Strengthening Supply Chains: Key Steps for the Oil & Gas Industry

Lack of real-time data tracking increases the likelihood of overpaying for equipment

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It feels like it’s getting harder and harder to win in oil & gas. Region by region, producers are competing with each other for the same vendors. Lead times for parts are doubling, sometimes tripling, while hikes in shipping and logistics costs add salt to the wound. Shareholders want to see more profit, but the price of oil continues to drop while input costs — vendor services, equipment, materials, labor, you name it — remain volatile at best. Any energy company operating in today’s uniquely challenging environment is all too familiar with the ever-growing list of pain points.

At a time where we are constantly being asked to do more with less, to scale revenue without scaling cost, and to be more efficient while the obstacles to efficiency seem to multiply daily, leverage to negotiate on better terms for projects (or time to get another bid to be sure you’re getting competitive rates) can feel out of reach. It’s not. This is simply a problem area that has yet to be tackled by the industry — an industry that has proven itself adept at innovating since the first U.S. oil well was drilled back in 1859. If today’s oil & gas companies want to flip the script and push back against the rising tide of cost inflation being felt throughout their operations, there is a clear unlock: supply chain resiliency.

These companies have innovated plenty at the wellhead and thousands of feet underground, constantly reinventing how they store and transmit resources extracted from deep beneath the earth’s surface. But on the business side, everything is dependent on regional and global supply chains. Energy companies can only be profitable if the input costs are lower than the costs of products they sell on the market.

Building a resilient, cost-effective supply chain in the face of significant obstacles requires a commitment to change in three key areas: category depth, vendor relationship management, and spend visibility. It’s time to tackle this last frontier. To proactively manage supply chain needs instead of letting external structural forces dictate imperfect solutions. And to end the status quo of being at the mercy of others when every minute and every dollar counts more than ever.

Depth by category

In our supply constrained environment, scarcity of suppliers on any given energy company’s approved vendor list (AVL) means that more often than not, the company pays the asking price — and then some. The only answer to this is increased competition. That means greater depth by category, across all categories.

Whether it’s standard project costs, rush fees for just-in-time services, or upcharges for subcontracting when there isn’t time to run a supplier through standard onboarding, there are countless illustrations of why oil & gas companies have an imperative to responsibly expand the network of suppliers with whom they can work.

Depth by category means that even for just-in-time needs, which arise on just about every project, there are multiple qualified suppliers lined up who are willing to do the work — wherever and whenever the work needs to be done. Until now, the status quo has been to pay the price you’re quoted, so long as there’s a promise you’ll get it where and when you need it.

Depth by category means that if your go-to is booked, or there’s a last-minute cancellation, the project doesn’t need to come to a screeching halt. You can keep moving with another qualified, high-quality vendor that is on your bench and ready to step in. Choice creates leverage, and that 10% to 20% upcharge is suddenly something you now have the power to combat.

Real-world example: Let’s say a pump goes down in West Texas and you are the field operations manager. You need a replacement water pump with the right horsepower to transport fluid from one field to another, and you need it now. In reality, you needed it an hour ago. Every single well downstream from the pump has had to be shut down because the tanks are full. No oil can be produced, and the clock is ticking. The costs of this temporary shutdown are rising by the hour. In your world, you can never “make up” for lost time; lost time and lost production translates directly to loss of revenue that cannot ever be recovered.

You have a few vendors in the area who you know can supply the pump you need. You quickly make contact with them and bid out the best price possible from those vendors, who you also need to get out to your jobsite asap. They effectively control pricing — not because they are colluding, but because they are on your very short list and they know what their competitors in the region are charging for this pump. Without leverage to drive the cost down, and with a pressing need to get this done, when one of your go-to vendors promises to get you what you need, when you need it, you say yes.

You have overpaid for that pump. But in today’s supply-chain challenged environment, the incentive for you to overpay is baked into the processes and systems that have become business as usual for oil & gas companies.

Bottom line: Without competition, you’re not going to get competitive pricing.

A streamlined system for managing vendor relationships

It’s easy to dismiss the above — who doesn’t want a bigger AVL, and if it were that easy, wouldn’t everyone have one? — but stay with me. Managing an energy supply chain requires an incredible amount of cost and manual effort from so many departments beyond dedicated supply chain teams: legal, operations, finance, transportation, logistics, and more.

All these manual processes create friction; onboarding a new vendor can take three to six months, often longer. A field operations manager might spend hours of the workday making calls to secure a vendor for a project, rather than focusing on the core responsibilities of designing and delivering projects in the field. As oil & gas companies scale production, they have to scale headcount across teams to support these processes.

The companies that truly innovate — with new tooling, new processes, revised organizational design — to responsibly overhaul how they manage vendor relationships, from onboarding through to payments, transportation, and logistics, will be able to support the expanded network they require to win. And they will get more leverage and productivity from each department that interacts with the vendors they need to operate.

Streamlining will bring a dramatic reduction in both the time and cost currently associated with purchasing from and managing vendors, which touches so much more than just the supply chain team within a larger organization.

