Description
The oil industry supply chain is a complex network of several entities consisting of: Upstream, Midstream and Downstream
AN EVALUATION OF THE UPSTREAM
CRUDE OIL INDUSTRY SUPPLY CHAIN
RISK :
LEVERAGING ANALYTIC HIERARCHY
PROCESS
Charles Awoala Briggs
Upper Great Plains Transportation
Institute
North Dakota State University
Of Agriculture and Applied Sciences
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CHARLES BRIGGS Ph.D (ABD)
AGENDA
? Introduction
? Research Objectives
? Research Methodology
? Data Collection and Analysis
? Empirical Results and Discussion
? Conclusions and Managerial Implications
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INTRODUCTION
? Global supply chains, are becoming complex as goods and services are
deliveredfaster andcheaper
? Greater disruptionriskfromthesourceof rawmaterialstotheconsumer
? The potential for disruption comes in many packages, fromlarge-scale
natural disasters and terrorist attacks to plant manufacturing fires,
widespread electrical blackouts, and operational contingencies and
terroristattacks
? The upstream crude oil supply-chain networks are vulnerable and
susceptibletodisruptionrisk indrilling, pipelineoperation, transportation
anddistribution.
? Post 9/11, thebiggest risk in theoil industry remains security threat that
ranges fromexploration and development security to pipeline security,
maritime transport security, to protection of product distribution and
retailingsector.
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RESEARCH OBJ ECTIVES
?Identifies sources of the upstream crude oil
supplychainrisksandvulnerabilities
?Leveragetheanalytichierarchyprocess(AHP)
to model risk management in the crude oil
industrysupplychain.
?Analyze and evaluate the potential impact of
risksintheUCOSC
?Propose risk treatments (mitigation) in the
UCOSC
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Topology of the Oil Industry
Supply Chain
?The oil industry supply chain is a complex
networkof several entitiesconsistingof:
? Upstream: Exploration, Development, Production, and
Transportation of the crude oil to the point of
transformationintofinal products.
? Midstream: Consists of the infrastructure used to
transport crudeoil and petroleumproducts, such as Very
LargeCrudeCarriers (VLCCs) andliquefiedNatural Gas
(LNG) tankers or through pipeline networks to various
refineriesaroundtheworld
? Downstream: Processing, Transportation, Marketing and
Distribution. Andservestwodifferent customers:
CHARLES BRIGGS Ph.D (ABD) 5
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6
Exploration
/Production
Pipeline Crude
Transportation
Maritime
crude
transportation
Crude
Storage Tank
Commodity
Market
Storage
Facility
New owner
Oil Refinery
Product
Pipeline
Retail Storage
Terminal
Product
Distribution
Retail
Markets
Industrial Markets
Commercial
Markets
Wholesale Customers
Retail Customers
GENERIC OIL INDUSTRY
SUPPLY CHAIN
CHARLES BRIGGS Ph.D (ABD)
Maritime Crude Oil Transportation
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Pipeline crude oil Transportation
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SOURCES OF CRUDE OILSUPPLY CHAIN RISKS AND
VULNERABILITIES
? ExplorationandProductionRisks
? Environmental andRegulatoryComplianceRisk
? TransportationRisk
? Availabilityof Oil ResourceRisk
? Geopolitical Risk
? Reputational Risk
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Oil Exploration and Production site
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Source of Exploration and Production
Risk
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Environmental Risk of Oil Spill
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The Exxon Valdez oil spill in March 1989
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Image of Double Hull Crude Oil Tanker:
The OPA-90 Requirement
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• Our coast is vulnerable to potential damage.
• 2/3 of all goods transported around global waters are from the
petroleum industry.
The Prestige Oil Disaster
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Transportation Risk: Maritime oil tanker piracy
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Threats to Pipeline Oil Transportation
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Attack on crude oil pipeline
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Availability of Oil Resource Risk
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World Oil Reserves, Production, and Consumption, 2007.
U .S. Department of Energy Fact #578: J uly 6
th
2009.
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The Alternative Options
?Accept and control the risk: Accept the risk and put
in place appropriate controls to manage the risk.
