipeline could come online as early as 2010 if all goes according to plan. Previously, Tunisia and Libya signed an agreement for around 70 Bcf of natural gas per year to be delivered from Libyan gas fields to Tunisia.
Eni also has promoted linking the reserves of both Egypt and Libya to Italy by pipeline. An agreement in principle to link Egypt and Libya's natural gas grids was reached in June 1997, following a visit to Libya by Egyptian President Hosni Mubarak. In 2001, a joint venture agreement was reached between NOC and Egypt's EGPC for construction of a pipeline to carry Egyptian natural gas to Libya (for power generation, water desalination, and possible export) and for another to carry Libyan oil to Alexandria, Egypt for refining and consumption there). The joint venture company is called "Arab Company for Oil and Gas Pipelines," or ACOG.
Exports
Libyan natural gas exports to Europe are increasing rapidly, with the Western Libyan Gas Project (WLGP) and the $6.6 billion, 32-inch, 370-mile "Greenstream" underwater natural gas pipeline, which came online in October 2004. Previously, the only customer for Libyan natural gas was Spain's Enagas. However, the WLGP -- a 50/50 joint venture between Eni and NOC -- has now expanded these exports to Italy and beyond. Currently, 280 Bcf per year of natural gas is being exported from a processing facility at Melitah, on the Libyan coast, via Greenstream to southeastern Sicily. From Sicily, the natural gas flows to the Italian mainland, and then onwards to the rest of Europe. Greenstream is 75% owned by Eni, with first flows coming from the Wafa onshore field near the Algerian border and the Bahr es Salam offshore field near Tripoli. Throughput on the Greenstream line reportedly can be boosted to 385 Bcf per year.
Italy's Edison Gas has committed, under a "take-or-pay" contract, to taking around half (140 Bcf per year) of this natural gas, and to use it mainly for power generation in Italy. Besides Edison, Italy's Energia Gas and Gaz de France have each committed to taking around 70 Bcf of Libyan natural gas. Another 70 Bcf per year of natural gas is to be produced from WLGP for the domestic Libyan market (feedstock or power generation) or possibly for export to Tunisia.
Source: Libya analysis brief, 2010; Luxner, 2009
A list of Libya's current major export partners is provided in Table 4 and illustrated graphically in Figure 8 below.
Table 4
Libya's current major export partners
Country
Percentage of Exports
Italy
37.65%
Germany
10.11%
France
8.44%
Spain
7.94%
Switzerland
5.93%
United States
5.27%
Figure 8. Libya's current major export partners
Source: CIA World Factbook, 2010 at https://www.cia.gov/library/publications/the-world-factbook/geos/ly.html
Chapter Summary
This chapter provided a review of the relevant literature concerning supply chain management issues as they affect the petroleum industry in general, with a special focus on the supply chain management practices at Toyota and Mobil Oil, followed by an overview of the oil industry in Libya today. The research showed that the global oil and gas industry is characterized by the need for efficiency at all levels of production, and the need for the elimination of waste, redundancies and bureaucracy is universal. Other commonalities that emerged from the research was the need to add value to every step of the supply chain whenever possible and to consider the improvement of the supply chain as an ongoing rather than a static affair. A description of the study's methodological approach is presented in Chapter Three below.
CHAPTER 3: METHODOLOGY
Description of the Study Approach
The study approach used in this study followed a series of steps that resembled the classic inverted pyramid for its research design. According to Mauch and Park (2003), "The research design is a total plan for carrying out an investigation. A completed research design shows the step-by-step sequence of actions in carrying out an investigation essential to obtaining objective, reliable, and valid information" (p. 123). In this regard, the study's research design was qualitative in nature but used both primary and secondary qualitative and quantitative data derived from a review of the peer-reviewed and scholarly literature as well as any available interviews and firsthand accounts of the supply chain management operations at Alwaha for developing the case study findings. According to Neuman (2003), the case study approach is "research in which one studies a few people or cases in great detail" (p. 530). There are a number of advantages to using a case study approach. For instance, Feagin, Orum and Sjoberg (1991) note that, "The case study offers the opportunity to study these social phenomena at a relatively small price, for it requires one person, or at most a handful of people, to perform the necessary observations and interpretation of data" (p. 2).
As described further in the data-gathering section below, the information for the case studies will be collected using a critical review of the relevant literature and corporate performance data. This segment of the research design is congruent with Fraenkel and Wallen's guidance that, "Researchers usually dig into the literature to find out what has already been written about the topic they are interested in investigating. Both the opinions of experts in the field and other research studies are of interest. Such reading is referred to as a review of the literature" (p. 48). The use of a literature review in a qualitative study can provide a number of useful outcomes, including the following:
1. It helps describe a topic of interest and refine either research questions or directions in which to look;
2. It presents a clear description and evaluation of the theories and concepts that have informed research into the topic of interest;
3. It clarifies the relationship to previous research and highlights where new research may contribute by identifying research possibilities which have been overlooked so far in the literature;
4. It provides insights into the topic of interest that are both methodological and substantive;
5. It demonstrates powers of critical analysis by, for instance, exposing taken for granted assumptions underpinning previous research and identifying the possibilities of replacing them with alternative assumptions;
6. It justifies any new research through a coherent critique of what has gone before and demonstrates why new research is both timely and important (Wood & Ellis, 2003).
The use of both primary and secondary data is also consistent with the guidance provided by Dennis and Harris (2002) who note, "Primary data are information that is being collected for the first time in order to address a specific research problem. This means that it is likely to be directly relevant to the research, unlike secondary data, which may be out of date or collected for a totally different purpose. Ideally, an effective research project should incorporate both primary and secondary data" (p. 39).
Data-gathering Method and Database of Study
The data-gathering method for this study will involve consulting reliable research resources including university and public libraries, as well as juried and trade journals, magazine and newspaper articles, tax documents, organizational Web sites, and online research resources such as EBSCOHost and Questia. In addition, although the research design is primarily qualitative in nature, it will also draw on relevant quantitative information when and where it is available to determine the effectiveness of existing supply chain management operations at Alwaha. This approach is also congruent with Mauch and Park (2003) who emphasize that, "The completed research design also indicates how the resultant objective information is to be used to determine conclusions about the accuracy of a hypothesis, a theory, or the correct answer to a question" (p. 123).
Assumptions
There are two assumptions in place in the analysis of the data. The first assumption is that researcher bias will not affect the interpretation or interpolation of the data analysis and the findings that emerge. The second assumption is that the information obtained using the data-gathering method described above is accurate.
Limitations
There are a number of cross-cultural factors that will inevitably come into play when an operational paradigm from one country is imposed in a wholesale fashion in another. This has been the case with the adoption of Japanese management approaches in the United States, for example, and it is reasonable to assume that there will be similar constraints to the implementation of a supply chain management approach that was developed in a foreign country in Al-Waha's case as well.
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