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CoVID 19 – Critical Supply Chain Strategies in Oil and Gas Industry

CoVID 19 – Critical Supply Chain Strategies in Oil and Gas Industry


By Vinodkumar Raghothamarao, Director Consulting, Energy Wide Perspectives & Strategy, IHS Markit EMEA

Oil and Gas companies operate in dynamic and complex environments, where they face constant challenges especially in terms of supply and demand. Now with the oil prices at historic lows and with the CoVID 19 supply chain disruptions, the time has come to evaluate the supply chain and procurement strategies, sourcing techniques and costs. Major pandemics like COVID-19 can create significant disruption to the reliable supply of oil and gas equipment/parts such as Valves, Turbines, Compressors etc within the oil and gas value chain. The COVID-19 pandemic is a wakeup call for C-level executives to develop new business strategies in their future supply chain designs. Procurement and supply chain strategies are set to be in the forefront of critical issues plaguing oil and gas companies especially with the current downward spiral of oil prices and CoVID-19.

Many oil and gas companies worldwide realized that either their suppliers or sub-suppliers (tier 2/tier 3 suppliers) are based in the affected regions such as China, Italy, South Korea and Spain. Single sourcing or sourcing everything from one geography or country has led to the current disruption. Even though some companies don’t source directly from China but their tier 2/tier 3 suppliers down the line do so. Oil and Gas companies should be proactive in developing robust supply chain resilience and have adequate supply chain risk intelligence.

Supplier Risk Intelligence is the process of acquiring and analysing supplier risks in order to understand the present and future risks; support current and future sourcing and market sector strategy execution; and enable the business to better anticipate changes in the external marketplace and react before others do.

Supply Chain Mapping is one way to mitigate the supply chain risks especially if there is over dependence on one country or concentration of souring from one country or geography. Supply Chain Mapping involves thorough understanding of suppliers including their global sites, local sites and subcontractors, as well as knowing which components or part originate or pass through them. Companies who are ahead in supply chain mapping benefit when disruptions happen, because they can deduce quickly how their supply chain could be impacted in the short to midterm. When companies have advance knowledge of where the disruption will come from and which equipment or parts will be impacted, they have lead time to execute avoidance and mitigation strategies — like alternative sourcing, strategic inventory allocation and debottlenecking the critical supply chain.

The IOCs/NOCs to improve and deploy best in class supply chain risk mitigation practices can adapt and/or implement some of the practical measures listed below:

  • Understand the critical supply chain of major spend categories. This requires thoroughly identifying costs and sourcing options across the supply chain for each category and determining appropriate interventions (e.g., seeking new supplier, changing specifications, altering contract terms)
  • Undertake critical and non-critical supply chain bottlenecking assessment. Target for paradigm shift in the supply chain that could mean identifying alternative suppliers.
  • Build custom fit procurement processes that provide better clarity, engage suppliers early in the process. Moreover follow through to execution and into operations
  • Manage risks across the entire spending portfolio—not just within individual projects or commodities, or splitting capital from operations spend
  • Proactively manage the supply base, select relevant suppliers, focus on alignment and sustainability (i.e., dynamic relationships), and ensure company ownership and accountability is clear to suppliers
  • Institutionalize the capabilities required for supporting procurement and supply chain activities.

Going forward, the rethinking of supply chain strategy had already begun for many companies but Covid-19 will accelerate the need to have decentralized global supply chain. Improved supply chain resiliency and collaborative supplier relationship management is the way forward for the oil and gas companies to reduce costs in this era of low oil prices and to focus on oil and gas production and exploration in the most optimized way. It will be interesting to see how oil and gas companies can effectively manage robust supplier monitoring system coupled with the adoption of best in class supply chain practice in 2020.