Production and Operations Management - Assignment Example

Marathon Oil Corporation of Production and operations management: Marathon Oil Corporation INTRODUCTION: MarathonOil Corporation is a multi-national oil and gas exploration and production company headquartered in United States. Marathon’s upstream activities can be classified into three categories; exploration and production, oil sands mining and integrated natural gas. The company is located in US, Canada, Angola, Equatorial Guinea, Indonesia, Libya and North Sea. It supplies hydrocarbons and natural gas to world’s developing energy markets. The downstream activities of Marathon are; refining, marketing and transportation. Marathon is the fifth largest crude oil refiner in US. The company has developed its network in all the inter-related activities that includes crude oil imports, refining, marketing and transportation to terminals and eventually to company owned convenience stores and gas stations. 1. Analyze Marathon’s product process and determine which phase is open to the greatest number of efficiency improvements. Explain your rationale.  The most important function of production and operations management is to manage the production process in way that reduces the lead time, minimizes the wastage of resources and ensures continuity of operations. On one hand the supply chain management of US oil and gas industry is very efficient. Normally it takes 24-35 days to transfer the finished products; gasoline, diesel fuel and other petroleum products, but the lead time can be significantly reduced if improvements can be made in the 2nd phase which is called; crude oil pipeline. It takes 8-10 days to transport crude oil from St. James to Marathon Robinson, Ill. Refinery. Since, oil is the basic necessity; therefore, efforts should be taken to reduce the transportation time, in order to ensure continuous supply of oil, petroleum products and Natural gas. In order to accelerate the process of crude oil transportation through pipelines, America’s oil and gas industry has two options. First, it may replace 40 inch diameter pipelines with 48 inch diameter pipelines which will increase the capacity of these pipelines so that more than one million barrels of crude oil can be transported each day, which is the current capacity. On the other hand, the second option will be to transport crude oil directly from LOOP to Marathon Robinson, Ill. Refinery. Briefly, instead of transporting crude oil to St. James, the crude oil should be directly transferred to refineries which will significantly improve the efficiency and speed of the process. However, the major hindrance in this case would be the huge cost required to build the new pipeline infrastructure. 2. Discuss the relationship between the retail price of gasoline and the world demand for crude oil.  Crude oil and gasoline have a direct relationship, because gasoline and other petroleum products are extracted from crude oil. Crude oil is traded in international market like gold, silver and other prestigious metals, while gasoline is traded in regional or national markets. “In some cases, the price of crude oil may account for up to half the price of a gallon of gasoline”, (Chevron Corporation, 2011). The reason behind this is that the retail price of gasoline is determined by considering several factors which includes the cost of refining, transportation cost, storage cost and profit margins of wholesalers and retailers. Furthermore, each state imposes independent taxes on each barrel of gasoline which further increases its prices. That is why we often observe that the price of gasoline rises quickly when the price of any of the given factor increases but it drops very slowly. On the whole, the retail price of gasoline is mostly influenced by international market rates and not by the demand and supply patterns. When the international price of gasoline rises, the retailers have no choice but to increase the retail price in order to earn their mark up. Moreover, with the increase in price, the price for refining, transportation cost and storage cost also rise causing a multiplier effect on the final retail price, which further increases inflation in the county. However, when the price of crude oil falls in the international market, we observe strict competition among the gas stations. If one station, lowers its price to attract more traffic than the other station has to do the same in order to beat the competitors. This intense competition results in cutting the retail price of gasoline to a point where retailers earn only a small mark up on their sales and the price of gasoline finally reaches to its lowest level. 3. Explain what Marathon could do to keep the price at the pump the same without losing profits if global crude production decreased by 10%.  When the supply of crude oil will decline as a result of under production of crude oil, the demand for oil will rise. However, due to shortage of supply, the sales transactions of Marathon will decline because the available stock of gasoline and other petroleum products will not be sufficient to meet the demand and to generate sufficient revenues. In such a situation, Marathon should take several cost cutting measures in order to secure its profits. For instance, the company should forecast its demand and accordingly purchase the crude oil in bulk in order to get quantity discount. But the storage cost of the barrels of gasoline should not be greater than the quantity discounts. Moreover, the company should try to generate revenues by giving emphasis on the extraction, production and sale of other petroleum products, which is an important business segment of the company. Also CNG is important substitute for petrol, therefore the company should also focus on increasing the demand for CNG by reducing its prices so that the customer traffic can be shifted. Apart from this, the company needs to reduce labor wages and labor time. Hiring cheap labor can save money spent on salary expenses and the revenues of the company will incline resulting in realizing more stable profits. Moreover, corporate expenses must be reduced and efficient measures can be adopted during the refining phase. On the other hand, the pumps can keep the price of fuel same by earning money from other activities. It is observed that gas stations earn more money from the sales made at convenience stores, auto repairs and car wash. Ironically these activities generate more profits in contrast to selling fuel which is the core business of the gas stations. This is how the gas stations can cope up with the challenges of demand and supply of crude oil and petroleum products. 4. In June 2010, President Obama imposed a six-month deep-water drilling moratorium. Determine the impact of a continued moratorium on deep-water drilling for retail gas prices in the U.S.  The “deepwater Horizon” during April-June 2010, has resulted in severe ecological damage and financial losses. Furthermore, the clean-up cost was relatively high as approximately 3 million barrels of crude oil was released in the Gulf of Mexico. Therefore, President Barak Obama imposed deepwater drilling moratorium for six-month so that new safety measures can be taken to ensure safety during deepwater oil and gas drilling. According to US Energy Information Administration (EIA), the production of oil in Gulf of Mexico was 567 million barrels while natural gas production was 2662 billion cubic feet in 2008. “EIA estimates that the six-month moratorium on deepwater offshore drilling will reduce U.S. crude oil production up to 70,000 barrels/day and natural gas production up to 0.24 billion cubic feet/day in December 2011”. On the other hand, the US consumption of oil is estimated to be 19.5 million barrels/day and the consumption of natural gas is estimated to be 61 billion cubic feet/day. Considering the consumption and production forecast, it is probable that the tightening of government control on deepwater and ultra deepwater drilling will increase the cost of exploration and refining of crude oil due to the increased safety standards. In order to deal with higher cost, US oil consumption will be declined and the US imports of crude oil will increase. But on the whole, since US production of oil and natural gas is significantly lower than the consumption; therefore it will not have a major impact on the “world oil prices”. The oil prices are projected to rise by 0.25 percent above the baseline in 2011 (EIA, 2011c). However, if “permanent” ban is imposed on underwater drilling, only then we can expect a significant impact on the world oil prices and the price is expected to increase by 3.54 percent in 2011. Similarly, if the deepwater moratorium remains for six months only, then the price of natural gas is expected to rise by 0.23 percent in 2011, but in case of permanent ban the prices are projected to rise by 2.13 percent in 2011 (EIA, 2011c). References Chevron Corporation, (2011). The price of fuel: supply and demand overview, Journal of the price of fuel. Retrieved from http://www.thepriceoffuel.com/whataffectsfuelpricing/ Brown, P.A. (June 2010). Some implications of tightening Regulation of U.S. deepwater drilling. PDF; “energy information administration”. Retrieved from http://www.rff.org/rff/documents/RFF-BCK-Brown-Regulations.pdf Austin, B. (2010). Deep Drilling Moratorium Impact on US Gulf Coast Economy Outlook - Houston Oil and Gas Drilling Industry Forecast. Blog; “Oil and Gas Drilling Company Downgrades After Gulf Drilling Ban” Retrieved from http://hubpages.com/hub/Drilling-company-ratings Read More