The oil and gas industry is one of the most vital industries in the current world. The oilfield services sector is an essential partner for exploration and production companies, providing drilling, production, supply, and logistical services. This essay will focus on the procurement and supply chain processes including the challenges faced when initiating these processes in the industry. It will also focus on ways of obtaining the money value from the procurement process. The extended value chain also will be of focus since through it industries thrive and become important to each other. As a result, creation of joint venture partners has risen resulting to strengthening of the extended value chains.
Introduction
Energy companies rely on oil and natural gas as their principal fuel sources, which has a significant impact on the world’s economy. An oil or gas production or exceedingly complicated distribution process requires the use of cutting-edge technology. Because of the upstream process, natural gas has long been associated with oil in the marketplace. Since its inception, natural gas has been seen as a nuisance and is still burned in vast amounts in several regions, including the United States (Library of Congress, 2021, par 1). This shift in global energy supply is mainly attributable to the booming U.S. natural gas industry and reduced emissions when burned compared to oil and coal.
Background Information of the Oil and Gas Industry
There had been a lot of development and fast industrialization throughout the nineteenth century. During this time, the country was linked together by the railways, and oil was discovered, which opened up new possibilities for building materials and fuel. The oil industry saw explosive expansion as a direct result of the discoveries of the Spindletop geyser in 1901 (Patowar, 2021, par 1). Over the course of a year, several new oil companies were formed, and oil quickly rose to prominence as the dominating fuel of the twentieth century and a key component of the American economy.
Stages and Tasks in the Procurement Process
Internal Organization Buying Behavior
- Figuring out what is required: It is necessary to need something before it may be obtained. This is why procurement begins with a corporation determining what it needs or what it wants.
- Creating a purchase order: Formally, a purchase order is a written agreement to acquire a particular item. If there are any extra duties, they are included in the purchase order and the product or service pricing, specifications, and terms and conditions.
- Conducting a three-way match: To avoid massive financial losses due to inconsistencies, any differences must be thoroughly examined and rectified as soon as they are discovered using 3-way matching. Three-way matching will be used at this procurement stage to verify the accuracy of the transaction and reconcile three critical documents.
- Orders for purchase
- Slips of paper in the packaging
- Receipts from vendors
- Keeping records: To keep accurate books and records, the receiving (purchasing) corporation must do so. Every completed transaction should have all essential paperwork saved. In an audit, you may find yourself in hot water if you don’t do this step correctly.
Sourcing
Evaluating and picking of vendors: Every company has to decide where to buy its products. Vendor catalogues exist for specific firms, while others are still determining which vendors are the finest.
Buyer-supplier Relationship Management /Supply Chain Management
- Submitting a purchase request: As soon as an employee knows what they need, they send an e-procurement request to the corporation. Procurement is usually in charge of scrutinizing purchase requests. Upon approval, the request will be converted into a purchase order and sent to the vendor. If a request is refused, it is reverted to the employee with a note explaining why it was denied in the first place.
- Price and terms of the agreement: Once a supplier has been selected, the procurement team will work to get the best possible pricing and conditions (such as delivery dates) for the purchase.
- Delivered products are inspected upon arrival: Upon delivery, the receiving firm is responsible for checking and accepting delivery of the goods. The firm might reject an unsatisfactory product before it is delivered.
- Invoice approval and payment: At this stage, the invoice is approved after everything is in order and a match has been made, and payments are made.
Obtain Value for Money
Value for Money (VFM) is a simple concept in daily life: paying no more for a commodity or service than the quality or availability warrant. In the context of public expenditure, it suggests a focus on efficiency, effectiveness, and cost-minimization. Value-for-money has traditionally been defined as ensuring that the correct product is procured in a timely manner from the right provider at the best price. This idea has been modernized to include acquiring higher-quality products and services from better providers at lower rates, in more convenient amounts, and just in time for when they’re required.
Managing the whole procurement process is necessary if one to get the most value for your money. During the first phase of the procurement process, it identifies a set of what is required. It is common practice when a firm purchase anything that has no utility or influence on the company’s success. This is why it is essential to determine the only goods that is of benefit to the firm before purchasing. Vendor evaluation and selection are also crucial in the procurement process’ third step. It’s possible that some merchants may provide subpar goods, and as a result, the purchased things may not work as promised. As a result, the objects’ monetary worth has been lowered due to a reduction in their efficacy and quality. For this reason, it’s critical to bargain for the greatest possible price with sellers. Following delivery, it is recommended to verify the acquired goods and make sure they are exactly what was ordered or purchased. At this point in the process, it is essential to do quality inspections on all of the goods that have been delivered.
Challenges posed by Procurement Management: Supply Chain Visibility and Flow
The supply chains for oil and gas are not always the most open. Few nations’ oil and gas output are all that most firms can bet on. These nations’ oil and gas supply chains and procurement processes are affected if they encounter shortages or other economic challenges that impede their flow (Gezdur and Bhattacharjya, 2017, pg 97-103). Making the supply chain more transparent in the oil and gas business is the greatest strategy for overcoming procurement issues in the industry. Always be on the lookout for new sources of supply and maintain tabs on market pricing. The more you can break down the supply chain operations into digestible segments, the simpler it will be to detect difficulties, solve them, and get the company back on track fast.
