Plunging demand, lack of storage capacity, oversupply: Oil and gas companies are grappling with severe consequences of the pandemic. Things may never go back to “normal,” as they did after past market and price crashes.

The time is right for oil and gas procurement and supply chain organizations to initiate strategies and solutions created by and for this industry, with its unique aspects and challenges.

This new GEP white paper — What's Next for Oil & Gas? Recovery Scenarios and Navigation Strategies to Power Through the Crisis — outlines steps that procurement and supply chain organizations can take to create much-needed value in hard-hit oil and gas companies. The paper also discusses the longer-term structural implications of the pandemic for these organizations and the industry at large.

What’s Inside:

  • Mitigating the financial impacts of capital contract cancellations
  • Innovative cost reduction strategies, including cash auctions that also help support suppliers
  • The industry’s procurement and supply chain outlook under a variety of recovery scenarios

This important paper has the most thorough assessment of oil and gas procurement and supply chain that has been presented since the onset of the pandemic.

INTRODUCTION

The oil and gas industry is experiencing its third market and price crash in the last 12 years. Today, the market faces increased global turmoil and supply wars, compounded by the unprecedented disruption caused by the COVID-19 pandemic. The result has been a crippling blend of drastically decreased demand, lack of storage capacity, and oversupply.

Integrated oil companies, particularly upstream independents, took the crashes of 2008 and 2014–16 on the chin, but eventually recovered. In 2008, the crash was caused by a much broader economic collapse that decimated demand for petroleum products. In 2014–16, the crash was of much longer duration as the result of the confluence of slowing Chinese growth and a Saudi attempt to curtail massive American gains in global supply from shale resources.

The oil producers’ ability to respond financially is more constrained now than it was in the past, owing to two factors:

  • Profit levels are lower than during the previous crash. In late 2019, prior to the crisis, it was reported that many shale producers’ profits were lower (though oil prices were above $60 per barrel — the average shale breakeven price) than they had been in 2015–16 with prices twice as high as they have been during the pandemic.1 Though oil futures prices will continue to fluctuate with every month’s physical delivery, it remains unlikely that a sustained average shale breakeven price will be approached in the near future.
  • The scope for consolidation is limited. Instead of being able to snap up smaller shale producers, as during the 2014–16 downturn, a handful of companies now find themselves as the major shale producers at a time when capital markets have come to distrust the shale profitability story.

The troubled state of the industry can be attributed partially to excessive shale supply.2 Another factor is declining demand due to climate change concerns and the increased adoption of electric vehicles (EVs). These pressures had already begun to create a sense of urgency for the transformation of the sector; the pandemic and market slump will accelerate change.

Stakeholders and shareholders are already watching and agitating, demanding improvements from boards; the former want to see more focus on sustainability, and the latter unsurprisingly prioritize shareholder returns. Boards and executive leadership will need to make strenuous efforts to identify strategies that will produce desired results for both stakeholders and shareholders. Failing to do so will result in mass obsolescence of the oil producing firm.

While oil and gas as primary fuel will continue to be relevant for the next 30 years, the emphasis will slowly shift away from modular liquid fuels to more power generation and petrochemical products. Producers that re-state their business models — and, effectively, their raison d’etre — will come out stronger and with a renewed purpose in enterprise and society. Those that fail to do so will either fall to a re-consolidation wave, or slowly wind down their operations, like the coal miners.

Amid this realignment, there are some short- and medium-term levers that all leaders should consider incorporating into their strategic approach, regardless of the long-term business trajectory.

This paper highlights realistic steps that procurement and supply chain organizations can take in the immediate term to help oil and gas companies navigate the next 12–36 months and deliver tangible value to the enterprise. It also outlines various scenarios that may come about in the medium term, and the attendant implications for procurement and supply chain management (PSCM) in the industry.

The paper also outlines three scenarios that may come about in the medium term — Full Recovery, Go It Alone, and Greener Growth, as presented in a report by research and consultancy firm Wood Mackenzie3 — and their implications for PSCM.

SHORT-TERM SOLUTIONS

The shortage of actionable insights for PSCM organizations within oil and gas producers stems from several factors.

