The global fight for resources

Nothing is more telling of the global fight for resources than a few trips to Asia and long conversations with clients as I have learned this past year.

To build the roads, bridges, cars, planes, and power plants their people need, policy makers, CEOs, and consumers in India, China, Thailand, and Malaysia in Asia are all consumed by sourcing the traditional commodities of coal, oil, and gas but also metals, minerals, and chemicals.  The same stakeholders in resource-rich nations such as Australia and Indonesia are focused on keeping their customers happy while fighting cost inflation and talent shortages.

Even so, companies across the value chain are proactively investing in innovation to improve extraction productivity, find substitutes for increasingly scarce ingredients, and promote recycling.  As a result, Mosaic now extracts 97% — up from 90% — of phosphorus from phosphate rock, BASF is developing alternatives to rare earths in key refining catalysts, and Dewalt is offering discounts to incentivize lithium battery recycling.

You, however, need not necessarily travel to Asia to learn more.  Three books — Winner Take All, The Race for What’s Left, and The Oil Curse — provide interesting if sometimes biased accounts of these issues.

                    

A SURGE of energy entrepreneurship

My colleague asked excitedly, “Are you here yet?”, but I was still looking for parking. She declared “This is a party, not a conference” before urging me to come and find a seat quickly.

SURGE is a Houston-based start-up accelerator focused on companies developing software for the energy industry. After putting their inaugural portfolio of 10 companies through a grueling 12-week incubation program, SURGE introduced the start-ups to investors late last month at an unconventional but certainly hip House of Blues in Houston. Given ADI Analytics’ experience and interest in working with clean tech start-ups including some from SURGE, we showed up in good strength.

Along with an incredibly funny Jason Dorsey and an insightful Matthew Nordan, the companies presented their wares to better access information (drillMap, Molecule), reduce retail electricity consumption (Lowfoot, Pinnacle, Snugghome, tune), and improve operations (Fuel Miner, Revokom, Advanced Seismic, ActualSun). We particularly liked a few companies — drillMap, Fuel Miner, ActualSun — and invite you to check them out.

Corporate social responsibility in the oil and gas industry

Two interesting articles that appeared last week highlighted for me a project that ADI Analytics recently completed on benchmarking corporate social responsibility (CSR) in oil and gas companies.  The first was in the Economist and talked about how CSR is now more constructive and better ingrained with core business operations and goals.  The second is a long piece in the New York Times describing Shell’s efforts — not just within CSR but across a host of related corporate functions, including government relations — to begin drilling in the Arctic.

North American resources such as shale gas, unconventional oil, and the Arctic present to oil and gas companies a huge economic opportunity without the political and security risks that are often present in pursuing resources overseas.  However, the industry will have to assure communities, environmentalists, and other stakeholders of their commitment to responsible development.  Such efforts will need CSR and other functional capabilities that are best in class, driven by expertise and analytics, and both robust and flexible.

The “make vs. buy” lesson for Delta and Chesapeake

Ford Motor Company apparently owned the land that fed the sheep whose wool was used to make its car seats.  While this is, in fact, an urban legend it brings up a very valuable point.  What is more beneficial − make or buy?  In other words, should a company invest in owning and operating all the components to make its own product or should it focus its attention on outsourcing and buying those not critical to its value proposition?

In April of this year, Delta Air Lines reported plans to buy the 185,000-bpd refinery in Trainer, Pennsylvania from Phillips 66 Company for $180 million not including a $30-million incentive from the state of Pennsylvania.  Delta estimates fuel cost savings of $300 million annually.  One doesn’t quite know how those savings were calculated but hopes that they exclude the return on its investment even if Delta got a good deal (which it did).  Even so, the airline will soon learn that producing more jet fuel will incur additional capital or operating costs.  Further, placing gasoline and diesel through its complex bartering plans has unnecessary transaction costs.  Finally, if one of the largest independent refiners with significant R&D and technical resources found it difficult to run a refinery economically, one must wonder why someone with an entirely different set of core competencies thinks it can do better.

If the “make vs. buy” argument is too theoretical, Delta could look to Chesapeake and its oilfield services subsidiary, which was created to combat oilfield services inflation and promote the company’s exploration and production at lower prices.  The Wall Street Journal did a great piece showing how Chesapeake Oilfield Services’ enterprise value is likely 30% less than that projected by the company.

While both of these transactions were designed to save costs in the long run, they benefit no one because the operating companies do not have the core competencies to run these complex businesses.  In addition, there is already enough competition to supply these services and products.  So what Delta and Chesapeake need are savvy buyers and a prudent procurement strategy; not refineries or pressure pumps.