?Terminate or forgo activity: Risks are avoided by
stopping an activity however, mitigating risk involves the
planning of future actions and activities to prevent or
reduce the consequence of the risk occurring.
? Transfer and / or share risk: Some risks are
transferred. Risk transfer does not mean total
elimination of risk, it entails transferring the
consequence of a risk to a third party eg. to insurance,
using external agents with renowned knowledge.
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RESEARCH METHODOLOGY
?Management decision making problems often
involvemultiplecriteria/objectives/attributes.
?Multi-Criteria Analysis is a decision-making tool
developed for complex multi-criteria problems
those include qualitative and/or quantitative
aspects of the problem in the decision-making
process.
?Multiple-Criteria Analysis (MCA) is a collection
of methodologies to compare, select, or rank
multiple alternatives that involve incommensurate
attributes
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RESEARCH METHODOLOGY
?Evaluationandmanagement of theupstreamcrudeoil
supply chain vulnerabilities and risks represent a
typical MCDM problemthat entails multiple criteria
that canbebothqualitativeandquantitative
?An example of MCDM selected to model risk
management in the upstream crude oil supply chain
riskisAHPdevelopedbySaaty(1980).
AHP was selected for this research
? Because it allows decision-makers to model a
complex probleminahierarchical structureportraying
the relationships of the overall goal, criteria
(objectives), andalternatives.
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RESEARCH METHODOLOGY
?Gaudenzi and Borghesi, (2006), used AHP in evaluating
supplychainriskmanagement.
?Hemaida and Schmits, (2006), used AHP in vendor
selection.
?Dey et al, (2001), used AHP for cross country petroleum
pipelineselection.
?Dey (2004), used AHP in decision support system for
inspectionandmaintenance: acasestudyof oil pipeline.
?Sam Nataraj, (2005), used AHP as a decision-support
systeminthepetroleumpipelineindustry.
?The AHP has also been a helpful methodology used in
solving decision problems in studies such as, supplier
selection, forecasting, risk opportunities modeling, plan
andproduct design, etc. (SiddharthV. et al., 2007).
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RESEARCH METHODOLOGY
Goal: Minimizing Crude
Oil Supply Chain Risk
Exploration
& Production
risk
Environmental &
Regulatory
Compliance Risk
Transportation
Risk
Reputational
Risk
Availability
of oil
Resource
Risk
Geopolitical
Risk
Accept and Control Risk Terminate or Forgo Risk Transfer or Share Risk
22 CHARLES BRIGGS Ph.D (ABD)
DATA COLLECTION AND ANALYSIS
? A survey questionnaire approach was used for gathering relational data to
assess the order of importance of the upstream crude oil industry supply
chain risks.
? From the hierarchy tree, a questionnaire was developed to enable pairwise
comparisons between all the factors at each level in the hierarchy.
? The pairwise comparison process elicits qualitative judgments or opinions
that indicate the strength of the experts’ preference in a specific
comparison according to Saaty’s 1-9 scale.
? The questionnaire was designed to collect opinion of subject matter expert
(Risk Managers) in the oil industry requiring them to respond to several
pairwise comparisons where two categories at a time are compared with
respect to the major goal.
? The result of the survey questionnaire technique was then used as input
for the AHP.
? The pairwise comparison matrix developed from the AHP survey
questionnaire is depicted Table 2.
? The analysis was carried out using Expert Choice Software (11.5)
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Table 2. Priority Matrix for the Major Objectives
CHARLES BRIGGS Ph.D (ABD) 24
Objective Priority Rank
Transportation Risk .263 1
Exploration /Production
Risk
.198 2
Environmental and
Regulatory Compliance
Risk
.161 3
Availability of Oil Resource
Risk
.150 4
Reputational Risk .124 5
Geopolitical Risk .105 6
Inconsistency Ratio 0.03
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RESULT AND DISCUSSION
Comparing the Priority matrix for the Major Objectives
? The result shows that Transportation Risk, (.263), Exploration/Production Risk (.198)
and Environmental/Regulatory Compliance Risk (.161) are the top three major risk
areas in the upstream crude oil supply network, followed by availability of oil
resource risk (.150), reputational risk (.124) and geopolitical risk (.105). While
reputational risk is .124 (12.4%) and geopolitical risk is .105 (10.5%) indicating that
the latter two are less important priorities to be considered. With inconsistency of
0.03 which is less than .10 indicating reliable expert opinions.