Traditionally, PSCM skills and the broader PSCM function have been underdeveloped in oil producers. Critical thinking and skills in cost management, materials movement, and logistics have traditionally been found in operations personnel who are less likely to come up with deep insights into an ancillary part of their core job. The lack of PSCM capability and thought leadership results in further underinvestment in these organizations by oil and gas producers.

The internal and external thought leadership offerings in this industry have tended to be rather generic — the “Procurement and Supply Chain Management 101” model. But this model is very much misplaced in the oil and gas production industry. Oil and gas producers were simply not at the table when the first generation of the procurement and supply chain model was articulated, and their operational needs are distinctly different from those of other industries. For example, most segments of the CPG, manufacturing and retail industries have workforces concentrated in a few large sites. Oil companies, however, have some of the most distributed and autonomous workforces, with most operating in locations that may not have an address, warehouse or connectivity. This has led to a strong divergence from the “PSCM 101” model, where something as simple and foundational as a purchase requisition is essentially irrelevant.

Generic recommendations for PSCM organizations are based on the idea of lowest per unit cost of indirect materials. But oil and gas PSCM organizations need more specific guidance on two key concerns:

  • How to deliver cost reduction in a high-services, high-capex industry that has already wrung most of the “dial for dollars” savings out of its supply base during the 2014–16 downturn; and
  • How to obtain buy-in from the most important stakeholder — operations — by addressing its concerns (e.g., quality and safety, material availability, shipment visibility), which are often at odds with the traditional priority of lowest per unit cost.

Here are four suggestions that are targeted specifically at the petroleum industry:

1. REVISIT YOUR CAPEX CONTRACTS

Oil and gas, like most extractive industries, is a capital-intensive endeavor. The need to constantly replace depleted reserves requires significant capital outlay to explore for, define and develop hydrocarbon production. While this does not differ from other extractive or capital-intensive industries, the scale and volume do. During good years, oil and gas producers have over 75% of their spend dedicated to capex; even in the down years, this number can exceed 60%.4

While a small amount of capitalization is driven by accounting nuances (e.g., flowback duration in unconventional production), the reality is that capex is the norm, not the exception. However, spending such a high volume of capital so consistently is much more than just an accounting concern; it is a major risk during a downturn. This is because limited capital is spent in a tactical or transactional manner — producers do not just go down to the store and purchase an off-the-shelf well. Instead, when capital is spent, it comes with complex, long-term contracts. Conventional spend reduction programs or advice would recommend reducing activity to correspond with lower prices, but oil producers cannot simply switch off spend in this area.

Typical capital contracts contain complex cancellation clauses, payment guarantees, and nuanced remuneration and indemnification structures that require careful examination prior to voluntary termination of a contract. Failure to do so can result in significant contractual penalties or years of costly litigation. This is true even in cases where the principal operator cites what would be considered good cause for cancelling a contract, such as poor or non-performance on the part of the supplier.5 Because of the typical length and sheer size of these contracts, even a portion of the contractual value awarded to a supplier, as the result of a lawsuit, can represent hundreds of millions of dollars.6

Producers cannot walk away from such complex contracts without consequence. In the current crisis,however, many have already announced severe capital cuts and continue to do so as the depth and length of the downturn becomes more visible.7 These announcements — meant to placate capital markets — are coupled with headcount reductions in an already depleted workforce for back-office functions like PSCM.8

Prior to the current economic slump, most producers reported that three-quarters of their PSCM workforce was tactical (i.e., not complex contract managers). During the 2014–16 downturn, contract management saw an average headcount reduction of 11%.9 The quick announcements and headcount reductions will create a predicament for producers. On the one hand, they need to quickly identify opportunities to reduce capex contract exposure; on the other hand, contract managers who conducted years-long negotiations of complex contracts are among the first to be let go, leaving organizations without the requisite knowledge to avoid the many pitfalls that have been given the force of law.

This confluence of factors leaves producers at the significant risk of either exiting contracts without properly assessing the risk profile, or minimizing the value derived from exiting those contracts.

Producers should adopt a three step-approach to review, segment, and reduce capex contract spend,while limiting penalties and legal exposure.

