Looking at previous cycles, our (oil) industry's knee-jerk reaction to oil price crash was almost identical all the time - 1) Squeeze suppliers 2) Don't worry, oil price will recover quickly 3) Cancel projects 4) Fire people. This time around the industry did exactly the same, but it was only helpful for a while until it got worse. Then, squeeze suppliers again, go down to basics, fire people. Even this did not work. Today, majority of oil companies are bleeding.
What is wrong here? Why we cannot recover? As an industry, we've been profitable at $30 per bbl 10 years ago, why we cannot stay afloat today? We've exhausted almost all resources and got all the low hanging fruits, yet struggle to understand what to do next and keep tuning ourselves to forecasts that almost always wrong.
But why? Well, we do not know how to do it, really. As the industry, we outsource almost everything we do. Historically, the oil and gas industry never bothered to have a look and understand what is happening beyond the 1st tier contractor / supplier and this is for a reason - there was never a financial merit to do it. Enthusiasm and drive to be best in class do very little in our “masculine” industry, full of personal ego and politics.
What this have created is a mindset and common practices of: 1) Transfer all risks 2) Have it just in case, 3) Plague of contingency - “I might use it one day” 4) Working in silo. This type of attitudes and practices create risks that are priced and paid by oil companies, but almost never materialize. Contractors and suppliers are so happy and really enjoy it, because this is a good source of additional revenue.
As the industry, we lost the skills and expertise of how to setup effective supply chains. There is a growing gap in knowledge and skills. What is most importantly, we've lost control of the cost basis. Costs to produce a barrel of oil skyrocketed over the last 10 years. A recent Wood Mackenzie report showed massive increases in cost per barrel, in some cases reaching a triple digit number (more than 250%). To my knowledge, there is no other industry where you see such a drastic increase in costs. Even aerospace and nuclear power industries have not seen such massive cost inflation, albeit both are highly regulated with ever increasing regulations and standards that translate into higher costs.
As the industry, we became lazy and too much focused on the technical side of the business, that we forgot that money has its value.
When things get tough, everyone is rushing around supply chain and performance improvement guys, who are like a lifeline in many companies. But because of years of being “paper-movers”, we got stuck and rarely know what to do next, after long hanging fruits are gone. Although there is probably no immediate magic pill to solve it, but those organizations who would look at it with a more strategically and long term view, would benefit tremendously in the years to come.
It is a paradox, but with metals (steel, nickel, chrome, molybdenum and the likes) and processes around it, being the backbone of what we do and contributing more than 60% of the costs, there is no oil company who controls this bottleneck resource, in one way or the other, or be able to influence lead times and costs. When you have to wait 2 years for a sour service wellhead, there is nothing much you can do with it.
Another paradox is projects delivery. Terrifying statistics on mega projects delivery. A quick refresh, this is the global average (Ernst & Young 2014 study of 365 oil and gas mega projects):
- 64 %of projects cost overrun
- 73 %of projects are facing delays
- 59%- average cost overrun in a project
Yet, no one wants to go and see what works. Project alliancing (relationship contracting) and Critical Chain Project Management (CCPM) have a plethora of fact-based evidence to prove that projects can be delivered faster and cheaper, sometimes half the estimated cost. Yes this could be done. Yet, we stick to the old-and-familiar, because if we fail in new, we get the blame, but if we continue with the existing system, well, everyone fails in it, so it is a norm.
Let true leaders and enablers make things happen and ensure the long-term prosperity of the oil industry and everything around it. Today, even a corner-shop owner and an athlete know what is the latest oil price.
About the Author:
Artur Osipyan is a passionate Procurement and Supply Chain professional with over 10 years experience in Oil & Gas industry in Middle East and Caspian region, with extensive expertise in Upstream industry cycle. With proven history in handling multimillion business initiatives, Artur has acquired a deep understanding of Upstream Supply Chain and developed a subject matter expertise in a variety of categories within the domain. Coupled with creative system thinking, structured and intuitive insight and leadership skills, Artur has successfully delivered a number of multimillion cross-functional projects with conflicting objectives.
Artur is a regular contributor to Oil & Gas Supply Chain body of knowledge, with a great vision in developing a strategic approach to Oil & Gas Supply Chain management and development of local capabilities and supplier base, with value chain localization.