Tuesday, August 14, 2007
Big oil's management slips
From the RoundTable blog
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Donald A. Stadler
Stadler lives in Roanoke County.
Forty years of management consulting to major industries has not dampened my profound awe at the internationally recognized ineptitude of American management. Hillary Clinton must now believe that too, considering she said, "We ought to take some of that," meaning big oil profits, and there wasn't a peep in response.
Many Americans don't know most foreign oil comes from non-Arab countries, like Canada and Mexico, or understand the major choke point in the oil products flow is the refinery, not the wellhead. The average legislator, demanding endless special blends, hasn't a clue as to how supply chain management works.
Worst of all, oil executives live for the eternal status quo. They won't take on their natural enemies, the environmentalists, because dealing with them (giving in) enlarges their own paychecks. Given all-time high profits, they ask, why try to improve what is already profitable? Why spend money to build refineries, even if the environmentalists would let us?
Why? Because we want the oil industry to be here tomorrow and still be professionally run -- not ruined, like steel.
Youngstown, Ohio, where I was born, was once the quintessential American steel town. Venal unions, rapaciously corrupt politicians and a steel industry management describable only as criminally incompetent irresponsibly gutted it. The consequences to Youngstown were Enron times a hundred. If it can happen to steel, it can happen to oil.
An entire industry can get it terribly, humiliatingly wrong. Automakers' incomprehensible refusal in the '50s to accept advanced quality control methodology put Honda's sales near Ford's today. Industry hubris led W. Edwards Deming to revolutionize Japan's industry, not ours.
Who else can we blame but management? Aerospace adopts "lean manufacturing" -- zero savings hit the bottom line. Government tries "results-based management" -- their subordinates entrench, fudge numbers, feign ignorance and generally ignore it until it goes away.
Can American management even focus? Forget for a moment offshore drilling and ANWR. Refining capacity is the choke point, remember, so increased oil availability is not the sole influence on gas prices. Incidentally, whatever happened to shale oil becoming profitable at $60 a barrel? Lost in the shuffle, wasn't it?
Lost ideas are common in the oil industry because new ideas can affect the status quo, even if the status quo is stupid.
In the '70s, oil was king in Houston. Employee turnover was at 700 percent with companies in a frenzied bidding war for scarce engineers and geologists. After the boom, a book, "In Search of Excellence," uncovered an interesting fact. If you want to explore for oil, the authors said, you had better bring plenty of money. Only one out of 10 holes sunk in proven fields found oil or gas, so you have to drill plenty of holes. The top-dollar geniuses were right only 10 percent of the time.
Before the boom ended, I did a study to determine the correlation between the time (man hours) spent deciding when and where to drill for oil and actual success. It was zero. In effect, I said that Company X could fire half its exploration staff and still bring in the same number of wells. That little exercise had a roomful of oil executives gagging into their wastebaskets, but, in the end, did little to change the culture.
A few years later, I encountered a man with another novel idea central to our current oil dilemma. In essence, he claimed that to build oil refineries in a fraction of the usual required calendar years, simply build them horizontally instead of vertically.
Using modular housing concepts, he devised a means of constructing the major components of a refinery on the ground, so to speak, and then hoisting them into place when completed. Instead of the four years it takes to build a $2 billion refinery, it goes up in under a year at substantial savings. My acquaintance, naturally, was fired.
Major project contractors, you see, have a vested interest in extremely lengthy endeavors and ever upward spiraling "cost-plus" billing. The perpetrators behind Boston's "Big Dig," the most egregious example, have enriched themselves through three generations.
Cost-plus means American management has discovered it is better (for them) to be paid by the hour, not by the job. If a housepainter proposed that, you'd laugh him off the property. American oil thinks it's swell.
At this level of management dopiness, it won't take a Hillary to bring down American oil. The executives will do it themselves.