Existing capex contracts should be holistically reviewed for:

  • Cancellation penalties and delay payments
  • Ancillary clauses impacted by or triggered during a delay period (e.g., hurricane shutdowns)
  • Punitive or exorbitant charges tied to non-value-generating activities

This review and segmentation will allow operators to make one key decision and one key sub-decision. The key decision is whether to cancel the contract outright or to delay performance of it. While many contracts have a timeliness element for suppliers, they often leave the door open to principals for indefinite or medium-term delays, or slower work. This option will allow operators to reduce capex as well as avoid the harsh penalties that accompany outright cancellation.

The key sub-decision: whether to renegotiate contracts intended to be kept, but delayed. Capex contracts often have several ancillary payment mechanisms that are triggered even without activity — for example, hurricane shutdowns or monthly bonuses. If a producer considers delaying capital contract delivery, a careful analysis of ancillary clauses will allow it to reconfirm its initial strategy as well as determine if any renegotiation is required to eliminate exposure to value-destroying clauses that would pay a supplier for doing no work.

Once the segmentation is complete, producers are free to set their own evaluation parameters of value, time, and ease of implementation. For example, capex contracts worth over $500 million with less than 10-15% of the total contract value as cancellation penalty can be cancelled, while those with penalties exceeding 15% should be reviewed for delay or slowdown opportunities and renegotiation.

There is an important step zero, however: the collection and digitization of contract metadata. That may sound basic, but most oil and gas companies have not fully digitized their supply contracts — a result of contractual complexity and geographic spread of capital activities. In fact, only about one-fifth of oil and gas producers have fully adopted contract lifecycle management (CLM) or repository tools.

Fortunately, the last five years have seen a leap forward in computer vision and AI technologies that make digitization easier and more achievable. There are now systems in place that allow for the digitization of contracts and the categorization of their metadata in a fraction of the time it formerly took consultants and auditors. This speed is far more important than just reducing the total fee paid to those providers; it also means that producers who use this technology will then have a competitive advantage in terms of how quickly they are able to redefine their contract position.

This approach toward contracts can head off potentially hundreds of millions of dollars in lawsuits and penalties, allow retention of preferred suppliers, and identify key negotiation levers that have previously gone unexamined — all while globally digitizing supply contracts. This can mean the difference between intelligently deferring capex to a later date, and a lawsuit for hundreds of millions of dollars.

2. REPOSITION INVENTORY

We know from past downturns that there is approximately an eight-month window to effectively reposition inventory before it is no longer broadly applicable across the enterprise. If inventory is not repositioned by then, it will almost certainly lead to significant write-offs, as inventory turns will significantly decline and inventory holding as a percentage of revenue will more than triple. Non-hydrocarbon inventory repositioning — allocating inventory where there’s greater need and use of it, instead of letting it degrade on the shelves waiting to be written off — is a must-do.

This lever is, however, often overlooked for three main reasons:

1.  For producers, value associated with more balance sheet value tends to be deferred in favor of P&L value during a crisis; this is because the majority of the balance sheet is made up of hydrocarbon reserves, hiding the likely value of non-hydrocarbon assets and their cash potential

2.  Inventory is hard to find and classify, and is sometimes no longer on the books but physically still carried

3.  PSCM organizations are reluctant to push operations out of its comfort zone with a lower level of inventory, because it has become used to excess availability

Inventory repositioning will accomplish three things: it will have the tangible P&L benefit of reducing inventory holdings, in terms of material and inventory management costs; it will drive P&L cost avoidance by limiting redundant ordering; and it will generate balance sheet improvements that can release in excess of $100 million in cash for large operators because of the sheer magnitude of material holdings.10 While investors may not be as quick to reward inventory repositioning, it will free up much-needed working capital and help minimize damaging future write-offs.

The root of the problem for oil and gas producers is that their material data quality is poor. The breadth of users, geographic range of operation, and complexity of materials lead to a proliferation of redundant and overlapping material records. This erodes the confidence of the operations team when it comes to systematic reporting of inventory location and condition. This situation is not helped by hard-to-use, disparate software systems that discourage user adoption and good record-keeping.

The problem is further exacerbated by capitalized project stock. Most ERPs are configured to consider inventory allocated to a project as “consumed” from an accounting perspective, and accordingly cease to track the record. However, to ensure operations proceed as smoothly as possible, even when unforeseen challenges arise, it is a common practice to over-allocate inventory to a project. But because the ERP has stopped tracking that record, it is common to leave the material in a staging laydown yard and not return to it. This material, while no longer on the balance sheet, represents pure loss to the enterprise and should be addressed.

