By Roger Anderson, Columbia University

Worst Blowout Ever? Coastal wetlands fouled? Seafood safe to eat? Miners killed? Survivors trapped for MONTHS? Drinking water polluted? Pipeline explosions? Refinery fires? Tanker spills?

The BP blowout in the Gulf of Mexico (GOM) has not quite faded from public view, but the ramifications of shaky safety practices will rattle throughout the worldwide energy industry for decades to come.  What’s going to fix our energy industry?

Let’s start with the obvious.  In our book, Computer-Aided Lean Management, we pointed to three exemplary manufacturing companies to guide the way to the transition to both cheaper and better systems engineering practices.  Since publication of the book, Toyota and Boeing have both fallen on hard times.  Only GE continues to excel. The lesson is that sustaining Lean Management processes requires constant vigilance to prevent sabotage of the very improvements and efficiencies that were so difficult to win in the first place.

After first getting it right, what Toyota and Boeing did wrong is a powerful lesson for BP and the Energy Industry worldwide.  Constant vigilance and challenges to business-as-usual will be required, once we get it right in the first place.  The energy industry will require double vigilance as we recover from our bad incentive programs: improper executive bonuses, ill conceived cost cutting, poor merger management, and faulty decision making.

My best answer to how we don’t fall off the Lean log, assuming we make it in the first place, is to watch the New York Times.  The “Grey Lady” is the “Newspaper of Record” for a reason.  Subscribe in the morning, then observe every evening how not only the cable TV news, but also mainstream channels repeat what you read that morning in the Times. The Times has not only an editorial culture of self-criticism, but also an independent “Public Editor” who they hire to work for their readers and not for them, to insure they publish “only the news fit to print” — see for example, the latest Public Editor’s  mission statement at http://www.nytimes.com/2010/08/29/opinion/29pubed.html?_r=1&ref=opinion .

The Energy Industry can only hope for that kind of self examination, AFTER we have gotten to Lean Management in the first place.  To get that far will require extraordinary leadership from the very tops of every major energy company in the world, including  government-owned, internationals, and independents. A tall task indeed.

Let’s start with Lean Manufacturing.  As you read in my last blog, we tried to convince BP that Lean Systems Integration was required for billion dollar, deep water oil and gas production in the 1990’s.  We even brought in Boeing to demonstrate that independent contractors, often welding on dirt manufacturing floors, could not see the big picture that life-of-system design and maintenance requires for superior performance.  That money spent upfront creates savings in the long run is a hard lesson to learn.

In the future and across the board, tragic mistakes must be prevented in the Energy Industry.  Such will not be avoided by hiring “image consultants” to cook up catchy news phrases or manage bad events after they have happened. Only difficult and expensive systems engineering up front  prevents disasters later on in the life of critical assets. Ask the aerospace industry.

The proof will be in the pudding. Read the rest of this entry »

July 25, 2010

By Roger Anderson, Columbia University

Lots has changed in the energy world since my last blog on this site.  Our Con Edison/Boeing/Columbia team won the largest Smart Grid stimulus award in the country at the end of November, 2009.  Our mission is to demonstrate the improved performance capable from adding Computer-Aided Lean Management (CALM), and the computational intelligence that CALM signifies, to the electric grid of a large urban city, New York.  After jumping through many, many Integrated Management Plan hoops that were right out of our book, we finally started work on June 1, 2010.  Summers are the highest stress times on the NYC electric grid, and we are collecting useful data on how the Smart Grid will in the future help urban utilities.

And then there was the BP blowout in the Gulf of Mexico.  I have been busy trying to add as much scientific and engineering “correctness”  as I could to coverage of the many news media outlets.  So far, I have been on the radio at AP, BBC, NPR, CBS, and in print at Scientific American, Washington and Denver Posts, AP, Reuters, Christian Science Monitor, and too many others to remember. Living in NYC, I try to stay off the TV so that no one will know what I actually look like.

