Innovating Supply Chain Collaboration to Create New Value for Oil & Gas Industry
Srikanth Subba Rao
Manager - Technology Excellence Group
QuEST Global

The continuous plunging crude price since last few years due to various reasons has raised the bar on investments over RoI in the Oil & Gas sector. This article stresses on building of a collaborative supply chain that interweaves the myriad stakeholders in the O & G ecosystem to drive greater on efficiencies by reducing operational cost while simultaneously increasing productivity. Also, the article emphasises on adoption of Digital Technologies is the need of the hour to deliver astounding cost savings through automation and predictive analytics, giving companies more wriggle room to increase profits.

The 2014 price crash shocker is a good example of why the word 'volatile' is often used to describe the oil and gas sector. With a voracious appetite to fuel economic growth, developing countries like China and India sent prices soaring in the early part of the new millennium. Then came the 2008 recession, where prices plummeted in a historic plunge. Whatever recovery the industry could salvage in the aftermath was lost a few years later in 2014, when a host of factors - political turmoil in major exporter nations, economic sluggishness in high consumption markets like Europe and Japan, plateauing growth rate in China and rising North American domination in oil production - signalled a steady downward spiral in demand.

Consumer windfall in O & G is never a good idea - being a 'price inelastic' sector, a supply glut of crude oil or natural gas can be the dominoes falling for the global economy. Singed by lowering prices, if oil companies scale back on new production, they cannot immediately address fluctuations in demand, causing upheaval in oil hungry sectors that run an economy - electricity and transport being the most crucial. For oil exporting nations, there is also the impact on GDP and employment.

In the current scenario, the growing focus on renewable energy and escalating trade tensions have only accentuated the market sensitivity of the oil and gas sector.

While we are still a long way off from being a zero carbon world, O & G companies are feeling the heat. A recent report by Carbon Tracker, a UK -based not-for-profit organization that tracks the impact of climate change on fossil fuel companies, called out the dangerous new trend in the sector where executive pay is linked to increasing production avenues rather than maximising returns with existing reserves. In other words, leaders are rewarded for risking investment in what could potentially turn out to be dead assets, instead of aligning their strategy to the demands of the Paris Agreement on climate change.

Driving Value over Volume - Streamlining the Supply Chain is Key

The deep-seated vulnerability of the Oil and Gas sector is ironically, its main strength - the diversity of the ecosystem that defines the role it plays in shaping global geopolitics. Spread across multiple locations and run by a decentralized workforce, the O & G market traverses multiple political, trade, infrastructure, regulatory, labour, environmental and safety considerations.

Given the complexity of the market structure, there is no simple answer to how much it costs to drill an oil well - budget companies have to allocate for capital spending (feasibility study, equipment), production costs, administrative & transpor t charges and taxation. In totality, the cost may vary anywhere between USD 20 million to 1 billion, depending on the type of rig.

With the cataclysmic changes in demand, shareholders and energy experts are now clamouring for the O & G sector to follow a new mantra - do more with less, strategize value over volume. A crucial factor to achieve this is the building of a collaborative supply chain that interweaves the myriad stakeholders in the O & G ecosystem. Such restructuring drives greater efficiencies by reducing operational cost while simultaneously increasing productivity.

This inevitable reality is not just based on the pressures of an unreasonable market, it has roots in the way the O & G industry is structured. For instance, according to a 2017 report by Mckinsey, even in a low price environment, the rise in cost of major projects can only be partly attributed to inflation, about 70 percent of the expenses are 'self -inflicted'. This is mainly because of the insistence on bespoke requirements for each project rather than standardized specifications.

Through industry-wide collaboration, that harmonizes specifications for material and manufacturing requirements, Mckinsey's research has shown that such streamlining the O & G supply chain can 'unlock five -year industry -wide savings of USD 90 billion to USD 240 billion on purchases of commonly used exploration and production equipment'. Citing the example of the synergies in the automotive industry, the report also goes on to state that harnessing collaboration with key suppliers, like engineering and procurement contractors and equipment providers to evolve 'supplier-led solutions' can lead to reduced cost and increase in output.

The Impact of Digitization on O & G Supply Chain
The 'capital project supply chain', as the Mckinsey report puts it, is only one part of the picture. The other, more significant aspect, is the impact of digital disruption on the Oil and Gas sector. Next generation technologies like Big Data, Industrial Internet of Things, Machine Learning and Artificial Intelligence are making headway in this legacy ridden sector. Whether upstream, midstream or downstream, these technologies have the potential to deliver astounding cost savings through automation and predictive analytics, giving companies more wriggle room to increase profits.

Take the case of IoT. Considering the low level of digital maturity in the sector, a Deloitte Insights ar ticle succinctly spells out the benefits of implementing IoT in O & G companies. "Increased data capture and analysis can likely save millions of dollars by eliminating as many as half of a company's unplanned well outages and boosting crude output by as much as 10 percent over a two-year period. In fact, IoT applications in O & G can literally influence global GDP. Industr y-wide adoption of IoT technology could increase global GDP by as much as 0.8 per cent, or USD 816 billion during the next decade, according to Oxford Economics", the report says.

With data being central to derive value from the implementation of technology, O & G companies have to innovate to synergize suppliers in the information supply chain. From the vendor that supplies the sensors to the cloud storage provider and the engineering service company that makes sense of the data to drive operational efficiencies, streamlining the information supply chain presents as many oppor tunities as it does challenges.

As the sector undergoes the inevitable evolution of digital transformation, what oil and gas players will increasingly look for is a partner that takes the lead in developing a collaborative platform that allows the seamless flow of data.

Being a leader for more than two decades in the oil and gas industry, QuEST is uniquely positioned in this sector. QuEST under takes projects in its entirety and works on the complete life cycle of a plant and we provide engineering ser vice/solutions during entire concept to commissioning phase of the plant. This helps the team to garner an in-depth knowledge on equipment, processes, systems, and utilities across multi - disciplines. QuEST assists customers in their digital transformation journey as a one -stop solution; right from software installation to its final execution. The company's exper tise of the domain makes it a leader in collaborative supply chain management which helps its clients to adopt to latest technologies such as AI, ML, and DL efficiently.