Energy

The Energy Industry’s Supply Chain Dilemma: Collective Pain Calls For Collective Action


Collective Behavior has gotten a bad rap. When sociologist Franklin Henry Giddings coined the term more than 100 years ago, he described it as the actions that a loosely organized group of people might engage in.1 Because those activities didn’t follow institutional norms and traditional conventions, they were considered not only spontaneous, but also unpredictable and even volatile. That’s why Collective Behavior is now often associated with events like the stock market crash of 1929. Or the pet rock fad of 1975. Or the flash mob dance videos now proliferating on social media.

I don’t think all collective behaviors are dangerous. Or silly. Or disorganized. In fact, I think they can be beneficial, inspiring and even necessary. Especially in business ecosystems. And particularly among industry players trying to solve collective problems. Like oil and gas companies now struggling to overcome persistent (and growing) supply chain hurdles.

An Issue That Can’t Be Ignored—Nor Easily Resolved

At CERAWeek in March, I had the chance to speak to a number of oil and gas executives. Understandably, the Russian invasion of Ukraine was top of mind for most of them. But the resilience of the industry’s supply chain was also a big topic of conversation. That’s not surprising, since the two themes—war and supply chain resilience—are closely linked. Few events are as disruptive to supply flows as a geopolitical conflict.

For the energy industry, the war may make supplies of iron ore, nickel and other materials used in a variety of oilfield equipment and sourced from Russia or Ukraine harder to come by. On top of all this, inflation will make the products that are available more expensive. Capital expenditures needed to meet surging demand will actually buy less.

The industry leaders I’ve spoken with fear that today’s supply chain problem will put at least some of their future capital projects at risk. I think they are right to be concerned. But the war isn’t the root cause of today’s energy supply chain problem. It’s simply revealed and exacerbated vulnerabilities that have been bubbling under the surface for years.

Drilling Down Into The Supply Chain Problem

The impact of the war in Ukraine and the COVID-19 pandemic on global supply chains is largely out of the industry’s control. But some supply chain problems are byproducts of oil and gas companies’ strategies to retain their relevance during the energy transition. Perhaps most notably, they have understandably responded to investors’ demand for consistent returns in recent years by cutting costs—even in times of high commodity prices and high energy demand. They’ve also pivoted more attention to cleaner energy sources. The result? Fewer investments in building supply chain resilience in their hydrocarbon business.

Oilfield Equipment and Services (OFES) companies, for example, have been downsizing for years to remain competitive in low-price environments. Now that demand for oil and gas—and commodity prices—are surging again, they are challenged to ramp up their inventories and production capacities. The same is true of their talent. The people they need to answer the industry’s call for support just aren’t there in sufficient numbers.

Operators, for their part, tend to lack the visibility across their supply chains that other industries enjoy. Few have digital operations platforms that drive efficiencies by matching materials and work crews. And many of them rely on spot purchasing or single-source supplier contracts for logistics services or tier-1 and tier-2 field support services. These contracts have not only locked them into short-term, transactional relationships with service providers that can no longer guarantee delivery, but also make it difficult for them to find alternative providers on short notice.

Challenges Now Bubbling To The Surface

Over the past two years, the pandemic placed additional pressures on the industry’s supply chains. Regional quarantines created shortages of vital raw materials such as the steel used for well casings. The production of maintenance, repair and operations equipment ground to a halt in many regions of the world. And even when materials and parts were available, logistical nightmares—from port congestions to sky-high container pricing to a shortage of last-mile drivers—made it difficult to transport them to their final destinations.

Now, Russia’s invasion of Ukraine has added another layer of supply chain complexity. Countries and energy-intensive industries are looking to quickly replace their Russian oil and gas supplies. Under the best of circumstances, non-Russian suppliers would have been hard pressed to fill the gap. With supply chain problems holding up brownfield and greenfield projects, the challenge to meet the world’s short-term energy needs has grown exponentially.

Together, these industry challenges are taking a significant toll. Accenture

ACN
analyses suggest that they can add $10 to $15 or more per barrel to the breakeven cost of a new well. With commodity prices near record highs, oil and gas companies can likely absorb these costs. But record high prices don’t stay around forever. Every boom cycle is eventually followed by a bust. When prices plunge, an additional $10 or $15 of cost per barrel of oil will be unsustainable.

Collective Action For Collective Benefit

The change required is substantial. Old remedies such as rethinking procurement processes or renegotiating contracts with suppliers won’t be enough to save companies from the growing supply chain dilemma. In fact, any initiative or investment by an individual company to strengthen its supply chain will only do so much. Industry-wide supply chain vulnerabilities can only be addressed with an industry-wide solution. Collective risk requires a collective response.

I believe the only way the energy industry can achieve the supply chain resilience that’s needed is through a radical shift toward collaboration. Operators and service providers need to work together as never before. This means:

· Pooling demand for equipment and other supplies to improve energy availability and energy system efficiency—and making this unified view of demand available to OFES companies.

· Sharing resources and infrastructures to optimize asset utilization, logistics networks and service crews.

· Establishing joint procurement teams to source and manage products to improve competition and innovation among suppliers.

· Stress testing the resilience of their supply chains under various disruption scenarios.

· Setting up basin-wide control towers to improve supply chain visibility and optimize the execution of daily drilling, completions and production activities.

· Developing new types of relationships and contract structures that not only allow operators to understand supply shortages in real time, but also work more closely—and more strategically—with OFES companies to build supply chain resilience.

These and other collaborative actions would mark a radical departure for industry players that have historically kept their cards close to their respective vests. But the urgency of the situation calls for nothing less.

Strength in numbers

Oil and gas companies will never be able to predict or avoid all the risks to their supply chains. But they can take collective actions today to strengthen their supply chains and mitigate the negative consequences of disruptions in the future.

I believe that without integrated planning, demand pooling, and infrastructure, and resource sharing among operators and OFES companies, the industry won’t be able to truly optimize asset utilization, logistics networks or service crews. Isolated and short-term fixes won’t withstand the next, inevitable supply chain shock.

The good news is that there are clear signals about what the industry can do to achieve the supply chain resilience that is required. With commodity prices near record highs, oil and gas players now have the opportunity to work in partnership to develop supply chain solutions that will enable the ongoing energy transition—and the security and reliability of an energy system upon which we all depend. Their collective wisdom and collective action will give Professor Gidding’s “Collective Behavior” a new and positive meaning.

[1] Clarence H. Northcott, “The Sociological Theories of Franklin H. Giddings,” American Journal of Sociology, Vol. 24, No. 1 (Jul., 1918).



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