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Business Analysis Final Paper

DeVry University

Thomas J Rones

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Executive Summary_____________________________________________________________2

Business Problem Review________________________________________________________3Figure 1: U.S. Recoverable Oil vs Foreign______________________________________________________3

Analytical Plan_________________________________________________________________4

Elicitation Techniques________________________________________________________________4Schedule of activities_______________________________________________________________________4

Figure 2: Inputs, Tasks, & Outputs___________________________________________________________5

Survey Description and Question(s)_____________________________________________________5Questions________________________________________________________________________________6Survey Conclusion__________________________________________________________________________6

Requirements Communication____________________________________________________7Internal Stakeholders:_______________________________________________________________________7External Stakeholders:______________________________________________________________________7

Enterprise Analysis______________________________________________________________7Figure 3: Production Equation______________________________________________________________8Figure 4: Exploration Equation______________________________________________________________9Figure 5: Techniques for Information Gathering________________________________________________9

Requirements Analysis_________________________________________________________10Figure 6: To Drill or Not To Drill (Cap Rate is KPI)_______________________________________________11

Solution Assessment and Validation_______________________________________________12

Techniques________________________________________________________________________12

Recommendations & Conclusion__________________________________________________12

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Executive Summary

This project began with a focus on how oil refineries are adapting to the new business

environment brought on by the United States oil shale revolution, but shifted scope to exploration and

production of oil, due to the results found during elicitation. As a result, this paper is of use to vertically

integrated firms and firms considering integrating either up or downstream. Producers looking

downstream need to be aware of the complexities in the refining arena and patient so as not to invest in

the wrong technologies. Upstream integrators can use the information found here as a starting place for

deciding if exploration and production makes financial sense – i.e. before obtaining expertise brought

through acquisition or consultation.

Business Problem Review

In June 2008 all the major oil benchmarks hit highs between $145 & $147/barrel. We recently hit

a low of $27/barrel. Many analysts and amateurs have tried to predict the ebb and flow of the supply and

demand for oil --- making statements such as “Oil prices doubled last year, even if people did not see the

price of their petrol double. The reason for this is simple: global demand for oil, particularly from

developing countries like China and India, is rapidly catching up to global supply (Our World, n.d.)” If

only it were that simple --- we would all be trading futures. The reality is that there are a myriad of

variables affecting the price and supply of oil.

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Figure 1: U.S. Recoverable Oil vs Foreign

U.S. oil shale estimates definitely played their part. This project began with a focus on how oil

refineries are adapting to this new business environment, but shifted scope to exploration and production

of oil, due to the results found during elicitation.

Analytical Plan

The plan was originally to send surveys to subject matter experts and collect the responses to

come up with a solution for refineries. The solution ended up being patience, let the oil majors eat the

R&D costs. This is when the analytical plan turned to focusing on another portion of the supply chain,

analyzing it, and mapping out the thought process so that firms can create standard operating

procedures for decision making. I chose to focus on exploration and production, but we could also

analyze the chain from the refinery to the end user – known as midstream and downstream.

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Elicitation TechniquesSchedule of activities

A. Stakeholder Selection – Decision makers (C-suite) at US oil refineries. If possible,

attempt to obtain a relatively even number of respondents per region and based on

refinery size. At a minimum, notate refinery size, location, and respondent’s position

within company so that the results can be filtered for analysis with a more specific

focus.

B. Analysis Techniques - The respondents will be contacted by email and/or phone. A

survey will be administered.

C. Timeline

Jan 17th- Design Survey

Jan 17th- Send survey through email

Jan 18th - Jan 27th – Collect additional responses over phone

Jan 28th – Analyze responses

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Figure 2: Inputs, Tasks, & Outputs

Survey Description and Question(s)

(For a full description of the rationale behind each question see week 3 Survey Monkey Essay.)

The goal behind the survey is twofold:

1. Use quantitative questions to gain insight into the change/risk management policies of domestic oil

refineries and..

2. Use qualitative questions to elicit information to guide the development of additional quantitative

questions for future surveys.

