Focus

Driving Efficiency in Upstream Procurement

Due to the highly dynamic nature of the oil and gas sector with its continuous challenges related to the volatility of supply and demand,  industry stakeholders are seeking new, proactive ways to optimise operational efficiency.


Potential savings

One of the main objectives of oil and gas companies is to achieve optimum exploration and production while maximising processing efficiency. Thus, it is particularly important for players to manage their procurement activities in the most effective and prudent manner to reduce costs and simultaneously ensure efficient operations across all links of the oil and gas value chain.

As the oil and gas industry comes to terms with the likelihood of a sustained low oil-price environment, procurement teams may wish to move beyond short-term methods and embark on a more proactive and strategic outlook. This includes working further upstream in project design and collaborating with engineering and design teams to reduce complexity before it becomes locked into long-term costs.

A study conducted by Bain & Co. shows that procurement savings based on this approach can be substantial, of between 8 to 25 per cent, especially for teams that are in the early stages of the efficiency drive (see fig. 1).

 

 

Liberalising procurement

Beyond individual actions of companies, the ability of a sector to respond to any given market challenge often relates to its governance framework. This is certainly the case for sections of the Malaysian oil and gas industry, for which one of the most salient issues at present is the perceived rigidity of the upstream procurement framework.

Under this governance structure, service providers, operators and PETRONAS, the national oil company, are required to work together on a step-by-step basis in order to secure a service agreement between the two former parties. This rigid framework is deemed to inadvertently create prolonged, costly and less efficient processes as well as to protract the implementation procedure and increase time to decision making. The lack of flexibility therein can make it difficult for companies to act swiftly in response to the sustained low oil-price environment.

In order to enhance flexibility within the procurement process, leading industry players contend that service providers and operators could be authorised to finalise the service contract directly, with only guidance being provided by PETRONAS. It is also important, they stress, that operators continue to adhere to all guiding principles and local industry development efforts, including the safeguarding of operator involvement in international alliances.

 

Shaping a new upstream framework

A pertinent example of a less structured governance framework, and one that could be replicated on the upstream procurement side, is that which governs the downstream segment. Indeed, liberalising the upstream framework in line with the downstream model would not only facilitate greater flexibility in the overall procurement process, but would also help to boost efforts to address the challenge of excess capacity of specialised assets in the local market.

Ongoing cross-sector discussions on replicating the downstream framework in the upstream segment, including thought leader debate on the possible introduction of additional thresholds to ensure greater autonomy, will facilitate progress towards this end.

In addition, it is important that any modification to the procurement process is aimed at bolstering service provider capabilities. It has been common practice for service providers, especially smaller ones, to operate reactively by simply undertaking the work that is requested. Greater support in boosting their capabilities would help them to adopt a more proactive approach in which they can work according to their own in-house standards of safety and/or capability.

Therefore, it is important that any new framework also ensures the provision of guidance to local companies in a collective rather than individual manner, as is the case at present, to fully maximise the development of local in-house capabilities. Such steps would not only foster greater efficiency in the upstream procurement process, but also improve safety standards and sector-wide competence as a whole.

 

Enhanced visibility in the system

One notable step has already been taken this year to enhance efficiency and planning in the procurement framework following PETRONAS’ release of its market info flow in March 2017.

This mechanism is expected to improve visibility in the system and increase the transparency of scheduled activities over a three-year period (2017-2019). It will include an updated annual report with a general overview and demand outlook for seven upstream and one downstream prioritised categories. Its major significance will be to greatly facilitate the overall planning process for all of PETRONAS’ licensed and registered vendors.

The primary objectives of the market info flow are threefold. First, to support vendors in planning their resources and investment more effectively, specifically for project-driven activities susceptible to demand spikes. Second, to help re-balance supply-demand dynamics by championing collaboration among companies and encouraging new players in emerging categories to contribute towards building an efficient and resilient Malaysian oil and gas sector. Third, to facilitate improved engagement between PETRONAS and its vendors.

 

Final remarks

Oil and gas thought leaders widely agree that the low oil-price environment will be a sustained reality over the short to medium term. Consequently, it is increasingly important that the necessary steps are taken to adapt to this new reality. In addition to concrete actions such as PETRONAS’ market info flow, this includes continued cross-sector efforts to liberalise the procurement process on the upstream side, to ensure that Malaysia’s oil and gas industry has the flexibility and efficiency to respond accordingly.

 

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