While it seems an easy idea, repositioning requires several foundational elements in order to provide substantial value. First and foremost, producers must get their arms around all their material data. This is not a simple master data cleanup exercise — it requires field resources to tag capitalized assets and to update inventory records in real time. That is easier said than done with operational locations and staging sites spread across thousands of square miles. For example, one U.S. operator has over 50 laydown yards just for OCTG (tubulars) and just for one business unit.11

Once the tagging has been done, a centralized view must be created and socialized with the operations team. Without their buy-in, this effort is unlikely to succeed, as operations will be essential to identifying interoperability of the inventory as well as assessing its usability; the material complexities cannot be assimilated by procurement alone.

If the operations team aligns and is willing to work with PSCM, they will also need to accept the least popular element of this idea: the hard stop. The operators who get the most out of this idea put a hard stop in the ordering system for all inventory purchases, and instead of routing them to purchasing, send them to a dedicated central team made up of materials, logistics, and operations specialists who can assess repositioning opportunities before allowing such purchases to be completed. This is the essential element of the idea that will create value. Just moving materials around one time at the onset of a downturn does not address the underlying problem of over-ordering because of poor data visibility.

Producers should be bold and fundamentally reorient their thinking about purchasing and consuming inventory. Building on the foundation required to execute a one-time repositioning of inventory, producers can set a new course that gives them better real-time inventory visibility and substantial cost avoidance. While not every type of inventory can or should be used in different geographies, there was enough interoperability for several categories of highvalue items during the last downturn to allow several companies to release over $100 million in working capital.12 The potential value is substantial enough to merit investigating this idea both in the immediate as well as in the long term.

3. PROCESS ASSESSMENT: ELIMINATION AND AUTOMATION

Despite years of futile efforts to force-fit a traditional “PSCM 101” model that just does not apply, there is an ongoing narrative that if oil and gas companies would do a better job adopting PSCM process norms, they would realize greater benefits during the downturn. But this line of thinking fails to appreciate the distinct nature of petroleum production operations and the demands it puts on procurement and supply chain support. For example, saving a few dollars per unit on piping is not a priority; minimizing risk by installing a secure hydrocarbon transmission pipeline is. Just as stopping drilling operations worth tens of thousands of dollars each hour to fill out a requisition form and wait for approval, transmission and acknowledgement of a PO will not gain traction with operations.

PSCM organizations exist to support the operations team’s revenue generation goals and the enterprise’s cost consciousness. Instead of trying to impose a model not designed for this industry, attention should be directed to what operations, and the broader enterprise, need from the supply chain to deliver consistent, sustained value. Essentially, PSCM organizations should stop insisting on more “discipline” or “maturity” from their operations partners and instead focus on ascertaining the real operational needs for PSCM and deliver on them. The desired approach should be reductive-to-constructive: cataloging everything a PSCM organization does today, and cataloging all the PSCM tasks that other organizations do today, and then asking, “Should we even be doing this?”

Often missed in discussion about process automation and outsourcing is the even more fundamental question of “should we have this process to begin with — what value does it provide?” Following the codification of end-to-end business processes in the 1980s and 1990s by consulting firms, many processes and sub-processes have become almost sacrosanct, and companies do them simply because that is what respectable companies do. A perfect example is the requisition-to-order sub-process. This process is at odds with the upstream oil and gas operating model of remote workers requesting complex services at high speed and volume. Yet, instead of recognizing this fact and leaving requisition-to-order behind, many oil companies have woven in workarounds and wasteful processes.

These “solutions” tend to let operations accomplish its objectives, but still allow the enterprise to technically achieve compliance with the textbook process. Some do this through blanket orders, while others custom-design programs that auto-create requisitions and orders upon receipt of invoice. This is the epitome of waste. Requisitions serve to provide budget owners with pre-commitment visibility and approval. If the budget owners do not actually see the requisitions because they are automated on the back end for policy compliance, they provide zero business value.

