Unconventional Excellence? How the North American shale boom Is shaping the future of business process

North America is in the midst of an unconventional resource and gas boom. So what effect is that having on process excellence?

In advance of the Energy Process Excellence Houston conference, John Douglas of the Advanced Operations Group at McKinsey and Company, discusses why the rise of domestic crude production is a game changer for the US economy and the challenges – and opportunities – ahead to achieve operational efficiencies.

Interview by Tim Haidar, Oil & Gas IQ

Q: I’d like to start the interview with a definition of what you think encapsulates process excellence?

John Douglas: I hear words like continuous improvement, operational excellence and process excellence and that’s not very definitive. I think it is about ensuring that every member of a team, - whether they be on an FPSO or on an on-shore rig, in a refinery, or working at a crude oil terminal - knows the work and that there are standards for how they do the work.

We talk about the steps in a process – whether they are documented or known by each of the individual people because they’ve been doing it for years. There’s a certain flow to how they do that do that work. And when we measure what is appropriate to measure; is it cycle time, is it the number of steps, is it the output of those activities?

Once you have created standard work and you know how to measure what are the two or three key performance indicators of that work, we start to figure out how do we improve that. In the case of cycle time, for instance, it’s about how do we do things faster than we did it yesterday without sacrificing safety and environmental risks?

When I think about process excellence, I think about a journey. I think about going to work every day and doing our jobs, and while we’re doing our jobs, working with our team to improve how we do our jobs so that we’re doing more with less – less resources, less time, less effort. And I think that people inherently want to work safer, faster, better, and easier. For me process excellence kind of embodies all of those things in how we approach our work.

When I think of people who use the word continuous improvement, if they don’t have standard work, then it’s just continuous change. So it’s all about creating that baseline of measurable performance and then figuring out ways to improve against that.

We all know the massive growth of North American unconventional oil and gas has meant significant structural changes across the entire value chain. This puts even more pressure on capital and operational efficiencies obviously, how is the industry responding?

John Douglas: First, let’s look at the big picture. The rise of domestic crude oil production is really a game changer for the US economy. Today the US refines about 15 million barrels of crude oil a day and most of that has been imported from other countries for many decades. US crude oil production fell for almost 20 years, reaching a low of less five million barrels a day in 2006. However, since that time that volume has grown to over seven million barrels of oil produced every day and it continues to rise. So that’s huge for the United States.

Every one million barrels a day equates to over $36 billion dollars a year for the US economy. In addition to that, energy companies are investing over $70 billion each year in the US to find and produce that oil. So it’s over a $100 billion a year – that’s a game changer for the US economy.

Second, outside the US government policy decisions, this is our industry’s chance to create a sustainable economic engine for domestic growth. Job creation in the private sector, improved balance of trade, energy independence – these are all big ideas for the future of our country. For those of us who have witnessed the rise and fall of manufacturing in the United States, this means a better future for the next generation. These are big ideas that have to be accomplished in a most economically effective, safe and environmentally friendly manner as possible for it to be sustainable.

So what opportunities are there for operational improvement?

John Douglas: Today the domestic crude oil value chain is fragmented, it’s less efficient than it must be to compete with the imported crude oil on a sustainable basis.

The Energy Process Excellence Summit in Houston is the perfect place for operational excellence leaders in the domestic energy value chain to meet, discuss challenges and opportunities and learn from each other. Let me give you an example: crude oil producers rely heavily on oil field services firms to put people or boots on the ground, they drill and complete large numbers of small volume production wells at a cost of less than $10 million per well and the best are targeting about eight million per well to make it economically viable long term.

Collaboration with pipelines and railroad companies is critical in providing logistics to get equipment and materials into the oil producing basins and then again to take the crude oil to storage terminals and domestic refiners. So loading the crude oil, transportation like pipelines, rail roads, barges and trucks, they all play a role.

And then the refiners, they need a portfolio of crude oil types to operate the refineries efficiently and economically. So each segment of the value chain is dependent upon the others to drive operation improvements, reducing costs, increasing safety, reliability and, importantly, transparency.

With regards to those last things you were talking about - reducing costs, increasing safety, increasing reliability and transparency - what is McKinsey seeing in terms of benchmarks and best practices to achieve this?

John Douglas: Well one of the presentations at the Summit will be a case study from Chevron, they participated in a recent McKinsey benchmark in the Marcellus Station which is Western Pennsylvania primarily.

The response from those participants has been positive. You know it’s always good to keep your score, that’s how we improve our performance whether we were playing a sport or going to school, it’s even better to compare others performance with ours for an independent benchmark and that way we can indemnity what truly are the biggest areas for improvement. So I’m certain that their presentation at the Energy Process Excellence Summit will be well attended.

In addition there are going to be case studies and presentations from a number of companies – producers, oil field services, crude oil logistics and refineries – all will be focused on operational improvements.

Another cool part about the Summit will be a presentation from the Prosci team on change management. You may have heard, because they developed the well-known model, it’s called ADKAR, which stands for Awareness Desire Knowledge Action and Reinforcement, because it’s always easy for us to tell others that they need to change and they need to improve their performance, it’s tough for us to help change ourselves and this framework helps create the alignment and behaviours that we need to drive change in our own behaviours and performance.

What major areas of performance do you think operators should be focused upon right now?

John Doulgas: Well, the major drivers for operational improvement in each segment of the value chain are probably a little bit different. However, I believe that there are a few common threads; first, there’s far too much variation in many of the most important processes. For example, integrated planning; we all need to reduce variation so that the right equipment, the right materials, the right people and the number of people show up at the right place at the right time.

Second, increasing flexibility. Things happen, these are very complex logistics and systems so agility and flexibility to move to the second best option from what we originally planned, to adapt from our morning huddles and stand-ups. You know using every day concepts from other industries like parts of delivery services, auto racing and supermarkets where they minimise hand-offs, be quick to change and create pull systems like you have in a supermarket, you know, getting what you need when you need it. So no over-supply and no shortage of resources and materials.

And I think third, the relentless pursuit of waste, identifying every opportunity to reduce what we call the seven types of waste – transport, inventory, motion, over-production, over-processing and defects. We see equipment not in operation. We see crews not working. We see too much or too little of just about everything. So there’s lots of waste in our current processes. No-one gets up in the morning hoping you create waste, so it happens, so there’s just got to be relentless pursuit to eliminate waste.

Now we all know that better operations can mean bigger rewards, what’s the financial upside when operation excellence is achieved, do you have any tangible figures?

John Doulgas: Well first of all it’s a great question because really it is one of the key end games. So I’d like to refer what Julia Roberts said in the movie Pretty Woman; it’s huge, huge. Operational excellence is a journey though, it’s continuous improvement, it’s day after day, year after year. In 2013, for example, both cut resources and have individually reported 20% reductions in completed well costs with no impact on well productivity, that’s the line coming out of each well, safety or environmental risk. When you look down the value chain to domestic refineries like Valero , Phillips 66 and Tesoro, they all reported record results in 2012 as the result of this rise of domestic crude production.

So if you take it together it means billions of dollars for the industry and the US economy. So, significantly improved financial performance may lead to increased domestic investment and a very bright future if we get it right. If we don’t, the US will be importing crude oil and we will not be competitive long term. So I think that the Energy Process Excellence Summit in Houston is a great opportunity for us to get together to learn, to grow and to share ideas.