Geary W. Sikich

Energy Sector: Transparent Vulnerabilities

Geary W. Sikich

Copyright 2008, all rights reserved, Logical Management System

The Future? The twentieth century saw unprecedented growth in population, energy consumption, and food production. As the population shifted from rural to urban, the impact of humans on the environment increased dramatically. The twenty-first century ushered in an era of declines, in a number of crucial parameters: Global oil, natural gas, and coal extraction Yearly grain harvests Climate stability Population Economic growth Fresh water Minerals and ores, such as copper and platinum To adapt to this profoundly different world, we must

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A Premise  The U.S. is a petroleum based economy dependent on cheap, abundant sources of petroleum products to continue society as we know it today.  We place a heavy dependence on technology to provide solutions.  Our debt is financed by foreign investors and is used to pay for increasingly expensive imports.  Our population is less educated (skill sets, human capital capabilities), therefore, less flexible, less adaptive to rapid change. Adaptive

Dependency on Technology

Flexible

Complexity

Probability of occurrence – Value of everything at risk

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What does the future hold? We are faced with: Aging infrastructure – highly dependent on foreign sources of raw materials and finished products; Crude Imports 1982 - 2007 6000000

Aging workforce; Thousands of Barrels

Slow uptake on alternatives;

5000000

4000000

3000000

2000000

1000000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Increasing demand from growing markets for the resources that we have traditionally viewed as an extension of our domestic supply.

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Aging infrastructure UNCLASSIFIED

345 - 499 kV 500 kV 765 - 1000 kV UNCLASSIFIED

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Aging infrastructure Once upon a time built in America Originally built in America it has sustained the United States for over a century: Now we are heavily dependent on foreign manufacturers to produce the products once made domestically in order to keep it running No Nuclear Plants since the 1970’s No New Refineries since Garyville, Louisiana, 1976 Increasingly “single point of failure” vulnerability Long lead times to repair/replace

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Vulnerabilities of the US Grid Identified

“Structural vulnerability of the North American power grid”  14,000+

‘nodes’ (generators, transmission substations, distribution substations

 19,000+

‘edges’ corresponding to the highvoltage transmission lines that carry power between the nodes

 According

to the model a loss of only 4% of the 10,287 transmission substations results in a 60% loss of connectivity

 During

a cascading failure, the loss of only 2% of the nodes causes a catastrophic

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Critical Infrastructure – Single Point of Failure System Status

Repair Crew to Sites Fuel Resupply

SCADA/EMS System Control

Transport to Operations Road Center Component Shipping

E-Commerce

Telecom

Fuel Resupply

Rail Component Shipping

Oil

Electric

Operation & Repair Crew Communications

Natural Gas Fuel for Generators

Water Component Shipping

Fuel for Maintenance

Fuel for Generators

Cooling & Emission Control

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Foreign Sources Once upon a time just augmenting America America used to export to the world, now it depends on the world for larger and larger percentages of the products it consumes: Net imports of crude oil in 2007 accounted for 58% of U.S. total and steadily increases U.S. production declining since the 1970’s Critical components of the electric grid are built overseas (transformers, electronic components, etc.) Increasingly vulnerability to supply disruption

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Crude Oil Imports (Top 15 Countries) CANADA SAUDI ARABIA MEXICO VENEZUELA NIGERIA

The top five exporting countries accounted for 65% of United States crude oil imports in June 2008.

IRAQ ANGOLA BRAZIL ALGERIA RUSSIA

The top ten sources accounted for approximately 86% of all U.S. crude oil imports in June 2008.

KUWAIT ECUADOR COLOMBIA CHAD LIBYA

Total crude oil imports averaged 9.994 million barrels per day in June 2008.

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Aging Workforce Once upon a time the best of class America used to lead the world in education, now it depends on the world for larger and larger percentages of key skill sets to keep operating:  In 3 or 4 years, there's expected to be a 30 to 40% shortage of technical and professional oil workers in the U.S., according to Damon Beyer of Katzenbach Partners, a Houston-based management consultancy. As much as 80% of the workforce will be eligible for retirement in the next decade.  In the next 5 years, just as the nuclear industry hopes to launch a renaissance, up to 19,600 nuclear workers – 35% of the workforce – will reach retirement age.  The top 25 oil companies in the industry have shed more than one million employees since 1982.  According to the US Bureau of Labor Statistics, more than 25% of the working population will reach retirement age by 2010, resulting in a

