While the Covid-19 pandemic is impacting every sector across the globe, few industries are facing such sustained and profound challenges as that of oil and gas. Ennio Senese, a managing director at UMS Group, and Patrick Heuer, oil and gas leader at GEP, share how the industry could recover from the pandemic and outline the impact on procurement and supply chain management.
1) Full recovery
The “full recovery” scenario articulated by energy research and consulting firm Wood Mackenzie can be seen as a “best case” for oil demand. After a few years of disruption, consumption returns to the long-term outlook that was forecast at the end of last year, reaching a peak in the second half of the 2030s.
Under this scenario, we see that the world, and the hydrocarbon industry, get back to “normal” quickly with an associated uptick in demand for petroleum products. In the early days of the pandemic, this was the most commonly cited likely outcome, and certainly the most hoped for. In the early stages, the pandemic was not a true economic crisis and could have resolved relatively easily if the pandemic had abated quickly.
Therefore, assuming a quick and full recovery, what would happen to petroleum producers’ PSCM organizations? There would likely be little change in the medium term. A full recovery in the short term should not drive profound structural changes to how producers think about their procurement and supply chain management (PSCM) organizations; while there may be reorganization or refocusing of priorities, the organization will remain largely intact and headed down the same road it was in late 2019. The most likely change is in reducing human interactions where possible.
For the most part, accountabilities and processes largely would remain in place, with perhaps a modest increase in responsibility for operations owing to PSCM headcount reductions during this time. For most PSCM organizations, the last downturn saw an increase in proportional headcount for strategic sourcing/category management resources, as processes they own have been noted as the key value levers during downturns, while tactical purchasing and support roles saw a corresponding decline.
While this portends the longer-term acknowledgment of relatively little value in the requisition-to-order process for producers, they should not abandon the more tactical side of procure-to-pay (P2P) altogether under this scenario, as they have tried for years to drive more fundamental P2P practices with operations.
Further, there would be a continued push to automate and outsource the basic business processes and to take advantage of the newer digital technologies. However, in past downturns, efficiency and automation have been further down the list of priorities than pure cost reduction, so the level of attention paid to this element will only increase as it relates to activities involving human-to-human interactions like field ticketing and kitting and staging of equipment.
It is highly likely that a redoubling of efforts to fully digitize field tickets will stem from this event to minimize the amount of time spent person-to-person in the field.
Returning to the central question under this scenario: has operations missed its PSCM counterparts? Most plausibly, the distance and disruption to service has been so minimal and of such short duration as to not drive deeper considerations about the PSCM organization as it stands.
2) Go it alone
In the “go it alone” scenario of Wood Mackenzie, weaker economic growth means that energy demand is on a lower trajectory through the next two decades. The markets for jet fuel and diesel continue to grow, but at a slower rate because of travel restrictions and trade barriers. Oil demand does not peak any earlier but shows very little growth after the initial post-pandemic rebound. By 2030 it is barely any higher than was expected for 2020 if the pandemic had not hit.
In this scenario, where the rebound is slight or non-existent, we start to see more structural medium-term changes to the PSCM organization. In some ways, this is the worst-case scenario where the world fails to open back up to pre-pandemic levels and economic activity slows. Both the reasons underlying this assumption and their outcomes would have major impacts on PSCM organizations.
Firstly, this scenario envisages that there are extended travel restrictions, which would likely drive an increase in decentralized PSCM models and accountabilities. Despite greater efforts at remote working, few PSCM organizations are truly geared to sustain remote work indefinitely while managing from the center.
This would create a fragmentation or compartmentalization of PSCM organizations with much of the responsibility for both strategic and tactical work reverting to local control, especially for direct categories. This would subsequently weaken the overall adherence to a central, standard PSCM vision and strategy, which would lead to increasing local variation in terms of operations, costs, and outcomes across operating units. This would not be a new experience, but rather a return to an older way of managing supply and costs.
Eventually, most tactical responsibilities for P2P and onshore logistics would fully revert to operations, with a few local sourcing and materials experts where required (e.g. shore base management).
