Existential Threats Facing Energy Companies
By Joshua Hirshman
Energy companies may soon face a new existential threat after surviving two years of a depressed oil market. Starting in 2014, the oil price slump has had a large negative impact on oil and gas extraction providers and their relevant supply chains. Not only have the margins of the extraction providers been reduced, but also have their support organizations by upwards of 60%, depleting the workforce of experienced talent and decimating the industries which had supplied critical materials and services to the oilfield over the preceding decade-long bull market. One of the biggest factors impacting whether oil and gas companies will be able to meet future demand is their ability to effectively manage their supply chains.
“Now is the perfect time for industry leaders to anticipate the risks most impactful to their companies and put the tools in place to enter a recovery with a competitive advantage.”
Any sustained recovery in oil prices will pose a major challenge to oilfield service companies and operators which need to deliver specialized products and services to the wellhead. In order to compete in an upswing, companies will need to quickly find new sources of supply, qualify new suppliers, rebuild logistics networks, manage quality and performance, meet high safety standards, recruit new talent, and do it all with organizations reduced to skeleton crews after two years of cost-cutting. Failure to meet these challenges will risk lost market share, damaged brand image, exposure to liability, and a talent deficit just as dangerous to survival as any hyperbolic swing in commodity prices.
Now is the perfect time for industry leaders to anticipate the risks most impactful to their companies and put the tools in place to enter a recovery with a competitive advantage. Oil prices appear to have bottomed, stabilizing to a great degree between $40 and $50 per barrel since April. This period of stabilization should give most companies an opportunity to set a baseline, assess their capabilities, anticipate risks and lay the groundwork needed to scale operations as demand increases.
“Addressing three key areas now will go a long way towards meeting the demands of a future recovery: supply base capacity, compliance and performance management and organizational responsiveness.”
While every company has reacted to the downturn differently, a few supply chain challenges are notably common across the industry. As a starting point, addressing three key areas now will go a long way towards meeting the demands of a future recovery: supply base capacity, compliance and performance management and organizational responsiveness.
Supply Base Capacity
Almost every major oil and gas player has consolidated spend with a smaller portfolio of suppliers. While leveraging spend has achieved real savings, it has also squeezed suppliers to the point where only a fraction of companies serving the industry in 2014 remain in business and those who have survived are running extremely lean. This is especially true in categories such as machining or sand for frack sites, where huge swaths of the supply base have either gone belly-up or have switched to serving other industries. Many surviving machine shops in the Houston area, for example, have completely left oil and gas and are now filling their capacity by serving the armaments industry.
Upstream oil companies should start assessing the capacity of their current suppliers to meet escalating levels of new business and develop contingency plans to ensure continuity of supply. As the market recovers, this could mean qualifying new suppliers, developing standardized master service agreements (MSA) and request for proposal (RFP) templates, securing logistics contracts that manage the costs of greater volume and establishing processes and procedures to manage supplier performance and quality.
Compliance and Performance Management
Most companies, especially those involved in engineering and procurement (E&P), have drastically reduced their supply chain organizations over multiple rounds of workforce reduction. This means they have a diminished capacity to centrally manage purchasing and opens the door to massive price inflation as field sites go off-contract to get what they need to operate. The risk of poor contract compliance not only impacts margins through ballooning materials and logistics spend but also opens the door to quality problems as suppliers scramble to fill orders.
Supply chain leaders should be taking the time now to identify what operations will need to expand operations and develop frameworks to manage costs and quality. Successful efforts will take more than establishing controls around the delegation of purchasing authority. It will require visibility into how the field’s approach to spending and building relationships with key operations stakeholders to facilitate future initiatives. This is a good time to start building trust between the supply chain and the field and introduce tools to help make the case for future change. Visual dashboards and reporting templates are relevant to key decision makers, and regular communication can pay dividends down the road.
One of the biggest challenges central supply chain departments will face in an upswing is meeting the growing needs of their operations clients for technical expertise and tactical purchasing. Staff reductions have drained many companies of both the experts needed to source complex products and services and the tactical folks such as buyers and expediters needed to process orders and get supplies to end users. An inability to meet internal stakeholder expectations exposes supply chain organizations to the risk of losing credibility and control over spend as operations go around procurement to get what they need.
Supply chain leaders should start assessing their future staffing needs immediately, including identifying key positions and skill sets, determining trigger points to prompt hiring, and putting in-place the recruiting and on-boarding procedures they will need to staff up. Understanding what technical skills, roles, responsibilities, reporting relationships, and training requirements will be needed at various stages of recovery will be critical.
To learn how SolomonEdwards can help your supply chain plan for the oil market recovery, please contact the author of this blog post, Josh Hirshman. Josh is the Senior Manager for SolomonEdwards’ Supply Chain Transformation practice. Previously, he led the business development and investor relations functions for a consulting and rapid prototyping materials distribution startup, was a Management Consultant at Booz & Company (now a PwC company) and worked as a global Procurement Associate at ExxonMobil. Josh graduated from Arizona State University with a B.S. in Supply Chain Management and served in the United States Army with two deployments to Iraq.
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