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Unique Supply Chain Challenges of Oil & Gas Industry

One of the common problems cited by the boards and senior management is that the consultants they hire do not understand their unique challenges.

This problem applies even more to large cookie cutter approach based consulting houses with thousands of consultants where the guys who have the knowledge are too senior (and too involved in their company’s internal politics) to focus on your problems, and the junior people who have all the time have little knowledge or experience.

Time and time again I hear clients complaining about this problem, and their aversion to teaching very expensive junior consultants everything about their own business, only to have it all regurgitated back to them in a report.

That is why our approach works – we focus knowledge on problems.

Let me give an example.

I was recently asked a question about the Key Challenges in the Supply Chain the Upstream Oil & Gas Companies Face?

See below my answer, and understand how unique the challenges in this industry are. All the generic supply chain challenges fade away in comparison.

My answer below:

I am going to assume that you are looking for challenges that are unique to this supply chain, and not generic challenges faced by all supply chains. I am also assuming that the boundaries of upstream go till the refinery and beyond that is the downstream oil and gas industry.

In the exploration stage, the investments are big and the probability of success is low. Exploration equipment, seismic survey vessels and equipment is very expensive. Today, it is also very data intensive work. You must procure contracts for equipment at the best possible rates, and keep them productive at a very high level of utilisation and availability. Getting parts to remote locations where exploration is underway and machinery or vessel is broken down is often a big challenge. The machinery itself is highly sensitive and must be treated with a lot of care.

Booms and busts are common in these markets due to oil price fluctuations. When the oil price is high all producers are rich and wants to explore and make more ‘finds’, and increase their proven reserves. When the prices are down they give up on exploration and a lot of equipment is ‘parked.’ MAnaging the economic cycle of the industry is one of the biggest challenges as a result.

Moving from exploration to pre-production, and then on to production has its own set of challenges. Consortiums of some of the largest companies on earth are involved in these processes. Co-ordinating these large companies’ activities is never a simple affair.

The business network becomes very complicated. Outsourcing is very common, and sometimes badly managed. I wrote the story of Deepwater horizon in my book Outsourcing 3.0 | Outperform | Outsource | Outprofit – Vivek Sood and will reproduce some parts below to give you a sense of the complications:

Deepwater Horizon, a semi-submersible oilrig owned by Transocean was a dynamically positioned drill rig of this type of vessel. A highly acclaimed rig for its numerous deepwater successes, it was deployed off the shore of Louisiana at an approximate cost of $1 Million per day to drill an exploratory well for British Petroleum (BP) who owned the exploratory rights for the block it jointly owned with two other unrelated parties. BP had chartered the oil rig from its owners, the Swiss entity, Transocean. Transocean operated this rig through a subsidiary – Triton Asset Leasing also based in Switzerland, although the rig carried a Marshall Island flag of convenience.

5-STAR Business Networks come together in many forms

As the exploratory well it was digging nearly came to completion, on 20 April 2010 Deepwater Horizon became front page news on nearly every newspaper on earth. The incident was reported in a press release by Transocean [1] as follows:

“Transocean Ltd. (NYSE: RIG) (SIX: RIGN) today reported a fire onboard its semisubmersible drilling rig Deepwater Horizon. The incident occurred April 20, 2010 at approximately 10:00 p.m. central time in the United States Gulf of Mexico. The rig was located approximately 41 miles offshore Louisiana on Mississippi Canyon block 252.”

“Transocean’s Emergency and Family Response Teams are working with the U.S. Coast Guard and lease operator BP Exploration & Production, Inc. to care for all rig personnel and search for missing rig personnel. A substantial majority of the 126 member crew is safe but some crew members remain unaccounted for at this time. Injured personnel are receiving medical treatment as necessary. The names and hometowns of injured persons are being withheld until family members can be notified.”

The details of the incident, as per the figures from popular mechanics [2] were attention-grabbing:

4.9 million: Barrels of oil (205.8 million gallons) leaked from the Deepwater Horizon well, about half the amount of crude oil the U.S. imports per day
 
19: Times more oil leaked from Deepwater Horizon than spilled from the Exxon Valdez in 1989 (10.8 million gallons)
 
62,000: Barrels leaking per day when the wellhead first broke, roughly the amount of oil consumed in Delaware each day
 
53,000: Barrels leaking per day when the well was capped on July 15, roughly the amount of oil consumed in Rhode Island each day
 
397.7 million: Dollars’ worth of the oil spilled at current market prices ($81.17 per barrel)
 
665: Miles of coastline contaminated by oil

The resulting investigation to establish the causality, contributing factors and liability will fill up a book many times the size of the one you are holding.

Outsourcing is a fact of life in business today

We will however, briefly focus on three relevant parties – BP, Transocean and Halliburton for the sake of discussion relevant to this Chapter – on modularized outsourcing. BP had outsourced the task of drilling to Transocean. At the same time Transocean had bought the Blowout preventer from Cameron International Corporation. Whether it can be argued that BP or Transocean had outsourced the task of Blow-out Prevention (BOP) to Cameron is not certain; neither is the liability on malfunction of the blowout preventer because of allegations of lack of proper maintenance. Cameron agreed to settle all claims related with the Deepwater Horizon tragedy with BP for $250M – without any admission of guilt. The situation with Halliburton is still unclear. As per a CNN news-report [3]:

BP and Halliburton sued each other in April 2011 claiming each is to blame for the deadly explosion on the Deepwater Horizon rig and resulting disastrous oil leak. Halliburton was in charge of cementing the Macondo well and claims that its contract with BP indemnifies (releases) Halliburton of any legal action resulting from its work as a contractor…

In a response filed Sunday, BP asserted that “maritime law prohibits indemnification for gross negligence.”

As part of that four-page filing, BP reiterated that it was seeking to recover from Halliburton “the amount of costs and expenses incurred by BP to clean up and remediate the oil spill.” BP has estimated in the past that the total cost will be around $42 billion, and by the end of November 2011 the oil company it has paid out or agreed to pay out $21.7 billion to affected individuals, companies and governments around the Gulf.

In an e-mail to CNN, Halliburton spokesperson Beverly Stafford said “Halliburton stands firm that we are indemnified by BP against losses resulting from the Macondo incident.”

Outsourcing tasks does not transfer responsibility for those tasks

President Obama quipped in an interview with CNN [4] On May 14, 2010 “you had executives of BP and Transocean and Halliburton falling over each other to point the finger of blame at somebody else…The American people could not have been impressed with that display, and I certainly wasn’t.” The legal wrangling continues and will take considerable time and expense to resolve. We need not go into the gory details of dollar numbers too big to even fully comprehend, but from our perspective in this Chapter three key points stand out:

  1. When you outsource a task, service or suite of services, you could still retain significant responsibility for its full and proper execution.
  2. Brand-names, size of the company or even their experience is no guarantee of performance of the outsourcing service contracts.
  3. No matter how close the ‘partnership’ is at the start, the test of a successful outsourcing contract is how it ends.

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