Worse still, these automations and processes have a real cost. The license, maintenance, and personnel associated with these systems can run up to several million dollars annually. So not only do certain processes not add value, they drive negative value, or loss, for the enterprise. These are precisely the kinds of processes that should be disqualified at step zero of process elimination, instead of being automated or outsourced.

Once the cataloging effort has produced a holistic view of the work that PSCM does and the PSCM work being done by other departments, and a process elimination assessment is completed, a gap analysis should be conducted with operations to determine what else can be undertaken that is not currently part of the formal or informal process portfolio. For example, few PSCM organizations in this industry actively track and manage the fulfillment of key bulk commodities like sand, water, fuel and cement, but this would add tremendous value.

Once this exercise is complete, PSCM organizations will have a map of existing processes that they should retain, and those that they need to initiate. Then they can start defining who will do them, which should be a much easier and quicker task, thanks to the cataloging effort and the redirection of thought to value-added processes.

4. CASH AUCTIONS

While many producers will rightfully be jealous guardians of their cash position during these times of economic turmoil, the reality is that most producers are in far better cash positions than their major, critical suppliers. While cash may be tight, a steady if diminished cash flow is guaranteed for producers, as they still sell the world’s most desired extracted commodity.

As far as ideas go, this fourth suggestion is the most provocative proposal in this paper, especially in light of the downturn, but it could generate significant value for the right enterprise. The idea is related to earlypay discounts / dynamic discounting, but on a much larger scale: cash auctions for cost reduction.

This idea is targeted specifically at producers — it is almost certainly not for the major specialist providers in oil and gas, as their demand is driven by new drilling and production, which when turned off can prove fatal to their already weaker cash positions. Indeed, even in relatively good times, the average major specialist providers can only cover 25% of their current liabilities with their operating cash flow. That stands in stark contrast to producers, who can cover upwards of 70% of their current liabilities out of operating cash flow.13

This means that producers can, within reason, leverage their cash position to extract long-term benefits from suppliers while providing them a vital lifeline during this uncertain time. This approach will better align the needs of producers and their suppliers than more traditional strategic sourcing activities because it does not represent a zero-sum game of reducing list prices to win business. Instead, both parties benefit in the way that is most important to them right now: the producers bolster their short- to medium-term P&L, and suppliers receive a cash injection that can be the difference between solvency and bankruptcy. Not only does this help producers reinforce their finances at a time when investor confidence — especially in those overexposed to shale — is at an all-time low,14 but it also helps them to keep valuable intellectual capital in play.

While this solution is not for everyone, it has shown the potential in other industries to provide the exact same benefit as dynamic discounting, but on a much larger scale. Instead of just leveraging a few days of cash arbitrage out of a pool of AP funds, PSCM and treasury groups could make a larger pool available and auction it off. The size of the cash on offer and the introduction of competitive bidding for cash, where the currency is cost reduction, could provide a novel lever to secure value in a supply base that is still recovering from the downturn in 2014–16.15

MEDIUM-TERM OUTLOOK SCENARIOS

What are the larger implications for PSCM organizations headed from a pandemic into a downturn? This section focuses on the medium-term scenarios for oil and gas companies, and what each of them means for procurement and supply chain organizations.

The global consultancy Wood Mackenzie has articulated three different recovery scenarios for the medium term: Full Recovery, Go It Alone, and Greener Growth.16

Here is a provocative question to guide this thought experiment: would oil producers miss their PSCM organizations in part or in whole? The heart of this question is derived from a deeper existential query: why do oil and gas producers have PSCM organizations at all? Remote working and furloughs during the pandemic have offered an interesting opportunity to begin to answer that question. But how enterprises ultimately do so will determine the support and funding PSCM organizations receive in the next decade or so, as well as how much of their strategic vision they will be able to achieve.

1. FULL RECOVERY

This scenario is the “best case” for oil demand: after a few years of disruption, consumption returns to the long-term outlook that was forecast at the end of last year — reaching a peak in the second half of the 2030s.17

In this scenario, the world, and the hydrocarbon industry, get back to “normal” quickly, with an associated uptick in demand for petroleum products. In the early days of the pandemic, this was the most commonly cited likely outcome, and certainly the most hoped for. At that point, the COVID-19 outbreak was not a true economic crisis. Assuming a quick and full recovery, what will happen to petroleum producers’ PSCM organizations?