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Alternatives Addicted to what once was? America has been slow to embrace alternatives to fossil fuels; yet continues to create rhetoric that serves to confuse and mislead:  Perception – Biofuels are not economically viable as a substitute for petroleum. Reality – Biofuels offer a competitive alternative to petroleum.  Perception – Biofuel crops will crowd out food crops. Reality – Agricultural productivity – technology & petroleum dependency. There are alternatives to the use of crops to create Biofuels.  Perception – The Pickens Plan is a bridge to the future – a blueprint to reduce foreign oil (wind, solar power). Natural gas and biofuels are the only domestic energy sources used for transportation. Reality – Predicated on massive investments in technology

 Perception – Government mandates and subsidies provide the necessary foundation for the development of the Biofuel industry. Reality – Unintended consequences of government action. Copyright 2008, all rights reserved, Logical Management System

No National Plan Just too complex and too complicated? Premise for Collapse: Relationships among resources, capital, waste and production form the basis for an ecological model of collapse in which production fails to meet maintenance requirements for existing capital. Tainter – complex societies break down when increasing complexity results in negative marginal returns. Unsustainably high level of complexity. Extended process of progressive disintegration rather than a rapid shift from an unsustainable state to a sustainable state.

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Copyright 2008, all rights reserved, Logical Management System

No National Plan Just too complex and too complicated? Premise for Collapse: A series of crises led to loss of complexity and the establishment of temporary stability at a less complex level of activity. Each such level then proved to be unsustainable in turn, and was followed by a further crisis and loss of complexity. Theory of catabolic collapse, explains the break down of complex societies as the result of a self-reinforcing cycle of decline driven by interactions among resources, capital, production and waste. America has no single point for coordination of a national plan to address energy sector needs. Federal, State and Local mandates serve to confuse and mislead.

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Do Your Research What We Know (Facts) What We Think We Know (Assumptions)

“Because we are asking the wrong questions precisely, we are getting the wrong answers precisely; and as a result we are creating false positives.” Geary W. Sikich, 2003

What We Do Not Know (Speculation) What We Do Not Know that We Do Not Know (Unknown Unknownables)

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Do Your Research Societies differ in their response to changes in resource availability and maintenance costs. The spectrum of response ranges from adjustment to a steady state, through a history of repeated maintenance crises and partial break downs followed by recoveries, to severe depletion crises and total collapse. Resources may not be sufficient to maintain indefinite expansion. Each resource has a resource replenishment rate – the rate at which new stocks of the resource become available. Unintended consequences result from solutions to problems that create more severe problems than those that they attempt to solve. Economy dependent on cheap, abundant fuel – oil, natural gas, coal.  Production fails to meet maintenance requirements for existing capital.  Heavy dependence on foreign investment to finance the purchase of imported oil.  Denial – failure to address the problem. Long term investment strategy is to invest for the short term.  Technology fails to provide a solution.  Bankruptcy – economic collapse, price bubbles – real 

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Do Your Research No matter how good you are at dominating the odds or how sophisticated your choices, randomness will always have the last word. Seat of the Pants?

Forward Thinking?

Process Oriented Rigidity

Situational Awareness

Old Planning Paradigms

Adaptive Behavior

Ineffective Response Modes

“Active Analysis”

Inflexibility

“Futureproofing”

The biggest single threat to business will be staying with a previously successful business model too long and not being able to adapt to the fluidity of situation.

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Horizon Scanning Options over time = more Short Term: 0 – 3 Months

Goals & Objectives Human Capital (Physical/SkillSets) Financial Strength

Customer Status Medium Term: 4 – 8 MonthsOperational Risk Modeling Operations Status Product/Service Demand Long Term: 9 – 12 Months

Prolonged State of Altered Operations: 1 – ? Years

Capacity to Realign

Options over time = le

The real value of operational risk modeling is the practical business benefits it can bring to an organization, not in mathematical calculations. Data only has value if it can be interpreted and used correctly, that is, turned into meaningful intelligence that facilitates decision-making. Geary W. Sikich, January 2008

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Potential Impact on Performance: General Analysis – Key Factors High

Natural Disasters •Hurricanes •Earthquakes •Floods •Tornadoes •Drought Information

