June 29, 2022

4 Best Practices in Oil and Gas Procurement:

Oil and gas industries operate in volatile and complex contexts, facing ongoing supply and demand challenges. With the oil prices at lows and no signs of an early rebound, it is essential to assess supply chain and procurement strategies and costs. 

Oil & gas procurement firms must focus on their product and non-hydrocarbon supply chains. These services handle the business’s parts, materials, and services. 

The non-hydrocarbon supply chain is vital for giving the tools and services needed to locate, extract, process, and ultimately market the oil and gas. Procurement and supply chain strategies are at the forefront of crucial industry concerns.

Oil & gas procurement firms mainly give the decreasing trend in oil prices.

According to Harvard Business Review, acquired items and services account for more than half of the overall costs of the average oil and gas company. As a result, even a 5% decrease in procurement costs can significantly boost profit margins for oil and gas companies. 

To do so, Oil & gas procurement firms should consider the following opportunities to improve the following:

  • Oil & gas procurement value
  • Supply chain market information
  • Materials/supplier relationship management
  • Supply chain people and technology

Supply chain market intelligence is gathering and analyzing information for the following reasons:

  • Better understand the current and future market
  • Support current and future sourcing 
  • Market sector strategy execution

It enables the business to better anticipate and respond to changes in the external marketplace. Oil & gas procurement knowledge is critical in any industry, especially in the volatile oil and gas industry. 

Sufficient supply chain market information assists oil and gas companies in dealing with vital supply chain difficulties such as:

  1. Capacity constraints
  2. Infrastructural constraints
  3. Fluctuating markets

It also assists businesses in making the best judgments about which markets to buy from. How to identify the best price to pay? And what benchmarks and targets will provide them with a competitive advantage?

Best Practice:

IOCs/NOCs can adapt and execute some of the practical strategies described below to improve and deploy best-in-class supply chain practices:

Recognize the “total value” of major spending categories:

It needs to broadly evaluate costs and options for each type across the Oil & gas procurement and select effective interventions. e.g., seeking new suppliers, changing specifications, altering contract terms.

Create unique procurement processes that provide greater clarity, and involve suppliers early in the process.

It needs follow-through to completion:

Manage risks across the entire spending portfolio, not simply within individual projects or items, or by separating capital cost from the operational cost.

Manage the supply base proactively, selecting the right suppliers, focusing on the following:

  • Alignment and sustainability (i.e., dynamic partnerships)
  • Ensuring supplier ownership 
  • Accountability

Establish the capabilities to support Oil & gas procurement and supply chain activities. These limited abilities are now in high demand. 

In the following years, cultivating the right talent here will get equal importance as in the most critical technical and operational areas.

Oil and gas firms can consider the following supply chain and Oil & gas procurement options:

  • Market Intelligence for Supply Chains 
  • Management of Supplier Relationships
  • Technology and Supply Chain Solutions

Market Intelligence for Supply Chains:

SCM Intelligence is gathering and analyzing information to understand the current and future market better. It supports current and future sourcing and market sector strategy execution.

It helps the business anticipate changes in the external marketplace better and react before others. Adequate supply chain market information helps oil and gas companies deal with vital supply chain tests such as:

  • Capacity constraints
  • Infrastructural constraints
  • Fluctuating markets

It also helps businesses make the best decisions about which markets to buy from. How to identify the best price to pay? And what benchmarks and targets will provide them with a competitive advantage?

Management of Supplier Relationships:

Suppliers provide complex services and vital equipment to support ongoing projects and operations in the oil and gas industry. Companies should use supplier benchmarking to improve supplier relationship management. 

Oil and gas firms must assess the robustness and performance of contractors across multiple spend categories. They should maintain regular interaction with contractors to ensure that suppliers meet the appropriate safety, training, equipment, and staffing duties.

Technology and Supply Chain Solutions:

The adoption of the Should-Cost model, as well as the Total Cost of Ownership (TCO) model, is another supply chain solution. It can assist the oil and gas business in pricing negotiations. 

The former calculates the overall acquisition cost for special equipment or service by factoring in the following:

  • Design cost
  • Supplier margin
  • Supplier operating cost
  • Transaction and acquisition expenses

The Should-Cost model for various spend categories will enable oil and gas businesses to negotiate contract terms and conditions with suppliers more effectively. Before selecting the proper supplier, the TCO technique (suited for long lead and crucial capital demanding equipment) calculates the various costs. It includes purchase, operation, and maintenance costs, at a reasonable price.

Modern supply chain solutions should include the following:

  1. Inventory management
  2. Contractor management
  3. Demand forecasting
  4. Master data management
  5. e-procurement

The oil and gas supply chain strategy revolves around demand forecasting/planning, inventory management, and e-procurement.

Oil & gas procurement solutions have radically altered supply chain planning in several industries. This is a paradigm shift in how oil and gas corporations have adopted or expressed interest in e-procurement technologies.

In the future, we recognize that while some supply chain best practices have permeated the oil and gas industry, there is always space for additional improvement. 

Better demand planning and inventory management can assist oil and gas organizations in maintaining oil and gas equipment uptime and, as a result, benefit from increased production. 

Improved spend category management and collaborative giver relationship management, combined with greater transaction processing automation, will result in sourcing savings and identifying secondary saving opportunities.

Effective supply chain best practices adoption for oil and gas firms to decrease costs in this era of low oil prices and optimally focus on oil and gas production and exploration.

Prismecs is a one-stop-shop for all of your oil and gas procurement needs. We will provide 24-hour assistance that will not allow you to go anyplace else, so why are you waiting? So, call us at 18887747632 right now for more queries.