Supply Chain Practices in the Petroleum Downstream by Fidel Santos Manzano Engineering Degree Universidad Pontificia Comillas Icai-Icade Madrid and Ecole Centrale Paris MSc Economics and Management IFP School-Enspm Submitted to the Engineering Systems Division in Partial Fulfillment of the Requirements for the Degree of Master of Engineering in Logistics MASSACHUSETTS INSTIMUTE at the OF TECHNOLOGY Massachusetts Institute of Technology JUL 15 2005 May 2005 K LIBRARIES ©2005 Fidel Santos Manzano All rights reserved The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part. Signature of Author ................... ........................... / Engineering Systems Division / ~-'May 2005 Certified by ............................................... ... ................ Dr. Lawrence Lapide Research Director, MIT CTL Thesy Supervisor Accepted by ...................................... .................. Yossi Sheffi Professor of Civil and Environmental Engineering Professor of Engineering Systems Director, MIT Center for Transportation and Logistics BARKER Supply Chain Practices in the Petroleum Downstream by Fidel Santos Manzano Submitted to the Engineering Systems Division on May 6, 2005 in Partial Fulfillment of the Requirements for the Degree of Master of Engineering in Logistics Abstract This thesis studies current supply chain practices in the petroleum downstream industry, using ExxonMobil as a case study. Based on the analysis of the literature and the interaction with industry experts, this work describes the main supply chain issues and challenges in the downstream sector. Moreover, supply chain strategies used by different players in the industry are studied, analyzing in particular the progressive but slow shift of the industry towards a holistic supply chain view. Finally, ExxonMobil operations are used as an illustration of several of the aspects of the previous general analysis. Advisor: Dr. Lawrence Lapide (Research Director, MIT CTL) ii Acknowledgerments I would like to thank all the MLOG class of 2005 and the rest of the people that made this year in Cambridge a wonderful learning experience. I would like also to thank Dr. Lawrence Lapide for his availability and especially his patient and insightful help in the development of this thesis. Finally, I am also grateful to the persons involved in the network of the Supply Chain 2020 Project that have actively collaborated with this thesis: Bruce Logan (AspenTech), Malavika Melkote (i2 Technologies), Andy Ott (UPS Supply Chain Solutions) and Parrish Potts (Accenture). Dedication To my family. iii Biographical Note Fidel Santos Manzano obtained engineering degrees from Universidad Pontificia Comillas and Ecole Centrale Paris. He completed a Masters in Economics and Management at the IFP School - ENSPM and has worked during five years in the energy industry. iv Table of Contents Abstract .............................................................................................................................. ii Acknow ledgem ents ......................................................................................................... iii Dedication ......................................................................................................................... iii Biographical Note ........................................................................................................ iv Table of Contents........................................................................................................ v List of Tables ................................................................................................................... vii List of Figures ................................................................................................................ viii 1 Introduction .......................................................................................................... I 1.1 Purpose of this thesis ....................................................................................... 1 1.2 Research methodology ................................................................................. 2 2 Literature Review .................................................................................................. 3 2.1 Supply Chain 2020 ...................................................................................... 3 2.2 Petroleum downstream industry ................................................................... 3 2.3 ExxonMobil .................................................................................................. 5 3 Industry O verview .................................................................................................. 6 3.1 Products and services .................................................................................. 8 3.1.1 Products ..................................................................................................... 8 3.1.2 Manufacturing processes ............................................................................ 11 3.1.2.1 Crude oil distillation.................................................................................. 12 3.1.2.2 Conversion ............................................................................................ 13 3.1.2.3 Final treatment and blending...................................................................... 14 3.1.3 Crude oil sourcing decisions ....................................................................... 15 3.1.4 Petrochemicals.......................................................................................... 17 3.1.5 Distribution and marketing ......................................................................... 17 3.2 Historicalrevenues, operatingmargins, and employees................................... 18 3.3 Evolution of top 5 companies in it ................................................................... 19 3.4 Customer segments and sales channels............................................................ 20 3.5 Industry & supply chain structure ................................................................... 22 3.6 Trends and industry drivers .............................................................................. 24 3.7 Supply chain challenges and opportunities..................................................... 26 4 ExxonM obil position in the industry................................................................ 30 4.1 Historicalcompany revenues, operating margins, and employees ................. 32 4.2 Business units.......................................................................................................32 4.3 Products and services ...................................................................................... 33 4.4 Sales channels and customer segments ........................................................... 35 4.5 Top competitors andpositioning againstthem over time................................. 35 V 5 ExxonMobil's Main Issues in Downstream Supply Chain............... 38 5.1 Analysis of downstream supply chain strategy................................................. 38 5.2 Porterfivejforcesanalysis in the case offuel retailing..................................... 38 5.2.1 Threats of entry .................................................................................................... 41 5.2.2 Power of buyers .............................................................................................. 42 5.2.3 Power of suppliers ............................................................................................ 42 5.2.4 Threat of substitutes........................................................................................ 43 5.2.5 Competitive rivalry .......................................................................................... 44 5.2.6 Conclusions of Porter'sflive/brcesanalysis ................................................... 46 6 Conclusions ........................................................................................................ 47 Bibliography .................................................................................................................... 49 V1 List of Tables Table I - Annual revenues (Source: Fortune 2004) .............................................................. 18 Table 2 - Annual net income (Source: Fortune 2004) ............................................................ 19 Table 3 - Number of employees (Source: Fortune 2004)......................................................19 Table 4 - Worldwide refining capacity (Source: Oil & Gas Journal2004)...........................20 Table 5 - Financialresults (Source: ExxonMobil) ................................................................ 32 Table 6 - Physical volumes of ExxonMobil operations (Source: ExxonMobil 10K)..............34 VII List of Figures Figure 1 - World oil/lows (Source: McGraw Hill 2002)........................................................6 Figure 2 - Oil tradeflows (Source: BP StatisticalReview of World Energy 2004)..................7 Figure 3 - Petroleum products and applications................................................................... 11 Figure 4 - Petroleum refinery basic configuration................................................................. 12 Figure 5 - Proven oil reserves (Source: BP StatisticalReview of World Energy 2004)......22 Figure 6 - Oil production by area (Source: