Oil Dependency Audit

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Oil Dependency Audit

• Simon Snowden
• University of Liverpool

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Agenda

• Introductions
• Reminder of the issue
• Process Overview
• Case study
• Oil vulnerability potential solution themes
• Next steps

3
Who Are We?

• Agility Centre
• Investigate how market turbulence affects
  business
• Targeted intervention in SMEs

• Oil Depletion Impact Group
• Social scientists investigating the implication
  of oil depletion

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The University of Liverpool Management School
Risk Crisis
Accounting Finance
Marketing
Corporate Governance
Leadership/ Strategy
Areas of Specialism
Public Admin Policy
Enterprise Entrepreneurship
Knowledge Management Innovation
E-Business Operations Management
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Who We Work With
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The Issue is NOT the Amount of Oil

• Rate of Production of Oil Products
• Upstream Constraints
• Refineries
• The Type of Oil
• Geological constraints

• The end of cheap oil, the end of cheap energy,
  the end of cheap transportation, the end of cheap
  food.

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The Threat of High Oil Prices
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IEA Global Demand

• No model
• Hard to model
• Difficult to predict policy
• Considerable downside uncertainty
• Non-OECD Data opaque
• Contentious
• Shortages undermine predictions
• Anything from 2 to 36 months
• Unsure of NOC policy
• Political Insecurity

• Prices
• Substitution
• Subsidies
• Economic Growth
• Data
• Biofuels
• Project Slippage
• Decline Rates
• Operating Environment and Constraints
• OPEC Supply

We Dont Know!
Laurence Eagles - Medium Term Oil Market
Uncertainties OECD International Transport Forum
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Demand Destruction

• Demand Elasticity
• China
• Trade Imbalance
• US Debt
• Purchasing Power
• OECD
• Accepts non-OPEC crude oil Peaked

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The Bottom Line
Profit Revenue - Cost
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Context

• Legal
• Civil Contingencies Act 2004
• Market
• Market conditions
• Environmental conditions
• Impact on the environment
• Impact of the environment
• Social conditions
• Supply chain
• STEEP
• Social, Technological, Economic, Environmental,
  Political

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Oil Vulnerability Audit Process Overview

• Outputs
• Project Plan
• Resources/Teams
• Output List
• Data Requirements

Define OVA Project
Confirm Outputs Expectations
Brief Team
1. Preparation
2. Identify Prioritise

• Business Summary
• Entity List
• Strategic Entities

Business Overview
List Entities
Prioritise Entities

• Activity List
• Process List
• Process Maps
• Resource List
• Costings
• OV Points
• Prices Analysis

3. Analyse Processes Activities
Define Activities Business Processes
Define Resources, Costs Costs Drivers
Identification Analysis of Oil Vulnerability
Points
4. Report Feedback
Compile Report
Present to Business

• OVA Report
• Top 3 OV Issues

Agree Top 3 Issues
Continue?
Energy Efficiency
Renewable Energy

• Potential solution themes/areas
• Certainty indicator

5. Research Solution Themes (e.g.)
Material Substitution
ID Solution Providers
Knowledge Txfr Progs

• Solutions Report
• Action Plan
• Responsibilities
• Costs
• Timings

6. Action Planning
Compile Solutions Report
Present to Business
Agree Action Plan
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Entity A Strategic Entity
ACTIVITY 1
ACTIVITY 2
ACTIVITY 3
ACTIVITY 4
ETC
Activities
PROCESS A1-1
PROCESS A3-1
Processes
PROCESS A2-1
PROCESS A1-2
PROCESS A3-2
PROCESS A2-2
PROCESS A1-3
PROCESS A3-3
PROCESS A1-4
Resources Costs
Allocated back to Processes, then rolled up to
Activities
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Oil Vulnerability Pathways
Energy
Liquid Fuel
Petro-chemical
Man-Made Material
Component
Direct heat or power from burning oil.
Transport fuels petrol, diesel, kerosine etc.
Products made from crude oil chemicals, naptha
etc.
Nylons, plastics etc.
E.g. Plastic window frames, rubber gloves
Most quickly vulnerable to price volatility when
resource is closer to crude oil due to higher
proportion of oil-based costs cost movement
lag. For this process, we just assume is
vulnerable if it falls in these categories.
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Entity The Dairy Herd Base Line
Activities
CULTIVATION
CLEANING
FEEDING
MILKING
ETC

• Baseline items that are directly oil
  vulnerable
• Shows significant OV
• Feeding is most significant part of costs
• Cultivation is most significant part of OVR (tho
  OVR is small in absolute terms)
• So a focus on Cultivation appears sensible

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Entity Dairy Herd Base Line
CULTIVATION
Activities
HARVEST
Processes
SPRAYING
FERTILISING
CULTIVATE

• Within Cultivation, the Spraying process is most
  significant for OV (due to costs of
  petrochemicals). 80 of Cultivation costs are oil
  price dependent.
• Fertilising also looks significant (the cost of
  fertiliser, heavily reliant on hydrocarbons for
  its production)

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Entity The Dairy Herd - Feed
CULTIVATION
CLEANING
FEEDING
MILKING
ETC
Activities
(incl feed)
(excl feed)

• Now nominated feed (including protein feed) as
  oil vulnerable due to heavy cultivation
  expenses
• Immediate increase effect on OV
• Change in significance from Cultivation to
  Feeding

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Finding Solutions

• Fixed Costs
• Variable costs
• Step Variable Costs
• Converting between fixed and Variable Costs
• Marginal Costs and Profit

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Finding Solutions
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Solution Themes

• Unfortunately

Moving from the oil based to the oil free doesn't
guarantee freedom from oil driven price
increases.
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Vulnerability Mapping

• Where is value added
• Where is the vulnerability
• Crossover points
• Types of vulnerability
• Vulnerability to price
• Vulnerability to supply
• Vulnerability to quality
• Targeted intervention
• Trigger points
• Scenario Testing

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Exploration of Farms Oil Vulnerability

• Operational Changes
• Spot treatment with petrochemicals (hand
  application)
• Trade off labour costs against fuel, and
  petrochemical costs
• Increased foraging
• Increase in silage
• Trade off milk yields against process feed costs
  (both of above)
• Carry over seed
• Trade off of seed costs against capital
  expenditure
• Must take into account potential cereal costs
  into the future
• A crop nutrient monitoring programme
• Timing of fertiliser application
• Crop rotations
• Increase clover on grazing land nitrogen fixing
  
• Reduced till system
• Trade off between fuel, petrochemical, and seed
  costs
• GM crops

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Exploration of Farms Oil Vulnerability

• Strategic Changes
• Dual Purpose Crops
• wheat bioethanol 1/3rd of crop left as a high
  quality animal feed oilseed rape biodiesel
  leaves 50 of crop as high protien animal feed
• 364 litres of oil from 1 tonne of seed
• Consider Diversification
• Energy Production
• Anaerobic digestors 4000 in Germany, just 20 in
  UK
• Example unit in Dorset had 20 return
• Consider all cycles on the farm, the more closed
  circles the better.

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Additions

• Track any resource
• key skills
• Carbon footprints
• To act requires understanding
• Decompose the carbon footprint into the
  organisation
• Fixed and Variable Carbon costs
• Marginal Carbon Costs

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Where Next?

• Awareness Raising
• Training
• Organisations
• Groups
• Individuals
• Consultancy
• Contact Details
• Nick Palmer Nick.Palmer_at_liverpool.ac.uk
• Tel [phone]