What Oil Can Learn from Forestry
- Andrea Feunekes (Remsoft) | Kevin O'Marah (Stanford University)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- February 2012
- Document Type
- Journal Paper
- 20 - 22
- 2012. Copyright is retained by the author. This document is distributed by SPE with the permission of the author. Contact the author for permission to use material from this document.
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In his JPT March column, 2011 SPE President Alain Labastie made a compelling call for innovation and creativity. In “Innovation and Creativity Needed,” he said, “Innovation will be one of the keys for unlocking future production—new problems will need new solutions. Our innovation will be dependent on how rapidly we develop technology and our creativity in applying that technology. … Our creativity will be required to find really new solutions, through step-changes in applications as well as significant new uses of technology.”
He is right. Moving forward requires innovation and creativity—and risk taking. Some of the ways to accomplish this may lie in lessons learned from other sectors.
Forestry, for example.
Forestry is a tough industry, dealing with a mix of public and private lands, and facing a heavy regulatory environment, established competition, and the very low margins of a nearly pure commodity. Operating under these pressures for many decades has forced the sector to dig deep, both in terms of operational efficiency and long-term risk management, to assure survival.
The oil industry in many ways shares this same set of pressures, but with dramatically better long-term profitability and a more strategic place in the economies of nations and the world. However, oil may be able to learn a few lessons from foresters who have wrestled with these issues for a longer time and with fewer margins for error.
Consider first the urgency to watch every nickel. The Fortune 500 list for 2010 includes only four forest and paper products companies. These four had combined profits for the year of only USD 590 million. The top four oil companies, by contrast, delivered USD 61.2 billion in profits for the year. Forestry has been around for hundreds of years and in the process has become so commoditized that most companies have had to radically rethink their operating and capital structure just to stay afloat. Like Weyerhaeuser, the best of them have been able to stay on top strictly because their approach to optimization in long-term operations prevents wasteful spending and maximizes market timing of the harvest.
Simple but expensive activities such as building and maintaining access roads, servicing equipment, and buying fuel are watched with extreme precision to assure some payoff for investors. Oil production, by contrast, is more often a race against time than budgets when new production is coming online. Considering the similarity in operational spending across the two sectors, it is worth looking at how the best foresters are able to keep the business going while operating under thin margins.
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