Fuel Supply

Written by Tom Marlowe

“Some of what we do is pretty easy,” DESC Director Kim Huntley told Military Logistics Forum. “We sometimes piggyback on the commercial industry, and then we’re another customer. But on the other end of the spectrum, we are faced with challenges like how do we get fuel to the military forces in a landlocked country like Afghanistan through mountainous terrain, small roads and insurgents.”

Those situations require a lot of planning and the use of innovative contracting, Huntley mused. DESC must know what is happening on the ground and maintain situational awareness to adapt their practices to overcome obstacles presented by enemy forces.

“If we find that one process we have designed isn’t working well because it’s becoming a target for mines or rocket attacks or the like, we have to find another way,” he explained. “Ultimately, we have to ensure that our armed forces don’t ever have to go a day wanting fuel for their missions, and we are very good at that.”

DESC therefore has combined stationary and mobile supply services to meet the challenges presented in such contingency situations. A component of the Defense Logistics Agency (DLA), DESC has about 1,000 people dedicated to delivering petroleum and other sources of energy to U.S. armed forces.

Huntley estimated that DESC sells about 130 million barrels of petroleum products annually for sales of about $15 billion this year. In addition, DESC has foreign military sales of about a halfbillion dollars annually.

The center is structured with four geographic regions that support the U.S. combatant commands with offices in Germany (European Command), Bahrain (Central Command), Hawaii (Pacific Command) and Houston (Americas).

“In addition to global support of all the department service components, we also do installation support for the department components as well. We sell about half a billion a year in natural gas and about half a billion in electricity and less than 100 million in coal,” Huntley stated.

In the provision of energy supplies, the center supports unique requirements, utilizing utility privatization to contract private companies to provide support to military bases for utilities such as sewage, water, electricity, natural gas and fuel under 50-year contracts. Those contracts encourage contractors to invest heavily into the utility infrastructure and maintain it, Huntley noted, which gets the military services out of the business of doing so.

In addition, DESC took over unique aerospace energy requirements several years ago, supplying chemicals and petroleum products to NASA and other organizations using high-altitude aircraft like weather balloons, he said.

“We also have a very unique mission in the defense department in that we have a federal civilian agency customer base as well, much like the Army Corps of Engineers,” Huntley remarked. “We are allowed to sell petroleum products as well as installation energy products to our federal and civilian partners. They range from the Department of Energy to the departments of Commerce and Interior. It’s the whole gamut of federal civilian agencies. By combining these requirements for these common products, we are able to drive a very good bargain for our customers. We leverage economies of scale to get our customers the best quality at the best price.”

BULK FUEL REQUIREMENTS

Because aircraft burn the most fuel, the U.S. Air Force is the biggest DESC customer. And Air Force Colonel Jon Larvick, who serves as DESC director of bulk petroleum, has the job of anticipating how much fuel storage is required to meet military wartime combat and peacetime training needs.

“It starts out with the combatant commanders and their identification of requirements. As we generate the requirements and work with the combatant commanders in the field, we take those requirements and we turn that into an inventory management requirement similar to what a Walmart would do when they stock their shelves. We determine the most efficient place to put fuel. We look at our entire supply chain when we do that,” Larvick described.

DESC determines the lowest lay-down cost to discover the best locations to store fuel inventory to support its customers, Larvick told MLF. Storage can be provided through tanks at military installations, which are owned by the military services but maintained by DESC. The center also contracts for storage locations globally where necessary. And sometimes, it simply rents the storage it requires from commercial providers.

“In cases where it is deemed necessary for the Department of Defense to build its own storage, we have a military construction program that is managed in DLA,” Larvick observed. “The requirements come in from the field, either generated by the combatant commanders or by the service components.”

DESC vets and prioritizes those requirements, dedicating about $225 million annually to construction projects worldwide. The prioritization process is key to the success of the construction program, Larvick stressed. Once a year, representatives from the military service and the combatant commands meet to discuss their requirements under a five-year outlook. DESC invests in those areas with the most need, relieving the services of the responsibility of hashing it out themselves.

“In other cases, we rely upon the commercial sector,” Larvick added. “The most efficient way to move fuel is through the pipeline systems. We have intermediate storage units along the pipelines throughout the United States. The second-best way to move fuel is via tanker ships. So we have commercial storage at strategic points along coastlines and such to help us be flexible with where we can move our fuel.”

DESC must maintain and improve petroleum infrastructure owned by DoD, Cindy Smith, chief of the Facility Sustainment, Restoration and Modernization (SRM) Division within the DESC Bulk Petroleum Business Unit, told MLF.

“We have programs that are centrally managed here where we go out and inspect the tanks on a regular basis,” she elaborated. “The American Petroleum Institute has standards for above-ground tanks that say they have to be visually inspected on the exterior every five years. Every 10 years, the tanks are drawn down and inspected on the interior. If there are problems with the tanks, then repairs have to be made. That ensures our infrastructure is going to be ready to receive the fuel and we won’t have problems with it at the most inopportune times.”

The SRM Division also conducts cathodic protection inspections to protect pipelines and tanks from corrosion as well as inspections of piers where services receive fuel by barge.

“The piers have to be inspected to make sure they have good integrity. It’s a multimillion- dollar program. We have about 489 locations where we are actually doing that work. Lots of contractors assist us with the work,” Smith said.