There would likely be little change in the medium term. A full recovery would not drive profound structural changes to how producers think about their PSCM organizations. While there may be some reorganization and refocusing of priorities, the organizations would remain largely intact and on the same course as in late 2019. The most likely change would be in reducing human interactions where possible.

For the most part, accountabilities and processes would remain in place, with perhaps a modest increase in responsibility for operations teams due to PSCM headcount reductions during this period. For most PSCM organizations, the previous downturn saw an increase in proportional headcount in strategic sourcing and category management resources, as these processes are accepted as key value levers during downturns; tactical purchasing and support roles saw a corresponding decline.18

While this portends the relatively low value in the requisition-to-order process for producers, they should not abandon the more tactical side of procure-to-pay (P2P) altogether under this scenario, as they have been trying for years to drive more fundamental P2P practices with operations.

Further, there will be a continued push to automate and outsource basic business processes and to take advantage of newer digital technologies. In past downturns, efficiency and automation were further down the list of priorities than pure cost reduction. This time, the level of attention paid to digitalization will increase because it relates to activities involving human-to-human interactions, like field ticketing, kitting and staging of equipment. It is highly likely that efforts will be redoubled to fully digitize field tickets to minimize the amount of time spent person-to-person in the field.

Returning to the central question under this scenario: will operations miss its PSCM counterparts? Most plausibly, the distance and disruption to service would have been so minimal and of such short duration as to not drive deeper considerations about PSCM organizations as they stand.

2. GO IT ALONE

In this scenario, weaker economic growth means that energy demand is lower through the next two decades. The markets for jet fuel and diesel continue to grow, but at a slower rate because of travel restrictions and trade barriers. Oil demand does not peak any earlier but shows very little growth after the initial post-pandemic rebound. By 2030, it is barely higher than was expected for 2020 if the pandemic had not hit.

In this case, where the rebound is slight or nonexistent, we start to see more structural medium-term changes to PSCM organizations. In some ways, this is the worst-case scenario, where the world fails to revert to pre-pandemic levels and economic activity slows. The reasons for these circumstances and their outcomes will have a major impact on PSCM organizations.

Firstly, this scenario envisages extended travel restrictions, which would likely drive an increase in decentralized PSCM models and accountabilities. Despite great efforts at remote working, few PSCM organizations are truly geared to sustain remote work indefinitely while managing from the center. This would create a fragmentation or compartmentalization of PSCM organizations, with much of the responsibility for both strategic and tactical work reverting to local control, especially for direct categories.

This would subsequently weaken the overall adherence to a central, standard PSCM vision and strategy, and lead to increased local variation in terms of operations, costs and outcomes across operating units. This is not a new thing; rather, it’s a return to an older way of managing supply and costs. Eventually, most tactical responsibilities for P2P and onshore logistics would revert to operations, with a few local sourcing and materials experts where required (e.g. shore-base management).

This hypothesis obtains further support in the event of sustained or increased trade restrictions. As supply chains become more local and less attenuated, suppliers themselves will follow suit. The benefit of global agreements will decline, and local sourcing and contracting will become more prevalent. If the fragmentation of the organization also carries through to core subsurface operations, the progress made in the past decade toward standard well types and designs will erode, and with it the need for broadly leveraged purchasing power over major specialist providers.

With decreased emphasis on global agreements and increased focus on local sourcing, the complexity required for more local spend or category management would decrease significantly. This, combined with weaker financial performance due to slower economic growth, would cause higher-cost, central strategic sourcing and contracting organizations to atrophy and eventually be replaced by advanced AI / machine learning capabilities like cognitive sourcing. The remaining organization would move into caretaker roles for troubleshooting local problems and maintaining some global indirect categories until the organization becomes fully comfortable with an entirely automated system for indirect spend management. A similar pattern would follow later for fully robotic warehouses, driven by the level of comfort the organization achieves with mostly or fully automated warehouse work.

Under this scenario, operations and the broader enterprises may not fully disregard the past contributions of the PSCM organization, but they would not see sufficient value in specialized and centralized groups to retain them when the remoteness and the cost become increasingly onerous. For businesses in extended financial difficulty, the standard playbook is to shift more and more traditionally back-office work to frontoffice staff to save cost while continuing to drive revenue. This case would be no different and would hold true for most private producers as well as NOCs.