An Overwhelming Amount of Information to Analyze and Process
In the oil and gas sector, firms will rapidly learn that they must handle and evaluate enormous amounts of data regularly. This data demands a lot of processing power, but it also necessitates a team of specialists to keep track of and understand it all. Oil and gas procurement plan that benefit the company’s bottom line may never be developed if enterprises do not have access to the data they need to make informed decisions (Gezdur and Bhattacharjya, 2017, pg 97-103). Organizing, processing, and interpreting the influx of data is best accomplished via collaboration with a data analytics professional. Once this is enforced, it will assist businesses in avoiding information backlogs, which are disruptive to the flow of business and prevent organizations from expanding at a consistent pace. These backlogs take up a lot of valuable time and resources.
Demand for Oil and Gas is changing
Although the oil and gas business is considered one of the most stable industries functioning on a global scale, this does not mean that it is devoid of fluctuations. The need for oil and gas will drop significantly as more individuals work remotely or from home instead of commuting to the workplace. The oil and gas procurement process must be more dynamic in light of the shifting demands (Gezdur and Bhattacharjya, 2017, pg 97-103). Due to the ever-shifting demand levels, the industry must keep an eye on the market and alter the supply chain accordingly. Without needing to make last-minute adjustments to your supply chain, you’ll be ready for times of low procurement and rises in demand.
Key Concepts in the Upstream Oil and Gas Industry Management
The oil and gas (O&G) industry is unique in that it faces both supply and demand difficulties constantly. Supply chain management as a whole is impacted by it. SCM in the oil and gas industry is thus more complicated than that of other businesses. Because of this, conventional methodologies cannot be immediately transferred to the oil and gas industries (Lisitsa, Levina and Lepekhin, 2019, pg 02061). This extra cost may be reduced by re-evaluating SCM methods in light of current oil prices, which are now at their lowest level.
Oil and gas Upstream Supply Chain Management (SCM) Challenges
These issues may affect any aspect of the supply chain, from the delivery of inbound drilling materials to the transportation of produced oil or gas from its field to its target site. These challenges may also affect the delivering process of employees to distant places supplied with supplies not only required to do their tasks but also essential to support life and preserve health (Gezdur and Bhattacharjya, 2017, pg 97-103). Health, safety, security, environmental management, and complicated operations involving various stakeholders are all issues facing the upstream oil and gas supply chain. As a result of broken supply chains or poor supply chain management, problems such as material tracking and optimization are exacerbated, and delays are created. O & G firms are most concerned about the logistics of significant projects, materials’ visibility, and the predictability of dealing with different stakeholders at several drilling locations. Overheads are inevitable when resources are wasted in the upstream business because of poor supply chain management (SCM).
Extended Value Chain
The borders between activities that create value are expanding and becoming hazier in our modern world. There has been an increase in the use of alternate sourcing methods and different business alliances in the last several years. As a result, the analysis utilized to make value chain decisions must be expanded (Knez, Jaklič and Stare, 2021, pg 1-8). As a result of the changing dynamics of today’s business environment, a more holistic perspective of the full extended value chain, which now incorporates the demand chain, must be considered. In the oil drilling process, Shell, for example, may purchase turbines and valves from a component supplier and then utilize them. Companies may save money and prevent complications by learning more about the extended supply chain of these drilling parts providers. The following are some of the most important methods for a successful extended value chain:
- Value chain analysis tools may be used to better understand the company’s value chain and its core competencies and areas for development.
- Value chain analysis tools may be used to better understand the company’s value chain and its core competencies and areas for development.
- In an era where adaptive manufacturing technology is advancing and opening up new business prospects for manufacturers, it is imperative that companies look for methods to connect their value chain directly to their final customers.
- Ensuring that all vendors are communicating and working together at all times.
Joint Ventures
An oil and gas joint venture (JV) arrangement is quite frequent, especially with upstream operations. Even with unconventional oil and gas projects, organizations and enterprises are unwilling to confront the many challenges they face alone (Muñoz de Prat, Escriva-Beltran and Gómez-Calvet, 2020, pg. 10176). This is why joint ventures are now an essential aspect of the petroleum business, since joint ventures may be used to carry out projects and solve these issues. Consequently, joint ventures are very risky because of the numerous variables that might go awry. Before embarking on a joint venture, organizations and enterprises should assess the primary risk factors that might affect the endeavor’s success. The following are some possible explanations:
- To more effectively manage to continue capital expenditures and transfer risk among several parties, enabling them to engage in high-value, larger-scale projects.
- To more easily get the financing needed to grow the business.
- Mobilize a wide range of expertise, assets, and tools.
- Portfolio diversification is essential in today’s unpredictable markets.
- To venture into new markets and satisfy the demands of local regulatory authorities.
References
Gezdur, A. and Bhattacharjya, J. (2017). Digitization in the Oil and Gas Industry: Challenges and Opportunities for Supply Chain Partners.Collaboration in a Data-Rich World, [online] pp.97–103.
Knez, K., Jaklič, A. and Stare, M., 2021. An extended approach to value chain analysis.Journal of Economic Structures, 10(1), pp.1-37.
Libray of Congress (2021). Oil and Gas Industry: A Research Guide: Introduction.
Lisitsa, S., Levina, A. and Lepekhin, A. (2019). Supply-chain management in the oil industry.E3S Web of Conferences, [online] 110, p.02061.
Muñoz de Prat, J., Escriva-Beltran, M. and Gómez-Calvet, R. (2020). Joint Ventures and Sustainable Development. A Bibliometric Analysis. Sustainability, [online] 12(23), p.10176.
Patowar, K. y (2021). Spindletop: The gusher that launched the oil industry. [online] Amusingplanet.com.