CHARLES BRIGGS Ph.D (ABD) 25 A
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Priorities with respect to:
Crude Oil SCRM
Transportation Risk .263
Exploration/ Production Risk .198
Environ/ Regulatory Compliance Risk .161
Availability of Oil Resource Risk .150
Reputational Risk .124
Geopolitical Risk .105
Inconsistency = 0.03
with 0 missing judgments.
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Priority of Objectives with Respect to Alternative Options.
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Alternative
Priority
Alternative Priority Alternative Priority
Accept & Control
Risk
Transfer or Share
Risk
Terminate or Forgo Activity
Objective Priority
Transportation Risk
.263
.413 .327 .260
Exploration and Production
Risk
.198
.550 .240 .210
Environmental &
Regulatory Compliance
Risk
.161 .413 .327 .260
Availability of Oil
Resource Risk
.150 .500 .250 .250
Reputational Risk
.124 .413 .327 .260
Geopolitical Risk
.105
.413 .327 .260
CompositeScore
.446 .303 .251
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Ideal Synthesis with Respect to the Goal.
? The global priorities for the alternative policies are ranked as follows:
accept and control risk (.446), transfer or share risk (.303), and terminate
and forgo risk (.251). When normalized, the priorities for the alternative
policies add up to 1.00. This result indicate that accepting and controlling
risk is themost important risk management policy option among thethree
policy options, with inconsistency of 0.03.
The oil industry supply chain is a complex network of several entities consisting of: Upstream, Midstream and Downstream
AN EVALUATION OF THE UPSTREAM
CRUDE OIL INDUSTRY SUPPLY CHAIN
RISK :
LEVERAGING ANALYTIC HIERARCHY
PROCESS
Charles Awoala Briggs
Upper Great Plains Transportation
Institute
North Dakota State University
Of Agriculture and Applied Sciences
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CHARLES BRIGGS Ph.D (ABD)
AGENDA
? Introduction
? Research Objectives
? Research Methodology
? Data Collection and Analysis
? Empirical Results and Discussion
? Conclusions and Managerial Implications
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2 CHARLES BRIGGS Ph.D (ABD)
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INTRODUCTION
? Global supply chains, are becoming complex as goods and services are
deliveredfaster andcheaper
? Greater disruptionriskfromthesourceof rawmaterialstotheconsumer
? The potential for disruption comes in many packages, fromlarge-scale
natural disasters and terrorist attacks to plant manufacturing fires,
widespread electrical blackouts, and operational contingencies and
terroristattacks
? The upstream crude oil supply-chain networks are vulnerable and
susceptibletodisruptionrisk indrilling, pipelineoperation, transportation
anddistribution.
? Post 9/11, thebiggest risk in theoil industry remains security threat that
ranges fromexploration and development security to pipeline security,
maritime transport security, to protection of product distribution and
retailingsector.
3 CHARLES BRIGGS Ph.D (ABD)
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RESEARCH OBJ ECTIVES
?Identifies sources of the upstream crude oil
supplychainrisksandvulnerabilities
?Leveragetheanalytichierarchyprocess(AHP)
to model risk management in the crude oil
industrysupplychain.
?Analyze and evaluate the potential impact of
risksintheUCOSC
?Propose risk treatments (mitigation) in the
UCOSC
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Topology of the Oil Industry
Supply Chain
?The oil industry supply chain is a complex
networkof several entitiesconsistingof:
? Upstream: Exploration, Development, Production, and
Transportation of the crude oil to the point of
transformationintofinal products.