Review my previous posts below, and you will see that they were prescient about the need for CALM in the deep-water oil world.  To prove the point, Tony Hayward, CEO of BP, resigned today after many contortions caused by BP’s lack of preparation for the possibility of such a “Black Swan” event.  Black Swans are the far end of the likeliness distribution, and so they surprise even the largest of corporations (and countries — think 911 and the U.S.) — when they happen.  On the one hand, foreseeing the worst has never been a strong human trait, but on the other, we worked directly with BP in the late 1990’s to convince them that they needed CALM methodologies to confront the real options of both success and failure in the deep-water, specific to the Gulf of Mexico (GOM).  We even brought in Boeing way back then, and I spent 3 years at Boeing’s Clear Lake, TX, offices (think NASA) trying to put together a project that would have delivered CALM and it’s requisite Systems Integration expertise  to BP.  We discussed using CALM at Thunder Horse, and the two other giant oil fields in the GOM deep-water that they had  discovered back then (Atlantis and Holstein).  BP rightfully thought Boeing alone was too great a risk because they had no oil field experience, so we added Kellogg, Brown and Root (KBR) to the team.  We were never able to convince BP that the benefits matched the costs, mainly because the costs from such a Black Swan event as we are now experiencing, were then beyond the imagination of BP’s Executives and Board of Directors.  To his credit, Tony Hayward was one of our biggest management champions back then.  Also,  such executive decisions are not surprising, and persistence is required.  Boeing is a big company and its skills are in high demand, so their management could not wait for BP to decide.  They withdrew to more familiar turf, as well, and the rest is history, unfortunately.  It is ironic that now I am developing Smart Grid electricity technologies for Con Edison, Boeing and the country, while BP and the entire deep-water  oil industry are reeling (for example, I was on the NPR of Brazil talking about lessons that they can learn from our GOM blowout).

We are experiencing not so much “Peak Oil” (google it) in oil Production, as is being predicted, but likely instead, Peak Oil Consumption — if not in the world, certainly in the U.S. — as the general population finally realizes the tremendous hidden costs of cheap gasoline and diesel (think military as well as civilian costs).

To put my money where my mouth is, our family went out yesterday and bought our first hybrid car — admittedly a Lexus HS rather than a Toyota Prius.  We would have waited for a Chevy VOLT, but my parking garage at Columbia does not yet provide charging outlets for such an all-electric car. I venture that 5 years from now, when our Lexus Hybrid is “obsolete”, Columbia will have many “green garages”, and the world will have had no more deep-water blowouts.  Let’s hope so.

By Roger Anderson, Columbia University

Nathan Edmonson’s thought-provoking comment on my last Blog entry “Implementing the Lean Smart Grid” had me thinking all last week about my dear friend Rick Smalley of Rice University. First, he discovered the “Buckyball” or Carbon Fullerene and won the Nobel Prize in Chemistry in 1996. Then, as his newly found freedom of thought took him on a crusade to convert the discovery into practical science to solve the world’s energy problems, he was struck down by cancer.

He died in 2005, but his crusade to produce and transmit enough energy to satisfy the needs of everyone on the planet continues. In his “remission years,” Rick was convinced that one of the biggest impediments to abundant and cheap energy for all was that there simply were not enough scientists and engineers choosing to work in the profession. Many more would be needed to invent the discoveries necessary to keep up with energy growth, let alone produce the required abundance. Computer-Aided Lean Management consists of a set of tools and techniques to fill this gap by empowering the best and brightest to do more with less. However, Lean concepts are often misconstrued by management to think it empowers a company to do the same with less. More below the fold.