Greater spend visibility

In an industry where paper tickets are still part of standard operating procedure, and where it can take 30 to 60 days to get an invoice (multiply that by the hundreds of vendors required for a typical onshore energy project), the people who manage and fund projects are often in the dark. This directly impacts their real-time ability to solve problems, plan properly, and avoid budget snafus.

A project’s operations leader might get anecdotal reports — like a call from a super in the field — but cannot see the big picture on how a project is unfolding, including whether it’s on budget or over, in real time. People outside the energy ecosystem would be shocked to know that if a field operations leader wants to pull a report to see whether a proposed bid on inspection services maps to what the company pays elsewhere in the region, it likely will take a week or two for someone on the team to come back with an answer. Unfortunately, a week or two is most likely five to nine days past when the inspection needs to take place.

No matter which team you look at — operations, supply chain, logistics, you name it — if you can’t easily see how you are tracking in real time, and if you can’t quickly get a read on what you are spending and where, you don’t have the data to know whether the prices you’re paying align to the market in a given category. You don’t have the tools to optimize how you leverage your vendors to deliver the projects in front of you. And you definitely don’t have the ability to proactively get ahead of problems to prevent them from snowballing into bigger problems.

This is especially true on construction projects. Drilling a new well means 100+ vendors touching the jobsite — from plowing the dirt and laying down aggregate to running casing and constructing tanks. All rely on paper tickets to verify that each task was completed as prescribed.

Paper tickets, as they’re used now, breed inefficiency and lead to untold delays and overruns. When the manager who needs to verify that a particular job was done cannot lay eyes on the work because their attention is needed elsewhere — they may be pumping cement or have a well control scenario they need to manage — they will pick a day and ask the worker to come back to have the paper ticket verified. Once this happens it then can take 10, 30, even 60 days from when the work was completed to receipt of an invoice. The company drilling the well doesn’t know the true expense of that project until they get the invoices. To put this in perspective, a well takes 15 days or less to build. So it isn’t uncommon to have two, three, or four wells drilled before project managers know the actual cost of the first well that was drilled … 30 to 60 days earlier.

This whole system keeps the jobsite and its costs worlds apart — literally and figuratively — from the people who are building the budget and managing the project design. More often than not they are sitting in an office hundreds of miles away, with no idea of real-time spend until it’s too late to make smart changes.

Now imagine a world where work is requested, dispatched, and verified in real time (all tracked, in app). Project leaders would have real-time visibility on spend, which enables them to get in front of the inevitable higher-than-expected costs for the work done on that first well — and to know early on that they need to rebid or redesign on other wells to hit their targets. That’s what greater spend visibility looks like for the decision-makers on O&G projects.

Moving from individualized, manual processes to connected systems and data is the last giant step in delivering supply chain resiliency. It will unlock the power to solve problems in real time, to improve the governance of larger and larger networks of vendors, and to allow each department that touches the supply chain to optimize every dollar it spends.

Incentivizing meaningful change

Each of these focus areas represents a meaningful pillar which, like the legs of a chair, work together to support and improve the cost basis today’s oil & gas companies operate with. On their own, none would cause a sea change in the industry. But when combined, these pillars — expanded vendor networks, improved processes and tooling, and access to reliable, real-time data by project, region, spend category, and service category — have the power to fundamentally change the way oil & gas companies manage their supply chain needs.

Change of this magnitude won’t happen overnight. And without a genuine commitment across the industry to overhauling the status quo, real change won’t happen at all.

Within oil & gas companies, there can be big variations in perspective on supply chain management overhaul. Depending on who you ask, it’s either one of the most pressing problems or not a problem at all. The truth is, if you admit there’s a problem then there is an expectation that you’ll try to solve it. But that may run counter to the wishes of some stakeholders who don’t understand the long-range benefits and perhaps aren’t willing to justify the costs of an operational makeover.  

The industry needs to adopt a unified approach to this issue, because it affects every single oil & gas company doing business today. We need to openly acknowledge that there is a problem — lack of visibility, unnecessary inefficiencies, high-friction manual processes — even to board members who may not want to hear about it. And we need to be unafraid to embrace the challenges of solving that problem with greater depth in category, better spend visibility, and streamlined vendor relationship management.

I believe that oil & gas companies will guide the way to a sustainable energy future, and a big part of it has to do with their proven ability to innovate. Horizontal drilling, hydraulic fracturing, pulling ourselves out of peak oil a decade ago, 4D seismic drilling — these are all complex technical innovations. Solving for supply chain cost inflation should be a relatively small hurdle for an industry that has overcome much thornier issues on the operational and engineering side.

It may feel daunting — and it’s true, building supply chain resiliency has never been tougher. But it’s also never been more important. This is the missing piece of the puzzle for energy companies who are serving our energy needs today while building for the energy needs future.

About the author:

Adam Hirschfeld is an industry veteran who worked in field operations, project management, and wellsite consulting before shifting to leadership roles focused on business development in the labor project management space.

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