Over the past five years, the oil and gas industry has experienced its fastest rate of economic growth in 20 years. Global demand is strong, driven in particular by China and India. While cost inflation is low, prices have risen from $20 to more than $70 a barrel, which has made previously uneconomical oil fields viable, and assured production growth over the next ten years.
Oil and gas companies’ supply chains are playing an increasingly vital role in this growth story as a sustained supply of high quality products and services – from steel and drill bits to transportation and catering - is required to meet global oil and gas production demand.
Four main supply chain challenges lie ahead for international oil and gas companies as they take on these opportunities. These are globalisation, the rise of the national oil companies, scarcity of supply, and corporate social responsibility (CSR).The effects of globalisation
Global economic growth and energy consumption has led to a proliferation of potential suppliers to the oil and gas industry, distributed around the world. This has enabled oil and gas companies to reduce their exploration and production costs by sourcing products and services from lowcost countries such as China; although this has not had an impact on the core highly specialist services such as drilling. In the last few years, many international oil and gas companies have therefore developed more extended supply chains than ever before. However, at the same time this has accentuated the need for better supply chain risk management processes. Oil and gas companies need to be absolutely certain of the quality of the products and services that they purchase and that their suppliers meet legal and company-specific social and ethical standards.
Sophisticated processes are therefore required to enable buyers to pre-qualify and monitor the companies that make up their supply chains – and they must meet specific high standards. Systems and processes hosting and maintaining supplier information also play a key role in ensuring the integrity of the data.
Traditionally, buyers have built up long-term relationships and trust with their suppliers. With supply chains becoming increasingly global in nature, there are many new, untried and untested suppliers to consider, many of whom may be sub-contracted or outsourced, further extending the chain. Collecting data about and pre-qualifying these newer, often low-cost country sourced suppliers, is a complex challenge in itself.
One of the benefits of globalisation for suppliers, including those new to the arena, has been the willingness of international oil and gas companies to agree to longer-term contracts with suppliers than were typically available five years ago. This helps buyers hedge against the risk of rising costs and in some cases, against potential scarcity of products and services.The rise of the NOCs
The rise of the so-called national oil companies (NOCs) has significantly altered the oil and gas landscape. Saudi Aramco, Russia’s Gazprom, CNPC of China, NIOC of Iran, Venezuela’s PDVSA, Brazil’s Petrobras and Petronas of Malaysia, better known as the ‘new seven sisters’, are now the world’s most influential energy companies. Together, they control access to 39 per cent of global oil reserves, whereas the more traditional players can tap into only 3.5 per cent of global reserves.
Many NOCs are expanding globally. Their supply chains, too, are therefore becoming ever more complex as the number of suppliers they need to work with and their countries of origin increase. In order to sustain their growth plans, the NOCs, like the older, more established companies, also need robust supplier databases.
Nigeria’s National Petroleum Corporation (NNPC) is an example of a NOC that is currently building a database of pre-qualified, high quality Nigerian oil and gas industry suppliers. Achilles is supporting the Nigerian government and NNPC in this goal with the aim of supporting the sustainable development of the Nigerian economy by providing a core tool for supplier development, full and fair opportunities for potential suppliers, and transparency in contract awards.Scarcity: a hindrance to growth
The third factor impacting oil and gas companies’ supply chains is one of scarcity of supply - not only of oil but also of labour, goods, and services.
There are contrasting theories on when peak oil production will be reached, but the current consensus is that it will be hit within approximately 50 years. BP’s Statistical Review of World Energy, published in June 2007, says that there is enough oil to last another 40 years of daily consumption at the current rate of 85 million barrels.
With NOC reserves generally off-limits to the large western oil companies, the traditional companies are being forced to consider exploration and production in harder-to-access oil fields such as the Canadian sand oils and deep water fields off Brazil. Exploring fields and drilling for oil in these tough locations requires highly sophisticated technology which must be sourced from reliable suppliers and can only be carried out profitably at times of high oil prices as the cost of development and operation is much greater than traditional fields. This adds another dimension to supply chain risk for oil companies.
Skills shortages, particularly of engineers, are also a problem for the industry. Experienced workers are retiring, but several years of relatively low oil prices, and therefore lower levels of recruitment mean that they have not been replaced by fresh talent coming up through the ranks.
Operators are working hard to plug this skills gap by encouraging graduates and experienced engineers from other sectors to enter the industry, but it is a problem that cannot be solved in the short term.
One way that the industry has helped to alleviate this labour problem is by combining procurement resources by building a shared database of pre-qualified suppliers. There is much that other industries could learn from this initiative.
Of course, there are also shortages of materials and equipment. Demand for steel, for example, is far outstripping supply and means buyers may be forced to pay premium prices to secure the product they need for new projects. Not only are commodity prices rising by huge percentages, copper prices for example have increased by 364 per cent over the last five years, but the oil industry is competing with other major industries for key components such as transformers, switchgear and cable. In addition, such is the wave of investment that the industry is finding major projects difficult to source.
The rapid rise of the Chinese and Indian economies is likely to increase global demand for oil and gas, which will have an additional knock-on effect, adding extra demand for scarce skills and resources.Corporate social responsibility (CSR)
The fifth major issue changing the shape of the oil and gas industry’s supply chain is corporate social responsibility (CSR). A number of disasters in the industry over the last ten years, many of which have resulted in fatalities and major environmental damage, have forced companies to embed CSR at the heart of their business (and public relations) strategies. There is no doubt that robust CSR is now vital not only to the reputation, but also to the business sustainability of oil and gas companies. This focus on corporate responsibility is being intensified by increasing scrutiny from stakeholders, investors, customers, employers, governments and the media alike. And the level of responsibility demanded will only increase. The EU proposal to reduce greenhouse gases by 20 per cent by 2020, for example, would significantly impact western energy companies, and it probably won’t be long before oil and gas companies will have to record their carbon footprint – which ultimately will need to include their supply chains - in their annual reports. A knock-on effect is that the industry will in turn, demand this information from their suppliers, wherever they are located in the world.
These new drivers must be taken into consideration as they are becoming key competitive factors. They also represent a transition towards alternative clean energy resources such as wind energy, hydroelectricity and tidal power. As pressure rises from NOCs and from the NGOs, Big Oil is becoming increasingly aware of maintaining the socalled “licence to operate” – the term used by many industry specialists to describe the acceptance of the societies in which the oil companies operate, and their wish not to be replaced by NOCs. Improving their reputation for fair dealing, promotion of local industry and environmental stewardship is vital to Big Oil’s ability to gain continuing licences and production rights.The way ahead
Through the processes of globalisation, oil and gas companies have been purchasing increasing volumes of lower cost products and services, many from emerging markets. High-quality, low-cost suppliers have benefited from this trend, however, the price for oil and gas companies has been a rise in their supply chain risk. Progressive energy companies have robust systems in place to monitor the product, service and ethical standards of their suppliers. These processes will, by necessity, become ever more central as supply chains diversify further and stakeholders demand greater standards of compliance.ACHILLES
Colin Maund is CEO of Achilles, one of the largest supplier management service providers in the world, helping companies to manage commercial, health, safety, environmental and corporate social responsibility-related risks across the supply chain.
For further information please visit: www.achilles.com