QuestionsQ1: Is the lift of the United States crude export ban a positive, negative, or inconsequential development

for your business?

Q2: Why or Why Not?

Q3: Is US storage capacity an issue you consider? (1-10)

Q4: How large of a factor is the 2016 election in your risk management strategy? (1-10)

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Survey Results

Analysis of Survey Results

Recommendations for future studies

Outputs

Conduct Survey

Tasks

Document Analysis

Survey Timeline

Business Need/Solution

Scope

Inputs

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Q5: Have you converted or do you plan to convert your refineries from overseas heavy crude to light

sweet (shale) oil?

Q6 :( If Yes to previous Q) What percentage of your refining capacity do you plan to convert?

Q7: Do you use a price per barrel break even analysis to justify new capital expenditures?

Q8: What is your price per barrel needed for profitability?

Q9: How much lower do you think the price of oil can go?

Q10: Comments – Any key items we missed?

Survey ConclusionAs of this time, the survey size is too small, and/or the survey respondents span to wide a

variety of job roles and refinery sizes & types to use this data to guide any business decisions.

Unfortunately many of the issues discussed in this survey are interrelated. For example, the choice to

convert refining facilities depends on the political and legal environment. One factor overlooked when

designing the questions was the industry structure. The majority of firms are vertically integrated, from

production through refining, distribution, and marketing. Questions such as “price per barrel for

profitability” would be ok for independent refiners, but irrelevant for vertically integrated firms because

productions costs are passed through all the way to end consumers. The survey results inform us that

we need to narrow our focus in future studies.

Requirements Communication

Requirements do not need to be communicated to stakeholders because the final output is this

document. If we were to execute the idea outlined in enterprise analysis and requirements analysis

below, then the stakeholders that would need to be kept informed would include:

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Internal Stakeholders: the project manager, financial department, team operating the

actual well

External Stakeholders: any applicable regulatory agencies, landowners, and/or financial

institutions with a vested interest.

Enterprise Analysis

We conducted enterprise analysis twice. The first time (Refining) used document analysis to

prepare for elicitation. After elicitation, we found that requirements analysis would not be

recommended due to the current state of technological adoption. There’s a fine line between the

leading edge and the bleeding edge, in other words, first mover advantage only applies to the pioneers

who survive the winter. Elicitation confirmed the need to shift scope to another section of the value

chain, but which one? The shale revolution has resulted in major upstream integration – production

companies getting into refining and distribution. This is because the cost of pumping oil is much less

volatile than buying crude on the open market. Let us then focus on the exploration and production

section of the value stream.

Round two of enterprise analysis consisted of functional decomposition - Which variables affect

our decision to invest in exploration and production? For exploration we are concerned with the initial

cost to acquire/drill the well, the lifetime barrels per well, the cost to pump each barrel, and the price

we can get on the market for each barrel (or downstream at the pump). The decision whether or not to

run the pump requires all of the above except for the initial cost of the well and the other variables are

concerned with a much smaller time period (days, weeks, or months).

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To make these decisions simple, we created some equations that reflect how changes in each of

these four variables affects the others.

Figure 3: Production Equation

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Figure 4: Exploration Equation

These equations can be put into excel for rapid scenario development, but where do we obtain our

numbers from? Unfortunately these are only estimates, but we can use the following information to

inform our estimates.

Figure 5: Techniques for Information Gathering

Technique Information

Document Analysis Cost/Well Barrels/Well Cost/Barrel Market Price/Barrel

Geo-Modeling X

Industry Reports X X X X

Competitors Public Docs X X X X

Futures Market X

Historical data on price of oil X

This document analysis will also provide us with the information necessary to conduct a SWOT analysis.

We need a SWOT analysis in order to Assess Capability Gaps.

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Requirements Analysis

We will now process model the value chain and then functionally decompose our/competitors

costs. This should uncover any cost saving capabilities not found earlier. At this point we should have

enough information to conduct a MoSCoW analysis (Must have, Should have, Could have, and Would

like but won't get) on the capability gaps we have discovered. Our requirements are now organized and

prioritized. At this point, it would be nice to have Key Performance Indicator(s) for our Acceptance and

Evaluation Criteria. Essentially we want a definite answer to whether or not we should go ahead with

drilling. Our Key Performance Indicator (KPI) can be anything, and our swimlane diagrams will change

based on the KPI chosen. We will still use the same sources of information, and the equations

introduced in enterprise analysis will remain the same – the swimlane diagram just maps the options

available to change the values of those four variables.