Back in 1998, I wrote an article called “Oil Production in the 21^st Century” for a special issue of Scientific American on the “End of Cheap Oil.” I was feeling optimistic about the technologies for production growth keeping up with international demand in the energy industry. Unfortunate and short-sighted management trends that were decidedly not Lean have since affected my optimism. When the oil price collapsed from $25 to $12/barrel at the end of the 1990’s, energy industry management slashed their technical and scientific staffs. These cuts were on top of the merger-mania layoffs of the 1980’s. They were so extreme that when the companies finally began, belatedly, to hire again in 2005 (when oil passed $40 barrel), an entire generation of knowledge-workers had been lost, leaving the industry technically crippled. Today, even after that heart stopping peak in oil price of $147/barrel last year and an international recession pumping billions into energy projects like the Smart Grid this year, too few new scientists or engineers are entering the profession. And that includes electric utilities as well as oil and gas companies. The graying and massive retirements of the old, experienced generations and the failure to hire and train several new generations of the world’s “best-and-brightest” could be devastating to the continued development of the energy industry. Where is the next Rick Smalley to sound the warning now that we really need it?

Energy is not an easy business to manage well. Whether it is oil, gas, electricity, or renewables, the energy industry requires long-term, massive investments in not only people but also in inter-dependent, heavyweight infrastructure. It also requires intelligent management of market forces that are dominated by risks from uncertainties such as weather, price and cost variations, governmental actions, wars and terrorism, global logistics problems, and asset reliability. There have been numerous advances in Computer-Aided Lean Management practices that have revolutionized the risk/reward performance of industries such as aerospace (Boeing and Lockheed Martin), automotive (Toyota and Honda), retailing (WalMart and Procter & Gamble), computers (Microsoft and Apple), heavy manufacturing (GE and Siemens), and the internet (Google and Amazon). Yet few comparable Lean Management innovations have come out of the energy industry in the last 10 years. Today, Computer-Aided Lean Management routinely transforms the information flow in these businesses into efficient optimization of decision making in an uncertain world. Without these Lean tools, energy companies are experiencing crippling difficulties in efficiently collecting, handling, comprehending, and converting their operational information into real options for future growth. Such knowledge transfer is the enabler that will ultimately result in optimal management of assets and people in the energy industry as well.

by Roger Anderson, Columbia University

As utilities and suppliers await the funding of the modernization of the electric system in the United States that goes by the name “Smart Grid”, there seem to be two schools of thought circulating across the country. There are those looking forward to the change and those dreading the consequences of the change.  Both camps have valid worries.  Those looking forward to the change that the Smart Grid will make to our economic and personal welbeing, are anticipating a new paradigm of cheaper, more reliable power delivery from cleaner and greener sources.  Those fearing the changes worry about more rather than fewer blackouts, costs that will increase with time, and even an electric grid made more vulnerable to terrorist attack.  As the Smart Grid becomes more like the Internet, they worry that worms, viruses, and as yet unnamed cyber attacks will bring down the grid.  More below the fold.

Both of these futures are possible, unfortunately, as the U.S. begins to reinvigorate the “greatest machine ever built by humans.” The course will be decided by how well we implement the changes, not by how high tech they are.  As our book on “Computer-Aided Lean Management for the Energy Industry” goes to great lengths to point out, a Lean implementation is only as successful as its methodologies.  If the U.S. government just throws the stimulus money into the industry without an Integrated Master Plan and Schedule executed with critical paths and performance metrics to judge progress and redirect failing efforts into more successful paths, then we can expect a mess at the best and a catastrophe at the worst. If instead, as in any Lean Implementation, there is an overall program plan coming out of DOE beginning in November, expect a huge success.  This is how to tell.  Look at the overall grants of funding across the country and see if you can see any logic to the decisions.  An example of  logic that is not Lean was the Department of Homeland Security’s funding after 9/11.  DHS scattered money all across the U.S. except in the main terrorism targets of New York City, Washington D.C. and the country’s other largest cities.  A good Lean implementation can be found from the Department of Defense through DARPA’s creation of the Internet, which steadily proceeded from a military-only net, to a university-mostly net, to an everybody-everywhere net.  That progression was foreseen, planned, and scrupulously executed over many, many years.

