Oil and Gas Procurement Optimization 101

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A Procurement Primer for Oil and Gas Companies

Oil and gas companies are always on the lookout for ways to improve operational efficiency and reduce expenditures. This is true regardless of fluctuations in oil prices. Oil and gas procurement strategies and best practices can play a pivotal role in achieving greater operational and financial efficiency.

Our goal with this blog is to establish a basic understanding of procurement process optimization as it relates to oil and gas companies. At the same time, we want to raise awareness of procurement both as a bottom-line strategy and as a potential source of competitive advantage for operators.

Generally speaking, procurement process optimization addresses multiple needs. When executed with planning and forethought, it can establish better demand management, better supply management, better supplier relationships, and better overall risk management. Ultimately, it ensures a complete and accurate picture of spending.

Oil and Gas Procurement Processes
The key business drivers of procurement optimization are cost and risk reduction—via standardization of processes; profit growth through cost savings; and better management of existing inventories.

While these drivers are arguably applicable to all industries, oil and gas procurement processes are decidedly different from other industries. For one, the difference is manifested in the uniqueness of our industry’s tangible assets (rigs, wells, pipelines, separators, etc.). For another, it is also evident in the industry’s intangible assets (business practices, processes, organizational structure).

In fact, the oil and gas industry’s unique organizational characteristics directly affects the design of procurement processes and the deployment of asset management systems.

In some oil and gas companies, a dysfunctional relationship exists among core operational units—between operations, supply chain, accounting, and information technology. This latent dysfunction is evident in common organizational disorders: poor communication between departments; a lack of data sharing across departments; the absence of policies, controls, and standardized business processes; and the absence of utilization and integration of technology.

Not surprisingly, these symptoms can have a direct negative impact on the effectiveness of the procurement function.

Best Practices in Process Optimization
To solve the unique challenges of hydrocarbon supply chain management, oil and gas companies should take an integrated approach that focuses on three key components:

  • Processes – Having defined procurement processes and controls in place to guarantee optimal execution and accountability throughout the enterprise.
  • Data – Ensuring data is high-quality, consistent, and flows seamlessly among departments and processes without bottlenecks or gaps.
  • Technology – Deploying procurement systems to enable enterprise asset tracking; equipment tracking; and integration of cost, budget, and price data.

For the purposes of oil and gas supply chain best practices, process and data may be viewed as distinct components. In actuality, however, process and data are two sides of the same coin. They are in fact inextricably linked. What’s more, process and data also encompass people and culture (arguably the most critical elements in solution development).

To illustrate, let’s examine a project in which a mid-sized upstream operator engaged Stonebridge to create a standard set of procurement and supply processes.

Oil and Gas Procurement Case Study
The project was initially defined by the client as an assessment of asset management systems to support purchasing and material transfer needs. As we conducted interviews with the various departments, however, it became apparent that while each department was well versed in their own processes and procedures, some departments had no idea what others were doing.

In fact, after our first cross-department workshop, a drilling manager approached us to say that merely having a cross-department meeting was a huge, eye-opening experience.

From the beginning, it was clear we were not merely there to deliver a set of standard process maps for our client. We were really there to help break down communication barriers and enable the company to work, think, and act as one enterprise when it came to procurement and supply chain.

As the project progressed and a standard set of optimized processes began to reveal itself, we identified several external systems and processes that either affected the optimal procurement process or would be affected by it. The most significant of these systems was the asset management system. Without a solid system to manage existing and new assets, the optimized procurement process would never reach its full potential.

The result of our work for the client consisted of two main deliverables: 1) a standard process for procurement and 2) a baseline recommendation for an asset management system. Both deliverables were technology-agnostic, allowing the company to choose the best path based on their needs, as opposed to modifying or redefining their needs in order to fit the technology’s limitations.

A Blueprint for Oil and Gas Procurement Optimization
As a result of this system-agnostic approach, the company had an actionable blueprint for standard procurement processes across the entire company. What’s more, they had a solid business case for an asset management system that supported these processes, without being tied to a particular technology. They had the option to conduct a gap analysis and modify their existing technology to accommodate the designed approach, implement different technology utilizing the foundation provided, or even build the entire system from the ground up.

And as for procurement systems, here’s an important caveat. There are many software solutions that focus on a single element in the procurement process: asset management, or inventory management, or operational equipment management. Such solutions are good but they’re designed to solve a portion of the procurement optimization challenge. But many do not provide a complete solution that integrates asset management and accounting.

In our experience, the technology component of procurement process optimization should ideally focus on enterprise asset management (EAM). EAM software is used to operate, maintain and dispose enterprise assets. At the same time, it facilitates integration with existing accounting, financial, and reporting software.

In closing, an integrated procurement optimization approach that focuses on process, policies, and controls, backed by EAM technology, will provide the required foundation. This approach allows for the transmission and sharing of informational data between business units and systems, and assures better utilization and integration of existing technologies.

Over time, these operational benefits will translate into tangible financial benefits—which is the goal of transforming procurement into a bona fide corporate competency for an oil and gas company.

To learn more about procurement process optimization, contact us.

About the authors
Edwin Acuna is a Stonebridge Senior Consultant with over 25 years of experience in management consulting, economic analysis and software implementations achieving more productive, lean and efficient results in both private and public sector.

Andy Reinert is a Stonebridge Principal Consultant with more than 10 years of oil and gas experience. Andy has been a member of the EnerHub team for the last five years, contributing both as a data quality and master data management expert and as a user advocate for EnerHub’s growing client base. Prior to joining Stonebridge, Andy worked as a Business Analyst for a large OKC-based operator.

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