The Oil Industry Must Prioritize Procurement

This guest blog comes to us from Megan Ray Nichols of Schooled by Science. 

Thanks to growing economic pressures and a troubled industry, oil and gas providers must consider prioritizing their procurement functions. The massive expenditures that have been possible in the past are no longer viable. Nearly all providers must come up with cost-effective and resource-light strategies if they hope to survive going forward.

Why Procurement Is More Important Than Ever

Oil prices are relatively low, and while that could change, it will be some time before they climb again. That means oil companies must prepare to meet long-term market trends. Luckily, natural gas prices are rising, but there’s no telling how long that will last.

Conventional day-to-day operations coupled with regulatory events tend to balloon costs, especially when you factor in sub-contractors and outsourced workers. Of course, this setup is what most companies are working with, which means something has to change.

It makes sense that project work makes up a bulk of operational costs, and it follows that a focus on procurement can cut down on said costs. Optimizing the supply chains for petroleum as well as for parts, materials and services can significantly lower overall costs and increase productivity.

According to the Harvard Business Review, over 50 percent of the average oil and gas company’s costs come from purchased products and services. So, even a small reduction in purchase costs can help alleviate some of the financial burdens as well as provide higher returns and profit margins. Even one component of a drilling operation can have a substantial impact.

As an example, when using sealed bearing mud motors, you need mud motor seals to retain bearing lubricant and keep out drilling fluid and abrasive debris. These seals are essential for the reliability of the motors. They need replaced regularly, so you need a procurement protocol that ensures you always have a supply of seals available. Otherwise, you may be forced to pause drilling operations while you wait to obtain new seals. The quality of the seals procured can also significantly impact costs. Some seals have a relatively short life, while others can last for more than 500 hours. Mud motor seals are just one of many examples of components that can cause severe issues if their procurement is not managed correctly.

Identifying Procurement Efficiencies

Companies can prioritize procurement and better organize their supply chain operations to achieve optimal efficiency and lower costs. By deploying more thorough supply chain market intelligence tools, along with other newer technologies, companies can cut down on many of the associated costs. Greater intelligence means greater opportunities to find talent and strengthen materials or supplier relationships.

By focusing on the supply chain directly, it’s possible to find not only better partners and suppliers but also ways to cope with the shifting market. Things like constrained capacity, infrastructure issues, volatile markets and shifting demand all become that much more manageable.

With the right insights and intelligence, it becomes possible not just to make the right decisions but also to accurately take predictive measures. You can see at a glance where a market might be shifting and what that means for the various elements. Lower costs might mean higher demand, which would, in turn, mean sourcing more supplies in anticipation. It could also mean the exact opposite. You can use supply chain intelligence tools to uncover trends to help discern what’s happening.

With the right tools in place, there are three major ways in which procurement can become more balanced:

• Resetting supplier relationships to negotiate better contracts and gain new insights into their internal operations. 
• Improving capital expenditure efficiency by mitigating complexity, costs and operations requirements.
• Transforming your business to be more cost-conscious through added transparency and data-driven infrastructure.

You may or may not have noticed that all of these areas are meant to foster a culture of cost-effectiveness. It highlights what oil and gas companies should strive towards now and into the future.

Welcome to the New Reality

For decades, the oil and gas industry has been a well-oiled machine with little to slow down its operation. Companies have had little reason to scrutinize their supply chains to lower the associated costs. Things have changed. These costs are proliferating, and many organizations need to mitigate these cost increases before things get out of hand.

Since the procurement of supplies and goods makes up a huge chunk of those operating costs, it makes sense to come up with new ways to manage it. By prioritizing the process, oil companies can discern what elements need to be optimized to improve overall efficiency. Procurement and business intelligence technologies and strategies can help with this as can new platforms, processes, and protocols.