? Midstream: Consists of the infrastructure used to
transport crudeoil and petroleumproducts, such as Very
LargeCrudeCarriers (VLCCs) andliquefiedNatural Gas
(LNG) tankers or through pipeline networks to various
refineriesaroundtheworld
? Downstream: Processing, Transportation, Marketing and
Distribution. Andservestwodifferent customers:
CHARLES BRIGGS Ph.D (ABD) 5
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6
Exploration
/Production
Pipeline Crude
Transportation
Maritime
crude
transportation
Crude
Storage Tank
Commodity
Market
Storage
Facility
New owner
Oil Refinery
Product
Pipeline
Retail Storage
Terminal
Product
Distribution
Retail
Markets
Industrial Markets
Commercial
Markets
Wholesale Customers
Retail Customers
GENERIC OIL INDUSTRY
SUPPLY CHAIN
CHARLES BRIGGS Ph.D (ABD)
Maritime Crude Oil Transportation
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Pipeline crude oil Transportation
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SOURCES OF CRUDE OILSUPPLY CHAIN RISKS AND
VULNERABILITIES
? ExplorationandProductionRisks
? Environmental andRegulatoryComplianceRisk
? TransportationRisk
? Availabilityof Oil ResourceRisk
? Geopolitical Risk
? Reputational Risk
CHARLES BRIGGS Ph.D (ABD) 9
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Oil Exploration and Production site
10
Source of Exploration and Production
Risk
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Environmental Risk of Oil Spill
11
The Exxon Valdez oil spill in March 1989
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Image of Double Hull Crude Oil Tanker:
The OPA-90 Requirement
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• Our coast is vulnerable to potential damage.
• 2/3 of all goods transported around global waters are from the
petroleum industry.
The Prestige Oil Disaster
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Transportation Risk: Maritime oil tanker piracy
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Threats to Pipeline Oil Transportation
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Attack on crude oil pipeline
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Availability of Oil Resource Risk
17
World Oil Reserves, Production, and Consumption, 2007.
U .S. Department of Energy Fact #578: J uly 6
th
2009.
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The Alternative Options
?Accept and control the risk: Accept the risk and put
in place appropriate controls to manage the risk.
?Terminate or forgo activity: Risks are avoided by
stopping an activity however, mitigating risk involves the
planning of future actions and activities to prevent or
reduce the consequence of the risk occurring.
? Transfer and / or share risk: Some risks are
transferred. Risk transfer does not mean total
elimination of risk, it entails transferring the
consequence of a risk to a third party eg. to insurance,
using external agents with renowned knowledge.
CHARLES BRIGGS Ph.D (ABD) 18 A
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RESEARCH METHODOLOGY
?Management decision making problems often
involvemultiplecriteria/objectives/attributes.
?Multi-Criteria Analysis is a decision-making tool
developed for complex multi-criteria problems
those include qualitative and/or quantitative
aspects of the problem in the decision-making
process.
?Multiple-Criteria Analysis (MCA) is a collection
of methodologies to compare, select, or rank
multiple alternatives that involve incommensurate
attributes
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RESEARCH METHODOLOGY
?Evaluationandmanagement of theupstreamcrudeoil
supply chain vulnerabilities and risks represent a
typical MCDM problemthat entails multiple criteria
that canbebothqualitativeandquantitative
?An example of MCDM selected to model risk
management in the upstream crude oil supply chain
riskisAHPdevelopedbySaaty(1980).
AHP was selected for this research
? Because it allows decision-makers to model a
complex probleminahierarchical structureportraying
the relationships of the overall goal, criteria
(objectives), andalternatives.
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RESEARCH METHODOLOGY
?Gaudenzi and Borghesi, (2006), used AHP in evaluating
supplychainriskmanagement.
?Hemaida and Schmits, (2006), used AHP in vendor
selection.
?Dey et al, (2001), used AHP for cross country petroleum
pipelineselection.
?Dey (2004), used AHP in decision support system for
inspectionandmaintenance: acasestudyof oil pipeline.
?Sam Nataraj, (2005), used AHP as a decision-support
systeminthepetroleumpipelineindustry.