TRACKING THE FUEL

With so much fuel supply being shipped in so many locations, DESC also needs assistance from contractors in tracking it all. In early 2008, DLA awarded a contract to Accenture and its partner SAP Americas to provide an overview of its fuel supply information, Mark Roddy, SAP Americas’ industry principal for DoD, told MLF. Accenture is in the process of mapping out what data DLA requires and where it should go, so actual work on integrating the information has not yet begun, Roddy added.

“We have some industry solutions in the oil and gas world that specifically help oil and gas producers—Valero for example—to manage their supplies from the wellhead all the way through their distribution system,” Roddy remarked. “DLA, as a major consumer of products from the energy industries, was interested in our capabilities in this area.” SAP has the capability to take the commercial solution used by its oil and gas clients today and link the solution with needs specific to the defense world and the DLA’s existing enterprise business system— with Accenture’s assistance in providing the proper interfaces, Roddy said.

The current DLA enterprise business system is an SAP solution used to manage their transaction, so extending its reach to encompass its fuel management needs makes sense for DLA, he added.

“We can then give them that enterprisewide integrated perspective, which we believe is our competitive advantage,” he declared. Once the system is complete, DLA will have the ability to better manage the energy assets that it buys and delivers to its customers.

Oil and gas companies use SAP software to manage their enterprises, tracking their products and managing their infrastructure. “It’s getting to the point today where there are interactive metering architectures coming out. The common name for them is smart meters. They let utilities read the electrical meter on my house. It saves time and money because you don’t need an individual to come around to read them. You get greater accuracy. You link that in, which is where SAP comes in, to those enterprise-wide capabilities that we give them,” Roddy elaborated.

Seeing that global entities like oil companies rely upon SAP, DLA can have confidence in meeting its own global requirements, Roddy asserted.

Currently, SAP and Accenture are in a blueprinting phase, where they examine the legacy systems DLA would feed into the solution, the types of data DLA needs to capture, and the ways to relate them.

“Once they get through that stage and the customer validates that is what they would like to do, then you get into the actual implementation when you start loading data, doing the testing and moving toward what we call a go-live—where all of the testing is done, the customer is satisfied and we are satisfied that we have the customers’ requirements met—and then they turn the system on and start making it operational,” he said.

The selection of SAP commercial off-the-shelf (COTS) software for DLA’s government enterprise reflects a growing trend Roddy has observed in defense agencies generally.

“I am seeing more and more interest in COTS products from a variety of agencies across the Department of Defense and other federal government agencies,” he commented. “There is a growing realization that COTS products like SAP can satisfy out of the box the vast majority of a customer’s needs and those needs that are specific to a defense agency can be satisfied with the tailoring of the products to meet their specific needs. That’s what we are doing with DLA. We are taking a commercially focused product with our oil and gas solution and we are tailoring it to meet the needs of the U.S. Department of Defense.”

SUPPLYING THE FUEL

When DoD must supply fuel to its military customers around the world, it turns to contractors like Agility Defense & Government Services (DGS) to meet the challenge. Agility DGS, for example, holds a contract with the Army to transport fuel to its forces in Iraq and Kuwait, Jack Vance, defense fuels global account manager at Agility DGS, told MLF.

Agility has been able to grow as it has leveraged its government and commercial divisions to engage opportunities as they become available, Vance noted.

“Major oil companies are moving away from what we call the downstream side of retail fuel sales and marketing. They are taking their investments and moving them upstream to the exploration and refining business sector. So it’s opening some new areas for companies like Agility to compete in,” he said.

In 2008, Agility DGS received seven overseas DESC contracts for operating bulk fuel terminals on behalf of the U.S. Air Force in Europe and the Pacific regions, kicking off its relationship with DESC, a subordinate unit of the DLA.

In March, Agility DGS won a contract under the Army LOGCAP 4 program for storing and distributing Army fuel at a location in Udari, Kuwait.

Most recently, Agility DGS received a DESC contract for its contractor-owned, contractor-operated (COCO) bulk fuel terminal in Guam, which it purchased from the Shell Oil Co.

“We have been operating the others on behalf of the government, but in this particular contract, we bought the Guam Agat terminal where we will receive, store and issue DESC-owned fuel for them to use as they deem necessary,” Vance explained. This arrangement is a departure from government-owned, contractor-operated facilities awarded in other contracts, he contrasted.

“In the future, we hope to win a contract where Agility will purchase, store and distribute fuel to military customers,” Vance said. “The customer in this case would be the DESC and their customers. Those particular opportunities are in Iraq and Afghanistan. We haven’t been awarded one of these contracts yet, but we are in the market competing for them.”

A movement to such total supply chain solutions would mirror what DLA does in other areas with its prime vendor programs like Subsistence Prime Vendor for food, Vance said.

“The new areas for them are the contingency areas in Iraq and Afghanistan,” Vance stated. “Those are a bit different because there are not already-established supply lines. So those contracts are a bit more risky. “We have seen an evolution to what you and I would call a total supply chain solution where the contractor goes out and buys the fuel and is responsible for it all the way through the chain until it is delivered to the customer,” he added.

Agility is well positioned to handle such contracts because it has government and commercial interests that can work together, Vance reported.

Companies that compete for defense fuel contracts in Iraq, for example, may leave the area when those contracts expire, Vance said, but a company like Agility can provide services to defense agencies and evolve that support into commercial markets as situations evolve. ♦

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