The supply chain in oil and gas consists of operators
(oil companies), main contractors, subcontractors and
suppliers. Procurement is performed during the
development and abandonment of oil and gas fields
and during operation of fields (production). During
development, the majority of procurement is
structured as project execution tasks. Projects are
unique and typically range in size from the tens of
millions of dollars to billions of dollars for large
offshore new builds. Big projects perform like fiscal
expansion in an economic sense.
Forces that govern the supply chain in oil and gas
are internal (business-related) and external
(political/economic).

By : E r i c Anderson

Background

The supply chain in oil and gas consists of operators
(oil companies), main contractors, subcontractors and
suppliers. Procurement is performed during the
development and abandonment of oil and gas fields
and during operation of fields (production). During
development, the majority of procurement is
structured as project execution tasks. Projects are
unique and typically range in size from the tens of
millions of dollars to billions of dollars for large
offshore new builds. Big projects perform like fiscal
expansion in an economic sense.
Forces that govern the supply chain in oil and gas
are internal (business-related) and external
(political/economic). Of the factors that influence
supply chain strategies and differentiate this sector
from other business sectors, there are four that will
particularly be considered here:

• the cost of field development must go down if
marginal (profit) fields are going to be developed
and alternative energy is going to be kept at bay;

• oil companies are big and getting even bigger –
mostly through mergers;

• oil prices fluctuate greatly; and

• oil companies are subject to various political
pressures.

Large operators interface with governmental entities
worldwide and some are closely linked to governments
themselves. Main contractors are often traditional
engineering/construction/service companies, some of
which have been nurtured under years of protective
development policies.
Subcontractors and suppliers are manufacturers and
service companies or regional agents with added
value in the form of engineering. Expertise is the
common factor that binds this supply chain
network together with the assumption that
requirements for safety and uninterrupted
operation are never compromised.

B u y i n g Power

Important to consider is that the cost of bringing oil
out of the ground is going to increase as more
challenging fields are being tapped, while cost of
alternative energy is decreasing as technology
improves. In addition, oil companies compete with
each other when bidding for licences to operate.
Among operators, it is commonly thought that only
the biggest will survive because they can absorb risk
better and have lower relative operating costs. The
mergers of the 1990s confirm this.
Academia agrees. As expressed in textbook
equations, after optimum size is reached, companies
become difficult to manage, logistics clog up and
supplies run out. However, with improvements in
information technology (IT), optimum size keeps
increasing, therefore oil companies still merge, unite
their buying power and make it more difficult for
new entrants to compete in what could be coined
‘oligopoly infanticide’.
The result is being felt at the top end of the supply
chain – ‘bigger’ means stronger buying power. With
increased buying power, long-term supply chain
strategy such as ‘win-win’, which was still an issue in
the 1990s, tends to lose out to short-term strategy
such as reverse auction.
In theory, the rate of main contractors and suppliers
being taken over or going under should increase as a
function of increasing operator buying power. This,
in itself, could be a supply chain strategy, since
‘survival of the fittest’ is a legitimate concept in
today’s economy. Buying power induces efficiency
since, when a supplier collapses, a new, better one
soon appears.
Whether this is really the case is a question that
may warrant a hard look in the future. Does the
increased buying power really result in more
efficient suppliers or just push the links below
towards oligopoly? This may depend on whether
operators use buying power in a strategic manner
or a tactical (short-term) manner.

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