Supply chain and procurement strategies for oil and gas

04 May 2020 4 min. read

With the oil prices at historic lows and with the Covid-19 supply chain disruptions, oil and gas companies are in major need to evaluate their supply chain, sourcing techniques and costs. Vinodkumar Raghothamarao, Director Consulting at IHS Markit, outlines a number of supply chain strategies that can be taken.

Major pandemics like Covid-19 can create significant disruption to the reliable supply of oil and gas equipment/parts such as valves, turbines, compressors etc within the oil and gas value chain. The Covid-19 crisis is a wakeup call for C-level executives to develop new business strategies in their future supply chain designs. 

Procurement and supply chain strategies are set to be in the forefront of critical issues plaguing oil and gas companies especially with the current downward spiral of oil prices and Covid-19. Many oil and gas companies worldwide realise that either their suppliers or sub-suppliers (tier 2/tier 3 suppliers) are based in the affected regions such as China, Italy, South Korea and Spain, with single sourcing or sourcing everything from one geography or country has led to the current disruption.

Supply chain and procurement strategies for oil and gas

Even though some companies don’t source directly from China but their tier 2/tier 3 suppliers down the line do so. Consequently, oil and gas companies should be proactive in developing robust supply chain resilience and have adequate supply chain risk intelligence. 

Supplier Risk Intelligence is the process of acquiring and analysing supplier risks in order to understand the present and future risks; support current and future sourcing and market sector strategy execution; and enable the business to better anticipate changes in the external marketplace and react before others do.

Supply Chain Mapping is one way to mitigate the supply chain risks especially if there is over dependence on one country or concentration of souring from one country or geography. Supply Chain Mapping involves thorough understanding of suppliers including their global sites, local sites and subcontractors, as well as knowing which components or part originate or pass through them.

Companies who are ahead in supply chain mapping benefit when disruptions happen, because they can deduce quickly how their supply chain could be impacted in the short to midterm. When companies have advance knowledge of where the disruption will come from and which equipment or parts will be impacted, they have lead time to execute avoidance and mitigation strategies – like alternative sourcing, strategic inventory allocation and debottlenecking the critical supply chain. 

Good practices

The IOCs/NOCs to improve and deploy best in class supply chain risk mitigation practices can adapt and/or implement some of the practical measures listed below:

  • Understand the critical supply chain of major spend categories. This requires thoroughly identifying costs and sourcing options across the supply chain for each category and determining appropriate interventions (e.g., seeking new supplier, changing specifications, altering contract terms)
  • Undertake critical and non-critical supply chain bottlenecking assessment. Target for paradigm shift in the supply chain that could mean identifying alternative suppliers
  • Build custom fit procurement processes that provide better clarity, engage suppliers early in the process. Moreover follow through to execution and into operations
  • Manage risks across the entire spending portfolio – not just within individual projects or commodities, or splitting capital from operations spend
  • Proactively manage the supply base, select relevant suppliers, focus on alignment and sustainability (i.e., dynamic relationships), and ensure company ownership and accountability is clear to suppliers
  • Institutionalise the capabilities required for supporting procurement and supply chain activities

Going forward, the rethinking of supply chain strategy had already begun for many companies but Covid-19 will accelerate the need to have decentralised global supply chain. Improved supply chain resiliency and collaborative supplier relationship management is the way forward for the oil and gas companies to reduce costs in this era of low oil prices and to focus on production and exploration in the most optimised way.