As we begin the building of the Smart Grid, look for the following Lean traits:  1. Cyber-security, built not only on standards gathered together by committees of experts via the Department of Commerce, but founded also on military technologies already proved invulnerable against real attacks by foreign countries and terrorists and tested daily by our own National Security Agency.  If present, ask if it is being applied uniformly across the country; 2. Interoperability, so that any hardware or software that is value-adding to performance can be plugged into the Smart Grid and played by all. Think of the thousands of apps for the Apple iPhone as opposed to the few tens that work with Microsoft’s Zune; and  3. Open Software, that allows any application adding value to the Smart Grid to communicate with valuable apps from other manufacturers and the vast volume of new data the will be exchanged both ways between utilities and customers. Look for what is called in the computer industry a “Middleware” layer that takes care of the communications, data transfer, visualization and implementation of actions between systems from any manufacturer to any other.

We see three different locations that the (hopefully) Lean government  implementation plan will have to cover with new Smart Grid technologies and techniques: 1. what we call the “vertical” city of skyscrapers and dense urban living; 2. the “horizontal” city of vast populations spread over large urban areas but with few high rise buildings; and 3. the suburbs where economies in the home and with Electric Vehicle recharging will occur.

With Peak Oil fast approaching, this coming transition from the present hydrocarbon economy to the future electric economy powered by the Smart Grid must succeed if the world is to maintain its progress towards the admirable goals of life (read food, water and shelter), liberty (read whatever each considers liberty to be), and that wonderful expression that requires no further definition in any language, the pursuit of happiness.  Wish us all Luck.

The problem with the Obama Stimulus Funding intended to drive the U.S. towards Energy Independence is that it hasn’t hit Main Street yet.  I am immersed, perhaps like many of you, in a ‘War Room,’ writing a gigantic proposal to the Department of Energy in hopes of getting Smart Electric Grid funding for the next few years.  The problem with this strategy is that the Smart Grid will take 20, maybe 30, years to roll out across the country.  Where will the sustainable, Lean Management for such a concentrated effort for such a long time come from, especially with Washington controlling the purse strings?  It reminds me of the other big event of the week, the 40th anniversary of man’s landing on the Moon.  If the Smart Grid is not to end up a dead end like the lunar mission, we have to come up with ways of funding it far beyond the rebound of our current massive recession that we all hope is soon to end.  After a career spent admiring the Defense Applied Research Projects Administration (DARPA) as it funded massive computer innovations sustained over 20 year time periods, such as the Internet (taking it from its early Mil-net days) and super-computers (taking them far beyond just modeling nuclear weapons), I have high hopes that ARPA-E, the DOE equivalent, will be the sustaining force for the Smart Grid in America.  ARPA-E is designed after DARPA to take innovation across not one, but two gigantic chasms:  the first is from Research to Development, and the second is from Development to Deployment.  The inherent problem with the Smart Grid is that all across the country, utilities are manning their War Rooms writing what I suspect are not proposals focused on the smarts in the smart grid, but on the information needed for the smarts of the smart grid….a beginning, true enough, but only that.  As a country, we will have to sustain the effort across decades in order to transition from an electric grid in which electrons are pumped into copper wires only to slosh around freely until they are consumed somewhere by anything, to a smart grid that, like the Internet, parses this valuable commodity and sends it among many intelligent routes to its optimal intended destination.  Sounds strange doesn’t it, but electricity in the coming electric economy will become both cheap and incredibly valuable, so that it simply must always be there for everyone to use if we as a planet are to pursue happiness as we all hope we will, someday.

