Background
The supply chain in oil and gas consists of operators (oil companies), main contractors, subcontractors and suppliers. Procurement is performed during the development and abandonment of oil and gas fields and during operation of fields (production). During development, the majority of procurement is structured as project execution tasks. Projects are unique and typically range in size from the tens of millions of dollars to billions of dollars for large offshore new builds. Big projects perform like fiscal expansion in an economic sense.
Forces that govern the supply chain in oil and gas are internal (business-related) and external (political/economic). Of the factors that influence supply chain strategies and differentiate this sector from other business sectors, there are four that will particularly be considered here:
- the cost of field development must go down if marginal (profit) fields are going to be developed and alternative energy is going to be kept at bay;
- oil companies are big and getting even bigger – mostly through mergers;
- oil prices fluctuate greatly; and
- oil companies are subject to various political pressures.
Large operators interface with governmental entities worldwide and some are closely linked to governments themselves. Main contractors are often traditional engineering/construction/service companies, some of which have been nurtured under years of protective development policies.
Subcontractors and suppliers are manufacturers and service companies or regional agents with added value in the form of engineering. Expertise is the common factor that binds this supply chain network together with the assumption that requirements for safety and uninterrupted operation are never compromised.
Buying Power
Important to consider is that the cost of bringing oil out of the ground is going to increase as more challenging fields are being tapped, while cost of alternative energy is decreasing as technology improves. In addition, oil companies compete with each other when bidding for licences to operate.
Among operators, it is commonly thought that only the biggest will survive because they can absorb risk better and have lower relative operating costs. The mergers of the 1990s confirm this.
Academia agrees. As expressed in textbook equations, after optimum size is reached, companies become difficult to manage, logistics clog up and supplies run out. However, with improvements in information technology (IT), optimum size keeps increasing, therefore oil companies still merge, unite their buying power and make it more difficult for new entrants to compete in what could be coined ‘oligopoly infanticide’.
The result is being felt at the top end of the supply chain – ‘bigger’ means stronger buying power. With increased buying power, long-term supply chain strategy such as ‘win-win’, which was still an issue in the 1990s, tends to lose out to short-term strategy such as reverse auction.
In theory, the rate of main contractors and suppliers being taken over or going under should increase as a function of increasing operator buying power. This, in itself, could be a supply chain strategy, since ‘survival of the fittest’ is a legitimate concept in today’s economy. Buying power induces efficiency since, when a supplier collapses, a new, better one soon appears.
Whether this is really the case is a question that may warrant a hard look in the future. Does the increased buying power really result in more efficient suppliers or just push the links below towards oligopoly? This may depend on whether operators use buying power in a strategic manner or a tactical (short-term) manner.
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Transportation
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