Nature of Supply chain management and their issues in the Oil & Gas industry & COVID 19 impact on the Oil and Gas logistics market

The Logistics network in the oil and gas industry is a bit critical and highly inflexible which arises from the factors like

• Production capability of the oil and gas producer
• Long transportation lead times
• Lack of Planning management (which includes demand management/ warehouse management /quality & timeline management)

Implementation of correct supply chain management in the oil and gas industry can help to avoid the above factors and can help to reduce cost within the framework of its value chain.

Currently, the main problem facing the oil industry is to minimize the cost of production and supply of finished products to consumers. Effective supply chain management can increase the efficiency and competitiveness of a petrochemical plant and its supply as a whole.

The problem of supply chain management is very popular essentially in the oil & gas industry. For the most important efficient and cost-effective supply chain management issue practise in the oil and gas industry represent important factors for

·      Maintaining continuous supplies of crude oil

·      The reduction of lead time

·      Distribution cost 

Although for an oil and gas firm to gain the competitive advantage, Porter’s five forces value chain analysis helps us to interpret the value activities and profit margin within the organisation to gain a competitive advantage over the other competitor especially in the oil & gas industry. If we co-relate the same issue with respect to supply chain management, the factors which create the best product or service are 

·      Inbound logistics

·      Operations

·      Outbound logistics

·      Marketing

·      Sales & service 

THE EXTREME NECESSITY OF THE SUPPLY CHAIN MANAGEMENT IN THE OIL & GAS INDUSTRY

The steadily increasing global demand for oil and its derivatives such as petrochemicals has enabled companies providing these products to reach more customers and increase their market share and profitability. This boom in global demand along with the ease of international trade and the inflexibility involved in the petroleum industry’s supply chain has made its management more complex and more challenging. However, even with the inflexibility and complexity involved in the industry’s supply chain, there is a lot of room for improvement and cost reduction, specifically in its logistics area.

The level of supply of end consumers especially with the oil & gas products and their by-products plays a particularly important role, since it affects the economic health of the main industries and agriculture, as well as the population.

But the main challenging which people holds in their mindset is the scarcity of resources but actually it is not , we have enough resources of oil and gas but the real practical challenging is putting this reserves into production and delivering the final products to consumers at the minimum cost possible. 

Especially in the logistics and supply chain segment, the nature of the problem lies in 

1.  Several weeks lead-time from the shipping point to the final customers’ location is very common in this type of industry.
2. The great distances between supply chain partners present a high variability of transportation times that can hurt suppliers in terms of service levels and final customers in terms of safety stock costs.

Considering the above 2 factors, recently lot of companies have recognized that improved supply chain efficiencies represent a huge area for cost savings specifically in the logistics area. 

Currently, Supply logistics software or supply chain management software is highly valuable to operational managers. These software tools support good transportation, warehousing, inventory and logistics network design to efficiently link the flow of products, data and finances. Nowadays, logistics is used as a strategic weapon in a competitive market, since it ensures the search for new sources of increase in the efficiency of enterprises, expands the areas for finding reserves outside production, optimizing the interaction of the constituent elements of the enterprise resource potential. If we talk about the oil and gas industry with reference to this, this industry passes through various loads and division of the industry involved in the supply, transportation, storage & distribution, dealing with materials that are in the three phases- gaseous/ liquid/ solid.

The implementation of logistics concept aims at reducing the time losses the production cycle and the timing of orders, stock of materials and finished products- enhances innovation process and compliance with contractual obligations while strengthening the integration of all material flows in the production process. 

So, taking into account the structure of the oil industry, we can obviously say it is complex and requires strict control and right planning that include

•  Availability of right information at the right time for various stockholders.
•  Integrating supply chain with vendors and suppliers for each organisation involved in the process.
•  Enterprise business solution to manage multi-modal transportation/ resource tracking /logistics and cost tracking.
•  Availability of new customized IT solutions.
•  Study the demand and offer on the market products that best meet the needs of customers.

Believe me or not Creating a network of effective communications between organizations, consisting of

•     Producers of petroleum products
•     Trading firms
•     Intermediaries
•     Financial structures

These all takes place within the framework of joint supply chains, while logistics companies are a complex unifying link. These principles are carried out within the framework of the logistics concept of supply chain coordination WHICH IS ACTUALLY THE SUPPLY CHAIN MANAGEMENT

SUPPLY CHAIN MANAGEMENT ISSUES IN THE OIL & GAS INDUSTRY & HOW TO IMPROVIZE THE ISSUES 

Whatever may be the industry or business segment, 1 of the weaknesses of a supply-chain is that each company is likely to act in its best interests to optimize its profit. The goal of satisfying the ultimate customer is easily lost and opportunities that could arise from some coordination of decisions across stages of the supply chain could also be lost.

