Disruption in Oil and Gas Supply Chains: A Necessary Intervention
Over the past few years, many oil and gas companies have gone from successful to lackluster. Steeply dropping crude prices played a role in this downturn--in June of 2015, oil prices hit a six-year low, forcing many businesses in the industry to reduce supply chain spending. However, a company can only cut the fat so much before it starts to hit the bone--and what happens after no further cuts can be made?
Making Changes and Cutting Costs
Historically, companies in the oil and gas industry navigated depressed crude prices by cutting costs. By sharply reducing expenses, they could generally weather the storm using reserves as necessary--but this time is different. There is a general lack of ability among people in the oil and gas industry to execute the type of changes that are needed to survive in the current economy. As noted by Cisco, there is no reason to think that prices will go back up.
Cost cutting really wasn't a solution for the oil and gas industry in the first place. It is true that it helped oil and gas supply chains survive, but it was also partially a correction. "The good times resulted in multiple years of cost inflation, with expenditure per barrel rising between 5 and 15 percent each year since 2009, depending on the service and the geography," explains McKinsey. "In the North Sea, for example, the cost of extracting a barrel of oil equivalent more than doubled, from just over $8 a barrel in 2010 to around $17 a barrel just three years later."
The introduction of cost-cutting measures enabled many companies to optimize their operations, but once the excess costs were trimmed, the price of crude kept falling, leaving many companies in the oil and gas space scrambling to maintain operations at any level.
Staff From Oil and Gas Industry
In the oil and gas industry, companies face some fairly common issues when it comes to their supply chains. Managing risk throughout different locations, protecting company reputation and maintaining compliance with local regulations is a chore, but the real expense comes from paying suppliers--and that's the problem. "As spend is being closely scrutinized, many firms are understandably focusing on delivering immediate cost reductions. But, according to new research, this could mean other issues are being overlooked," writes Achilles. "With up to 80 percent of revenue spent with suppliers, it is vital that oil and gas firms take a long-term approach to managing all risks within their supply chains--particularly those involving contractors."
Moving forward, low crude prices are joining increased labor costs--and the combination is bound to take its toll on oil and gas as an industry. The problem is that vetting and overseeing suppliers takes staff hours. Someone has to validate suppliers properly, prequalify potential supply candidates and audit existing suppliers on a regular basis. Without these extra steps, which are easy to skip when a company is trying desperately to cut enough costs just to stay above water, the company opens itself up to the unnecessary risk that the supplier's conduct introduces. After all, it only takes a few supply chain problems to risk a company's reputation and financial position--and that's assuming everything is above board.
According to PWC, "the market is quick to punish companies that report supply chain disruptions. On average, affected companies' share prices dropped 9 percent below a benchmark group during the two-day announcement period (i.e. the day before and the day of the announcement)."
Technology could help oil and gas companies navigate these highly reactive waters. "The energy industry--faced with increasingly difficult challenges, such as declining production rates, a retiring workforce and cost control of remote mega projects--has as much or more to gain as any other industry by harnessing digital disruption and technical innovation," explains Accenture. "However, while the concept of digital should be straightforward, the execution is anything but easy… [Accenture's own] research shows that while many executives recognize the transformational potential of digital technologies--especially in an industry drowning in data and active in scattered, remote locations--energy leaders still have difficulty executing the ideas."
As a result, the oil and gas industry has significantly invested in data management and certain other technology opportunities, but in many cases, the end result is no more than an expensive investment that is underutilized from day one--like a supercomputer being used to hold files but not to crunch performance numbers or provide analytics to inform change.
Collaboration and Disruption
Supply chain management is not a necessary evil - it is an opportunity. Collaboration amongst external partners to reduce costs throughout the supply chain can help but there also needs to be disruption from traditional attitudes. This may include working together to share vessels and ensure no cargo hold travels empty, but it could mean so much more. Shell is a perfect example of this. The company recently started employing "chief irritants" to challenge the way business has always been done and identify new opportunities going forward.
Disruption in oil and gas supply chains is a necessary intervention. Companies may not want to rock the boat unnecessarily, but they also cannot be content with the status quo when revenue is down 50 percent or more for so many companies in the industry. Oil and gas companies need to push their companies forward by moving past the way things have always been done and imagine a different way of doing things. They will be able to cut costs and execute major changes effectively when they disrupt their businesses constructively.