3. GREENER GROWTH

This scenario is in line with Wood Mackenzie’s existing projection of accelerated energy transition, reflecting potential changes to the global energy system if governments worldwide commit to radical change to cut carbon emissions. After the post-pandemic rebound, global oil demand will essentially be flat in the 2020s before starting a steep decline in the 2030s.19

This outlook depicts a dramatic and sustained shift to non-hydrocarbon sources of primary energy that would drive a flatline and then steep decline in petroleum demand. This would likely trigger the most profound changes for energy companies as well as split responses. Large companies with the requisite balance sheet and broader access to capital and customers would likely show a renewed, increased effort to transition to a majority renewable portfolio. Smaller independent producers, however, will likely enter terminal decline. For them, this transition would resemble the similar slow fade of most North American coal companies that are simply running down their existing reserves without expanding their resource or reserve base.

The implications for PSCM in each of these two cases would be starkly different. For large companies that attempt to make the transition, their PSCM organizations will grow in importance and accountability as entirely new categories will have to be sourced, purchased, managed, moved and installed. The learning curve would be steep, but the standard PSCM model adherents would be well served as the renewables supply chain hews much closer to the textbook approach. Within these large companies, the longstanding efforts to drive greater coverage in P2P would become more relevant, with an increase in large, long lead time material orders and a proportional decrease in highly complex capital services. The need to carefully manage the deliveries of that equipment and all the associated material preservation, tracking and warehousing would present several opportunities for growth in the reach and impact of PSCM organizations.

Smaller companies unable to make the transition, however, would see a gradual and then increasing decline in the importance of their PSCM organizations. As the emphasis turns from exploration and development to simply squeezing the most out of each remaining active well, PSCM organizations would first see their focus shift from strategic sourcing to driving process efficiency. The run-to-decline model would dramatically shift the buying patterns of these companies, and they will be driven almost exclusively by MRO materials and inspection and maintenance services. The purchase activity of these types of categories can be automated easily with existing technologies and augmented to be even more responsive to changes with emerging IoT applications.

Once that transition has taken place, there would be little in the way of transactional procurement, and the strategic side of the organization would have already been reduced to a skeleton crew of a few category specialists for key areas. Logistics would likely be fully outsourced and materials management would have become basic, merely supporting the bare-bones autonomous maintenance and forwardstocking locations.

These two diverging paths best help to answer the initial question — in a transitionary company where the unique nature of oil and gas production is fading away, the skills and processes that a PSCM organization can bring to bear will be sorely needed. By contrast, as those operations wind down without transition, the importance of PSCM will fade. So if oil companies transition away from oil, they will find significantly more value in the PSCM organizations that they have been trying to build the entire time.

UNCERTAINTY AHEAD

There is no doubt that the COVID-19 pandemic is a truly generational event that will have longstanding global impacts. Few industries are likely to face such sustained and profound challenges as oil and gas. While tourism and airlines will undoubtedly rebound, and retailers and restaurants will continue to evolve, the oil and gas industry has taken a serious blow while keeping an uneasy eye on the emerging market parity of renewables. Oil will continue to play a major role in the global economy for another half century, but it may never again soar to the heights of its past.

What the future holds and what companies should do in the long term remain somewhat opaque. Notwithstanding, in the short term, producers need top- and bottom-line relief, and PSCM organizations have a key role to play here. The breadth and sustainability of the value they provide, however, will vary greatly and will depend on their willingness to eschew traditional textbook strategies in favor of more nuanced and targeted approaches that yield tangible value. In doing so, they will be better positioned to both strengthen the enterprise and drive forward a more strategic agenda. Those that fail to do so will remain largely on the sidelines during the recovery and find themselves increasingly relegated to support roles.

In the medium term, it is unclear what will happen to both the global economy and the petroleum industry. However, it seems clear that the longer the ripples of the pandemic play out, the more likely PSCM organizations are to see lasting and fundamental changes, ranging from increased decentralization, to outright automation and elimination, to a great spike in their importance and impact. Those who start grappling with all these questions today will have a decided advantage in their approach to the future and their navigation of the choppy waters ahead.

