- For Discussion Problem Solving Perspective 1 What Is The Underlying Problem In This Case From The Perspective Of U S S 1 (24.39 KiB) Viewed 10 times
- For Discussion Problem Solving Perspective 1 What Is The Underlying Problem In This Case From The Perspective Of U S S 2 (46.46 KiB) Viewed 10 times
- For Discussion Problem Solving Perspective 1 What Is The Underlying Problem In This Case From The Perspective Of U S S 3 (49.09 KiB) Viewed 10 times
- For Discussion Problem Solving Perspective 1 What Is The Underlying Problem In This Case From The Perspective Of U S S 4 (50.17 KiB) Viewed 10 times
- For Discussion Problem Solving Perspective 1 What Is The Underlying Problem In This Case From The Perspective Of U S S 5 (47.86 KiB) Viewed 10 times
Management in Action The U.S. Shale Boom ... and Bust Who produces most of the world's oil? Your first guess may be somewhere in the Middle East. Indeed, that area of the planet has long been the center of the global oil market and derives much of its revenue from the export of crude oil. 175 Pointing to Saudi Arabia, Iraq, or Iran would therefore be a good guess, but you would be wrong. The United States is now the world's largest crude oil producer, beating out Saudi Arabia, Russia, and other countries. This is in large part due to U.S. shale's boom in crude oil production since 2014. Shale drove American daily oil output from 8.8 million barrels in 2014 to a record 12.2 million barrels in 2019. As a result, the United States is now king of "black gold,"176 Things are not well in the kingdom though. Fuel demand in 2020 plunged by 30%, or 30 million barrels a day, as the COVID-19 pandemic grounded air travel, decreased vehicle usage, and led to a worldwide recession. As a result, oil fields from Texas to North Dakota had to shut off their drills, causing tens of thousands of U.S. oil workers to lose their livelihood. The future of the U.S. oil industry looks grim with experts predicting over a thousand bankruptcies by the end of 2021.177 Will U.S. shale survive the great oil crash of 2020? Page 735
WHAT IS SHALE OIL ANYWAY? Before we continue any further, it's important to gain a better understanding of shale oil, which is crude oil that lies between layers of shale rock. It's produced by drilling into the shale rock and pumping water, sand, and chemicals into it-a process known as "fracking." The oil is located thousands of feet deep into the rock, making it quite labor intensive and costly to get to. In fact, some experts put the cost of the entire process at around $60 a barrel. This means that when oil prices dip below $60, many shale oil companies lose money if they continue to operate. 178 On the other hand, conventional oil is quite cheap to produce because it is closer to the earth's surface and does not require complex fracking techniques. This is the primary way in which the world's other top producers get to their oil. Saudi Arabia, for instance, is able to produce conventional oil for under $10 a barrel, making it more resilient during price slumps. 17 179 A FRACTURED CONTROL SYSTEM The formula for success in the U.S. shale industry was simple. First, as long as oil prices remained high, there was enough profit to keep shale exploration and production going. This was the case between 2011 and 2014 when oil prices averaged $90 a barrel. Second, smaller shale companies needed low interest bank financing in order to stay afloat. And the banks delivered to the tune of almost $250 billion in 2014 alone, 180 Things started to change in 2016 as there was an oversupply of oil in the world markets, decreasing the price of oil to around $26 a barrel. The Federal Reserve also increased interest rates that same year, which meant banks were unwilling to lend to shale companies at the same low rates. This one-two punch resulted in shale companies having negative income statements and balance sheets filled with debt. 2016
Dozens of companies declared bankruptcy in 2016, but those that were able to withstand the storm saw light at the end of the tunnel when oil prices went back up between 2017 and 2019,181 The lesson from the 2016 crisis was that shale companies couldn't simply rely on market supply and demand to stay afloat. They needed to find ways to reduce their break even point in order to stay competitive. Companies such as Occidental Petroleum Corp. and CrownQuest Operating were able to reduce their costs to around $30 a barrel, but that meant they didn't have enough cash to pay shareholders. And even $30 a barrel wasn't enough when the COVID-19 pandemic hit. The virus sent oil prices to below $0 a barrel because there was such oversupply of the commodity in the market that producers couldn't afford to store it. 182 U.S. shale seemed to hit a wall-fluctuating oil prices were causing havoc on operations while costs couldn't be reduced any further. DRILLING FOR DATA Advancements in technology may provide hope for an industry on life support. Keep in mind that oil companies haven't typically shied away from technology. French and Italian oil companies Total and Eni, for instance, are owners of some of the "Top 500 most powerful supercomputers of 2019.-183 The problem is that much of the industry's data are never used. "A lot of data are collected, but a lot of it is very isolated," said Binu Mathew, head of product management at Baker Hughes. "Only a small percentage of it is actually being analysed. 184 If oil companies could do a better job controlling their operations in real time they could have competitive advantage, especially during challenging times. This is where Al and data analytics come into the picture. According to Mark Mills, a senior fellow at the Manhattan Institute, "Bringing analytics to bear on the complexities of shale geology, geophysics, stimulation, and operations to optimize the production process would potentially double the number of effective stages, thereby doubling output per well and cutting the cost of oil in
production process would potentially double the number of effective stages, thereby doubling output per well and cutting the cost of oil in hálf." Oil companies can use AI and analytics to find the best drilling locations, optimize how and where they steer their drill bits, find the best ways to rupture the shale, and ensure efficient truck and rail logistics. 185 Shell is a good example of a company using AI and data analytics to its advantage. The company partnered with Hewlett-Packard to develop fiber optic cables that provide sensors throughout the ground. The data from these sensors is then transferred to Amazon Web Services cloud-based servers for its AI to extract and analyze. The results provide engineers with a more accurate idea of what lies below the ground. This is important because drilling in the wrong place can cost companies upwards of $100 million. Another oil giant, Chevron, is such a believer in the power of AI and data analytics that it is installing around 1 million sensors in a new oilfield it is launching in Kazakhstan in 2022. Experts believe that Shell and Chevron's digital practices can help improve their oil production costs by 6 to 8% 186 Machines are another important part of the equation. Drilling is a continuous process and machines are subject to working long hours under severe temperatures and conditions. Al can help ensure that these machines are working efficiently. For example, some companies fit their machines with sensors that collect performance data. Al then compares the data to aggregated data, ensuring that parts are replaced on time and unplanned disruptions are minimized. 187 An Accenture and Microsoft survey of oil companies found that 86 to 90% believed "an increase in their analytic capabilities... would increase the value of their business. The companies surveyed also expected to increase their investment in AI and data analytics an average of 8.5% in the next few years. 188 Technology-based control practices show that there may be hope yet for U.S. shale.