My examples are using capitalization rate (the number of years it will take for income to reach

the cost of the capital expenditure at purchase). I chose this because after our capital expenditure is

paid off, our margin per barrel will be higher (no interest!).

(A full explanation of “To Drill or Not to Drill” can be found in the week 5 Visio assignment.)

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Figure 4: To Drill or Not To Drill (Cap Rate is KPI)

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Solution Assessment and Validation

The purpose of the Key Performance Indicator is solution validation. The Visio diagram shown

above is meant to be ever expanding, particularly under “Cut Costs”. For example, operational could be

sub-divided into categories – always remembering that a penny saved in a repetitive process is saved

every time the pump runs. The solution is thorough in that it reminds the oil producer to consider their

bargaining power, through five forces analysis - that penny saved might be as a result of being a major

customer of the local electric utility. To validate the solution further we would have to actually go

through the process of exploration and production.

TechniquesTechniques have been detailed all throughout this paper. One key technique is document

analysis. After elicitation yielded sub-par results, we used document analysis to find that as of now it

would be better to refocus our efforts on another section of the value chain --- production instead of

refining. Brainstorming and surveys were obviously used.

Recommendations & Conclusion

As recommended in the Executive Summary, patience is a virtue for refineries. Producers do not

have such an easy decision. If the equations indicate that it would be very profitable to acquire land and

drill, then do so. More work needs to be done to evaluate opportunity costs. In particular, a history of

drilling innovations with a focus on acquisition and operating cost would reassure producers that their

capital expenditures do not become sunk costs. It would also be prudent to gather information about

past deals and deal structure. Even if it does not make sense to drill in the current economic

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environment, firms should always be aware of the supply of and demand for property sitting on shale

formations.

Oil majors may have more opportunity analyzing and transforming their downstream strategy.

Minor issues such as pricing and gas station accessibility could have dramatic consequences. This may be

anecdotal, but I usually end up at the same gas stations because they are conveniently located. This

might actually be a more interesting topic to research, but unfortunately we have reached the end.

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References

Eberhart, D. (2014, February 14). Light on the Top, Heavy on the Bottom: A Crude Oil Refinery Primer - Canary, LLC. Retrieved January 16, 2016, from http://canaryusa.com/crude-oil-refinery-primer/

Levine, S., Taylor, G., Arthur, D., & Tolleth, M. (2014). Understanding Crude Oil and Product

Markets. Retrieved January 15, 2016, from http://www.api.org/~/media/Files/Oil-and-Natural-Gas/Crude-Oil-Product-Markets/Crude-Oil-Primer/Understanding-Crude-Oil-and-Product-Markets-Primer-Low.pdf

Obama rejects Keystone XL pipeline - CNNPolitics.com. (n.d.). Retrieved January 16, 2016, from http://www.cnn.com/2015/11/06/politics/keystone-xl-pipeline-decision-rejection-kerry

Oil Price Rises as Airline Fails - Our World. (n.d.). Retrieved January 16, 2016, from

http://ourworld.unu.edu/en/oil-price-rises-as-airline-fails

Oil Shale - IER. (n.d.). Retrieved January 16, 2016, from http://instituteforenergyresearch.org/topics/encyclopedia/oil-shale/

The Economics Of U.S Crude Oil Storage Capacity | Investopedia. (2015). Retrieved January 16, 2016, from http://www.investopedia.com/articles/investing/041015/economics-us-crude-oil-storage-capacity.asp

U.S. Oil Shales: Breakeven Oil Price Is A Tricky Concept. (2015, May 10). Retrieved January 16, 2016, from http://seekingalpha.com/article/3166446-u-s-oil-shales-breakeven-oil-price-is-a-tricky-concept

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