AUTHORS

Patrick Heuer

Director, Business Development

Patrick leads business development for GEP in the area of oil and gas, providing practical, digital solutions for our clients’ most pressing supply chain problems. Formerly, Patrick led PwC’s oil and gas procurement and logistics practice in North America and founded its oil and gas consulting business in Western Australia. In the course of his career, he has advised four of the integrated supermajors, several Middle Eastern and Commonwealth of Independent States oil companies, and Southeast Asian National Oil Companies, and many upstream independents, delivering P&L and balance sheet benefits involving hundreds of millions of dollars.

 

Ennio Senese

Executive Advisor

Ennio is an Executive Advisor to GEP’s leadership, with a focus on oil and gas customers. Additionally, Ennio is a chairman and board member of three charity NGOs in The Netherlands. Previously, Ennio served as the lead of Accenture’s Resources practice in the East Mediterranean, based in Rome, with offices in Athens and Istanbul. He also had a stint at Accenture as an Executive Partner. Prior to Accenture, he was an Executive Director with Shell Global Solutions and Chairman of Shell Services Italy, and board member of Shell Italy.

 

1 Bradley Olson, Rebecca Elliott and Christopher M. Matthews, “Fracking’s Secret Problem—Oil Wells Aren’t Producing as Much as Forecast,” Wall Street Journal, 1 January 2019. Retrieved 5 May 2020 from https://www.wsj.com/articles/frackings-secret-problemoil-wells-arent-pro...

2  Note: U.S. production doubled from 2008 to 2018, an unprecedented supply increase in a mature commodity industry. See “Statistical Review of World Energy, ” BP, June 2020. Retrieved 1 June 2020 from https://www.bp.com/en/global/corporate/energy-economics/statistical-revi...

3  “The Future of Energy After COVID-19: Three Scenarios,” Wood Mackenzie, May 2020. Retrieved 12 May 2020 from https://theworldaftercovid19.think.woodmac.com/

4 Derived from GEP analysis of various companies’ annual reports and other industry data.

5  Arathy S. Nair, Arun Koyyur and Sam Holmes, “Diamond Offshore Sues Australia’s Beach Energy for Terminating Drilling Contract,” Reuters, 7 April 2020. Retrieved 2 May 2020 from https://www.reuters.com/article/us-diamondoffshore-bankruptcy-lawsuit/di...

6  “Transocean Beats Eni in Lawsuit over Drillship Contract,” Offshore Energy, 24 January 2018. Retrieved 2 May 2020 from https://www.offshore-energy.biz/transocean-beats-eni-in-lawsuit-over-dri...

7  Tsvetana Paraskova, “Chevron Slashes CapEx Again to Protect Dividend in Oil Price Rout,” OilPrice.com, 1 May 2020. Retrieved 5 May 2020 from https://oilprice.com/Latest-Energy-News/World-News/Chevron-Slashes-Capex...

8  Shadia Nasralla and Ron Bousso, “Oil Major BP to Cut 15% of Its Workforce, 10,000 Jobs, by the End of Year,” 8 June 2020. Retrieved 21 July 2020 from https://financialpost.com/commodities/energy/bp-to-cut-15-of-workforce-s...

9  Steve Wright and Patrick Heuer, “Upstream Supply Chain Management – Benchmarking Study,” PwC, June 2017.

10  GEP Analysis

11  Ibid.

12 Ibid.

13 Ibid.

14  “Wall Street Calls Time on the Shale Revolution,” Financial Times, 29 March 2020. Retrieved 7 May 2020 from https://www.ft.com/content/39125b8a-524f-11ea-a1ef-da1721a0541e

15  Matt Phillips and Clifford Krauss, “American Oil Drillers Were Hanging On by a Thread. Then Came the Virus,” The New York Times, 20 March 2020. Retrieved 5 May 2020 from https://www.nytimes.com/2020/03/20/business/energy-environment/coronavir...

16  “The Future of Energy After COVID-19: Three Scenarios,” Wood Mackenzie, May 2020. Retrieved 12 May 2020 from https://theworldaftercovid19.think.woodmac.com/

17 Ibid.

18 Steve Wright and Patrick Heuer, “Upstream Supply Chain Management – Benchmarking Study,” PwC, June 2017.

19 Ibid.

 

RECOMMENDED