Probability of Disruption

Physical Disasters •Industrial Accidents •Supply Chain •Value Chain •Product Disasters •Theft of Proprietary Failure •Fires Information •Environmental •Hacking, Data •Health & Tampering Personnel Economic •Cyber Attacks Safety Disasters Disasters •Strikes Reputation • Recessions •Workplace Disasters •Stock Market Violence •Rumors Downturns •Vandalism •Regulatory •Rating Agency Criminal •Employee Issues Downgrade DisastersFraud •Litigation •Product •Product Liability Tampering •Media Low Not •Terrorism Catastrophic Significant Consequences Investigations •Kidnapping & •Internet Hostages Reputation

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Potential Impact on Performance: General Analysis – Key Factors High

Probability of Disruption

Customers Natural Current Competitors Disasters Physical •Hurricanes Human Capital Disasters •Earthquakes •Industrial •Floods Accidents Partners • Tornadoes •Supply Chain Infrastructure •Drought •Value Chain Information Disasters Government •Product •Theft of Proprietary Failure •Fires Information •Hacking, Data •Environmental Personnel •Health & TamperingSuppliers Stakeholders Economic Disasters •Cyber Attacks Disasters Safety •Strikes Reputation • Recessions •Workplace Disasters • Stock Market Violence •Rumors Downturns •Vandalism Substitutes •Regulatory • Rating Agency Criminal •Employee Issues New Entrants Downgrade DisastersFraud •Litigation •Product •Product Liability Tampering •Media Low •Terrorism Investigations •Kidnapping & Catastrophic Not Significant Consequences •Internet Hostages Reputation

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26 Global Risks – Likelihood – Severity by Economic Impact (Loss)

Retrenchment

More than $1 Trillion

Asset Price Collapse from Globalization (developed) Slowing

Chinese Economy (6%) Oil & Gas Price Spike Pandemic Liability Regimes Critical Cyclone Transnational Earthquake

$250 Billion – $1 Trillion

$50 – $250 Billion

Information Infrastructure Breakdown

Chronic Disease Developed World Crime and Corruption Food Insecurity Middle East Instability Infectious Disease Developing World Heatwaves & Droughts

Major Fall in US $ and Civil Wars Retrenchment from Globalization (emerg Fiscal Crisis in Advanced Economies

Interstate

Extreme

Extreme Climate Change Related Weat Inland Flooding Emergence of Nanotechnology Risk Failed & Failing States

$10 – $50 Billion

International

Terrorism Loss of Freshwater Collapse

of Non-Proliferation Treaty

$2 – $10 Billion

Below 1%

1 – 5%

5 – 10%

10 – 20%

Above 20%

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18 Global Risks – Likelihood – Severity by Number of Deaths

More than 1,000,000

Infectious

Disease Developing World

Food Insecurity Pandemic Interstate

and Civil Wars Chronic Disease Developed World Failed & Failing States Cyclone Middle East Instability

200,000 – 1,000,000 Earthquake

40,000 – 200,000

Extreme

8,000 – 40,000

Loss of Freshwater Extreme Climate Change Related Weather Inland Flooding International Terrorism Heatwaves & Droughts Collapse

of Non-Proliferation Treaty Information Infrastructure Breakdown Emergence of Nanotechnology Risk Critical

1,600 – 8,000

Below 1%

Transnational

1 – 5%

5 – 10%

Crime and Corruption

10 – 20%

Above 20%

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Operating complexity has outpaced risk management practice Networked

Distributed

Operating Model Complexity

Centralized

Present State

Resilience Gap Time

Risk Management Sophistication

Functional Single Point of Failure

Present State

Coordinated Managing Risk Across the Enterprise

Adaptive Creating Resilience Across the Enterprise

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Black Swans, Randomness, Preparedness A black swan is a highly improbable event with three principal characteristics: it is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was.

Nassim Nicholas Taleb The Black Swan: The Impact of the Highly Improbable

Stock exchange meltdown foils eager traders – 9/8/2008 A technical glitch brought share trading on the London Stock Exchange to a halt for seven hours yesterday, wiping out most of the trading day on what should have been one of the busiest sessionsCopyright of the year. 2008, all rights reserved, Logical Management System

Summary and Conclusions Aging infrastructure – highly dependent on foreign sources of raw materials and finished products Some

improvement noted as a result of “crisis” events

Aging workforce Recognition

does not resolve the problem

Slow uptake on alternatives No

national plan

Increasing demand – limited supply Greater

competition could result in chaotic markets

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Questions

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