?The AHP has also been a helpful methodology used in
solving decision problems in studies such as, supplier
selection, forecasting, risk opportunities modeling, plan
andproduct design, etc. (SiddharthV. et al., 2007).
CHARLES BRIGGS Ph.D (ABD) 21 A
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RESEARCH METHODOLOGY
Goal: Minimizing Crude
Oil Supply Chain Risk
Exploration
& Production
risk
Environmental &
Regulatory
Compliance Risk
Transportation
Risk
Reputational
Risk
Availability
of oil
Resource
Risk
Geopolitical
Risk
Accept and Control Risk Terminate or Forgo Risk Transfer or Share Risk
22 CHARLES BRIGGS Ph.D (ABD)
DATA COLLECTION AND ANALYSIS
? A survey questionnaire approach was used for gathering relational data to
assess the order of importance of the upstream crude oil industry supply
chain risks.
? From the hierarchy tree, a questionnaire was developed to enable pairwise
comparisons between all the factors at each level in the hierarchy.
? The pairwise comparison process elicits qualitative judgments or opinions
that indicate the strength of the experts’ preference in a specific
comparison according to Saaty’s 1-9 scale.
? The questionnaire was designed to collect opinion of subject matter expert
(Risk Managers) in the oil industry requiring them to respond to several
pairwise comparisons where two categories at a time are compared with
respect to the major goal.
? The result of the survey questionnaire technique was then used as input
for the AHP.
? The pairwise comparison matrix developed from the AHP survey
questionnaire is depicted Table 2.
? The analysis was carried out using Expert Choice Software (11.5)
CHARLES BRIGGS Ph.D (ABD) 23 A
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Table 2. Priority Matrix for the Major Objectives
CHARLES BRIGGS Ph.D (ABD) 24
Objective Priority Rank
Transportation Risk .263 1
Exploration /Production
Risk
.198 2
Environmental and
Regulatory Compliance
Risk
.161 3
Availability of Oil Resource
Risk
.150 4
Reputational Risk .124 5
Geopolitical Risk .105 6
Inconsistency Ratio 0.03
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RESULT AND DISCUSSION
Comparing the Priority matrix for the Major Objectives
? The result shows that Transportation Risk, (.263), Exploration/Production Risk (.198)
and Environmental/Regulatory Compliance Risk (.161) are the top three major risk
areas in the upstream crude oil supply network, followed by availability of oil
resource risk (.150), reputational risk (.124) and geopolitical risk (.105). While
reputational risk is .124 (12.4%) and geopolitical risk is .105 (10.5%) indicating that
the latter two are less important priorities to be considered. With inconsistency of
0.03 which is less than .10 indicating reliable expert opinions.
CHARLES BRIGGS Ph.D (ABD) 25 A
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Priorities with respect to:
Crude Oil SCRM
Transportation Risk .263
Exploration/ Production Risk .198
Environ/ Regulatory Compliance Risk .161
Availability of Oil Resource Risk .150
Reputational Risk .124
Geopolitical Risk .105
Inconsistency = 0.03
with 0 missing judgments.
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Priority of Objectives with Respect to Alternative Options.
CHARLES BRIGGS Ph.D (ABD) 26 A
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Alternative
Priority
Alternative Priority Alternative Priority
Accept & Control
Risk
Transfer or Share
Risk
Terminate or Forgo Activity
Objective Priority
Transportation Risk
.263
.413 .327 .260
Exploration and Production
Risk
.198
.550 .240 .210
Environmental &
Regulatory Compliance
Risk
.161 .413 .327 .260
Availability of Oil
Resource Risk
.150 .500 .250 .250
Reputational Risk
.124 .413 .327 .260
Geopolitical Risk
.105
.413 .327 .260
CompositeScore
.446 .303 .251
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Ideal Synthesis with Respect to the Goal.
? The global priorities for the alternative policies are ranked as follows:
accept and control risk (.446), transfer or share risk (.303), and terminate
and forgo risk (.251). When normalized, the priorities for the alternative
policies add up to 1.00. This result indicate that accepting and controlling
risk is themost important risk management policy option among thethree
policy options, with inconsistency of 0.03.