VARIOUS ISSUES 

1)    MANAGEMENT DECISION

On a broader aspect, supply chain management involves configuration, coordination & improvement. There are certain issues which are to be considered in each case

Configuration involves the following questions:

• what product-service bundle to produce.
• what portions of the bundle to produce in house and what portion to purchase from others?
• Facility capacity.
• Location of facilities.
• Type of technology to adapt.
• Handling communications between suppliers and customers.
• Standards expected of customers and suppliers.

Coordination from the perspective of each company involves the following issues

• Ensuring supplier effectiveness in cost, timeliness and quality. 
• Setting appropriate targets for inventory, capacity and lead time.
• Monitoring demand and supply conditions.
• Communicating market & performance results to customers and suppliers. 

OTHER ISSUES

2)    VERTICAL INTEGRATION

In the recent oil & gas industry, depleting the existing oil and gas assets is forcing many companies to find new oil and gas resources. This results not only in technical and operational difficulties along with the cost risk. In response to these changes, many oil and gas industry companies are moving away from just from being just oil drilling companies to seeing themselves as reservoir development and resource management companies. Supporting this important shift requires a strategy to manage the acquisition/exploration and production function of an oil company in a more integrated cohesive and balanced manner

There comes the vertical integration decision in the oil and gas industry. Vertical integration is the joining of 1 firm with another to which it either sells an output or from which it buys an input. Vertical integration works well in oil & gas industry where the output of 1 firm is the input of other along with the supply chain segments. e.g. the output of exploration is the input to production. The output of production is the input to the refinery, while the output of the refinery is the input to the marketing. So, this oil and gas industry provides an excellent avenue for vertical integration. and the same vertical integration can be considered for long term profit relation (even in case goods or service is not in line with the firm current business)

Advantage side: (there are reasonable benefits to vertical integration)

• Greater control the product quality
• Greater coordination of operations along the value chain
• Access to new technologies
• Intelligence of strategic operations

Dis-advantage side:  

• on a negative side, a vertically integrated oil and gas company get the increase exposure to financial risk associated with the business cycle of growth and recessions.  
• Other disadvantages of vertical integration may include a loss of expertise associated with the consolidation of management and operations- failure to recognize external market opportunities because of the internal market, and a loss of competitiveness resulting from the secure internal market.

3)    OUTSOURCING:  

As an alternative to vertical integration, outsourcing is the process of contracting with third parties to furnish some aspect of the product-service bundle. Outsourcing may provide much better quality and supply chain performance. The big question is “what should be the company outsource”?

Dis-advantage side:

on the reality side, from the outsourcing, liability issue can come. If the vendor is a partner in new product design and there is a design or manufacturing defect which causes harm or injury- who will be liable for the harm done: the firm or the supplier partner?

IMPROVING SUPPLY CHAIN LINKS IN THE OIL & GAS INDUSTRY 

Following 7 strategies are recommended for improving oil & gas industry supply chains 

1. Segment customer based on service needs:

overall performance can be improved through effective matching of what is produced, when it is produced and the quantities to be produced to the specific customer requirement.

2. Understand the “total value” of major spend categories:

This requires thoroughly identifying cost and option across the supply chain for each category and determine appropriate interventions (e.g., seeking new suppliers, changing specifications, altering contract terms)

3. Watch for market signals and plan accordingly:

Here I am referring to demand projection. Planning based on demand forecast often result to material & capacity balances

4. From partnerships to Enhance supply -chains:

Relationship management is a 2-way traffic in oil & gas industry. This oil & gas industry is involved in a global supply chain that involves domestic and international transportation, value-chain strategic warehouse management, order and inventory visibility and control, materials handling, import/export facilitation, and information technology. This means in effect that the shipper and the oil companies are jointly and mutually involve and intertwined with each other, end-to-end in transportation management from the moment an order is placed by the vendor to the day it is unloaded.

5. Apply strategic sourcing:

strategic sourcing implies that suppliers who have consistently demonstrated superior performance deserve a favourable status, including customer loyalty and preferential treatment. Therefore, one method for improving a supply chain is to select an excellent corps of suppliers.

6. Adapt a supply chain-wide technology strategy:  

improvisation in information technology services can give supply chain management in the oil and gas industry a more integrated approach to exploration/production/refining and marketing operations.

With modern information technology services, Exploration and production company can benefit from simplifying and streamlining data management & access, interlocking the experience of regionally disparate workers, saturating investments, and operational decisions.

Adapting a supply-chain wide technology strategy can also result in every user of the system along the chain seeing a single file system, can access all computational servers with high-speed data access, can connect to real-time high-speed visualization, and can participate in realistic collaboration, and be provided instant service irrespective of the user’s location or desktop device.