Tony Hayword, the CEO of BP, has a Ph.D. in Geology from Edinburgh University.  He is a very smart guy, so his recent indications that BP is refocusing on its core skills of finding, producing, refining and selling oil and gas are to be taken very seriously.  Looks like the era of ‘Beyond Petroleum’ is at least temporarily derailed.  Whether that is the right move for major international oil companies in this economic climate is not a question of this essay.  Rather I would like to focus on the “Computer-Aided Lean Management” alternative to such refocusing-on-the-principals events in the Energy Industry.  The Lean solution would be to keep as real options all future possibilities for diversification by continuing investment in as many alternatives for selling into an unpredictable and dynamic market into the future as possible.  As new and unexpected world changes become realities, it is always a threat to any company’s sustainability that their market will change out from under them.   We all know of companies that were defeated in the marketplace not by competitors, but by the marketplace changes.  A Lean company in the oil and gas business would always be looking to sell its core products in as diverse a way as possible.  Real Options are the mathematical formulation of the projected worth to the company of keeping such options open.  To give a specific example, oil and gas production can always be converted into electricity directly at the site of production. We do it all the time to drive generators to power our offshore and remote drilling rigs.  To do it at a sufficient scale to sell enough to capture price anomalies among oil, gas and electricity in reachable markets requires estimates of the maximum and minimum real option value of those investments from “cradle-to-grave.”  Arbitrage among varying prices in as many markets as profitable is a fundamental advantage to any company.  Specific to oil, gas and electricity, the oil price has recently been way out of kilter with it’s equivalent BTU value of 7:1 versus natural gas (barrel to mcf), mostly because of hedge fund speculation in the market.  If you don’t believe that, look at the precipitous drop in NYMEX price this last week from >$70 to <$60 because of threats to regulate and make transparent such speculation in the U.S. and Europe.  Adding price variability from gas affected as always by the cost of long-distance transportation, and from electricity’s transmission congestion makes for a compelling case for evaluating the real option of conversion of oil and gas to electricity for every giant oil discovery in the world at the moment (that is not in the Middle East, that is).  Yet, no oil company that I know of (with the possible exception of PetroBras) is currently computing such 3-way, oil-gas-electricity real options.  Anyone out there know of others?  Beyond Petroleum was my biggest hope.

By Roger Anderson

Columbia University

New York

We all hate getting caught in urban traffic jams; especially those with semi-trailer trucks everywhere.  A Computer Aided Lean Management (CALM) approach to traffic congestion in the cities of the world creates win-win solutions to such complex problems.  My favorite is to lower the volume of vehicles on the roads by voluntarily moving people to electric subways, buses, and rail systems by making them faster, more energy efficient, cheaper, and most importantly, more reliable than driving to work.  If the remaining cars, taxi’s and delivery trucks on the roads use hybrid and electric power trains, we also lower emissions of particulates and CO2.  That improves both our chances of stopping the global climate change that is messing up our weather and our health (tuberculosis and asthma).

Converting our cities to electric transportation systems requires conversion from only gasoline and diesel stations to electric recharge sites and e-parking garages;

And that requires that the electric grid must deliver ever more electricity to cities in environmentally and carbon neutral ways;

And that requires massive, renewable electricity sources such as wind and solar farms and new transmission lines integrated with distributed generation and storage facilities, such as photovoltaics on every rooftop and batteries in every garage;

And that requires integration of the electric grid with other vital infrastructures like transportation, water and sewage (electric pumps are critical to these systems);

And that requires nations to modernize each, in order to integrate them into a smart infrastructure system with enough controls, monitors, intelligence, and above all security, so that the power never goes out;

And that requires collaboration among the great cities of the world to make such an intelligent, efficient, clean, green, affordable infrastructure management system available to all inhabitants of the modern cities of the future, whether New York, Chicago, Los Angeles, San Francisco, Phoenix, , Dallas, Houston, or Shang-hi, Hong Kong, Singapore, Beijing, Tokyo, Mumbai, Moscow, Cairo, Jerusalem, Berlin, Paris, London, Madrid, Rio, San Paulo, Caracas, Lima, Buenos Aires, or your city.

The “good” news from the current global economic meltdown, if you can call it such, is that for the first time since after World War II, we might have the focus required for an urban infrastructure makeover that is global in scale and scope.  In order to get it right, CALM tools and techniques must be used for such major surgery to the energy systems of the world.