This hypothesis is further supported in the event of sustained or increased trade restrictions. As supply chains become more local and less attenuated, suppliers themselves will follow suit. The benefit of global agreements will decline, and local sourcing and contracting will become more prevalent. Moreover, if the fragmentation of the organization also occurs for core subsurface operations, the progress that has been made in the past decade toward standard well types and designs will erode, and with it the need for broadly leveraged purchasing power over major specialist providers.
With decreased emphasis on global agreements and increased focus on local sourcing, the complexity required for more local spend or category management would decrease significantly. This combined with weaker financial performance due to slower economic growth, higher-cost, central strategic sourcing and contracting organizations would atrophy and eventually be replaced by advanced AI and machine learning capabilities like cognitive sourcing.
The remaining organization would move into caretaker roles for troubleshooting local problems and maintaining some global indirect categories until the organization became fully comfortable with an entirely automated system for indirect spend management. A similar pattern will follow later for fully robotic warehouses, driven by the level of comfort the organization achieves with mostly or fully automated warehouse work.
Under this scenario, operations or broader enterprises would not fully disregard the past contributions of the PSCM organization, but they will not see sufficient value in specialized and centralized groups to retain them when the remoteness and the cost become increasingly onerous. For businesses in extended financial difficulty, the standard playbook is to put more and more traditionally back-office work on front-office staff to save cost while continuing to drive revenue.
This case would be no different, and would hold true for most private producers as well as NOCs.
3) Greener growth
The “greener growth” scenario is in line with Wood Mackenzie’s existing projection for an accelerated energy transition, reflecting potential changes to the global energy system if governments worldwide commit to radical change to cut carbon emissions. After the post-pandemic rebound, world oil demand would be essentially flat in the 2020s, before starting a steep decline in the 2030s.
This scenario depicts a dramatic and sustained shift to non-hydrocarbon sources of primary energy that drives a flatline and then steep decline in petroleum demand. This will likely trigger the most profound changes for energy companies and a split in their responses. For large companies with the requisite balance sheet and a broader access to capital and customers, it is very likely to see a renewed and increased effort to transition to a majority renewable portfolio.
Smaller independent producers, however, will likely enter terminal decline. For them, this transition would resemble the similar slow fade of most North American coal companies that are simply running down their existing reserves without expanding their resource or reserve base.
The implications for PSCM in each of those two cases could not be more starkly different. For the large companies that attempt to make the transition, their PSCM organization will grow in importance and accountability as entirely new categories come to the fore to be sourced, purchased, managed, moved, and installed. The learning curve will be steep, but the standard PSCM model adherents will be well served in this scenario as the renewables supply chain hews much closer to that textbook approach.
Within these large companies, the long-standing efforts to drive greater coverage in P2P will now become more relevant with an increase in large, long-lead material time orders and a decrease in highly complex capital services proportionally. The need to carefully manage the deliveries of that equipment and all of the associated material preservation, tracking, and warehousing will present several opportunities for growth in the reach and impact of the PSCM organization.
Smaller companies unable to make the transition, however, will experience a gradual and then increasing decline in the importance of the PSCM organization. As the emphasis turns from exploration and development to simply squeezing the most out of each remaining active well, PSCM organizations will first see their focus shift from strategic sourcing to driving process efficiency.
The run to decline model will dramatically shift the buying patterns of these companies to be driven almost exclusively by MRO materials and inspection and maintenance services. Purchases of these types of categories can be easily automated with existing technologies and can be augmented to be even more responsive to changes with emerging IoT applications. Once that transition has taken place, there will be little call for much in the way of transactional procurement, and the strategic side of the organization will have already been reduced to a skeleton crew of a few category specialists for key areas.
Logistics will likely be fully outsourced, and materials management will become a basic organization to support bare-bones autonomous maintenance and forward-stocking locations.
These two highly diverging paths help to best answer our question from the outset; in a transitionary company where the unique nature of oil and gas production fades away, the skills and processes that a PSCM organization can bring to bear will be sorely needed. By contrast, as those operations wind down without transition, the importance of PSCM will fade. This indicates that the value most PSCM organizations have provided to date would be better suited in other organizations with different operational contexts, but remains somewhat distant from the value sought by the core operations groups of oil and gas producers.
So, if oil companies transition away from oil, they will find significantly more value in their PSCM organizations that they have been trying to build the entire time.
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