7. Adapt or create operational innovation:

Operational innovation includes a supply-chain management program encompassing the integration and innovation of the process for engaging and communicating with suppliers and doing so in a way that competitors cannot duplicate or replicate. Furthermore, operational innovation includes coming up with entirely brand-new ways of developing new products, providing customer service, filling orders, or performing any tasks along the supply-chain that adds value to the enterprise. Therefore, the objective of applying operational innovation along the supply chain is to discover new ways of working by examining and optimizing core business links.

COVID 19 impact on the oil and gas logistics market and its supply chain & prominent solutions to have a smooth market 

With US shale oil production companies have increased their production since 2014 and other producers keeping to their existing pace, the oil barrel price was continually declining over the past few years. As the COVID 19 virus spread pushed China towards lockdown and being the largest importer of oil and gas – factory and transportation declined. Eventually, the demand for oil fell will bring the oil price further.

To address the situation, the organisation of the Petroleum and exporting countries (OPEC) convened a summit to ask the leading oil and gas producer to cut the oil production by an additional 1.5 Mn barrels. OPEC requested the non- participating countries to follow the same guideline, but few countries kept producing oil at the same production level. With more countries announcing lockdowns to contain COVID19 spread, the production rate remained steady in contrast to a steep fall in requirements resulting in a huge gap in supply and demand in the oil & gas industry. 

1)    UPSTREAM IMPACTS & SOLUTION THOUGHTS:

As several major oil and gas producer, mostly in Saudi Arabia and Russia are not reducing their oil and gas production due to the breakdown of talks in the OPEC summit, the major downstream supply chain impact is the availability of resources and workforce to keep the production operation and related maintenance going amid the lockdown and other containment initiatives.

 PROMINENT SOLUTION

Solution such a IOT/AR- VR enabled remote diagnostics and monitoring & preventive maintenance using advance AI models could be optimally used in such a situation to reduce dependency on the physical presence of the workforce in the production lines and to reduce the chances of a machine failure at a critical time. 

2) MIDSTREAM IMPACTS & SOLUTION THOUGHTS:

Like the oil production situation, the major oil refiners have not stopped buying oil from the exploration companies. However, due to huge shortfall in demand and in the downstream areas of the oil and gas supply chain, the transport carriers such as transcontinental tankers, rail tank cars, tank truck etc are getting queued up. Keeping track of the logistics, controlling the oil spillage and pilferage from the containers are exacerbating the problem in this pandemic.

 PROMINENT SOLUTION

There could be several solutions, based on emerging technologies which could be deployed for the near term and long-term benefits to mitigate the solutions. Remote container tracking and health monitoring can provide ready alerts for oil spillage and pilferage and a robust fleet management can control the already over-utilized transportation modes. 

3)  DOWNSTREAM IMPACTS & SOLUTION THOUGHTS:

The downstream supply chain is probably the hardest due to COVID 19 situation. With the sudden shortfall of demand but with production lines producing oil at the same rate as before, the transition market space area from the midstream to downstream is creating the major bottleneck in the entire supply chain. With COVID 19 lockdown lifted in due time, this segment will witness a massive surge in demand almost instantaneously. This will require a very robust supply and transportation planning capability to meet such demands even as the supply is overstocked.

 PROMINENT SOLUTION

Initiatives that could be useful to mitigate the situation are to plan for maximising the transport utilization, smart demand-supply match etc. Digital solutions can be designed to use advance machine learning models to isolate end consumers based on the probable demand surge e.g. even with the lifting of COVID 19 lockdown, the travel and hospitality sector are likely to recover slowly and thereby would have less energy consumption. Such initiatives will lead to the optimization of transportation focusing only on high demand or high relevant opportunities.   

CONCLUSION

• Historically, the oil and gas industry remained skeptical to adopt digital technologies in its full potential. Only over the last few years, companies are understanding the critical need for intelligent remote maintenance in oil fields in the inaccessible areas, need of faster decisions based on advance statistical models of drilling operations, worker safety, real-time monitoring of logistics etc. Similarly, under sudden and catastrophic circumstances such process, if implemented can be optimized and utilized to mitigate adverse situations.
•  In another perspective, the global Oil & Gas industry have already entered a turbulent phase. This industry would need adequate support from respective governments in their country of operation for survival. In the short run, this oil & gas companies can use their cash reserves to sail through the financial turbulence. However, in the long run, capital intensive upstream sector would seriously struggle to remain efficient. Oil importing nations may enjoy low price whereas exporting nations will have to find their way to generate revenues from alternative mechanism. COVID 19 will seriously push the oil industry to the intensive care unit where a lot of surveillance is required. During COVID 19 and beyond, policymakers must take care of the oil industry as a survival of the oil industry holds key to revive the market and its economy.